Buying a franchise: test the system on your own location before you sign

A week after you receive the draft contract, the franchisor calls. Another candidate wants your territory, and a deposit this week will hold it for you. If you are buying a franchise, know that several countries build a pause into exactly this moment. In the US the franchisor must give you its disclosure document at least 14 days before you are asked to sign any contract or pay any money (source: US Federal Trade Commission, December 2023). In Australia the Franchising Code of Conduct gives you at least 14 days to read all the information a franchisor provides (source: Australian Competition and Consumer Commission, April 2025). Pressure to pay before then is a warning sign, not an opportunity.

A franchise means stepping into something that already exists. The question stays that of every founder, though: does this business, at this location, earn enough now that a cost has been added that moves with your revenue?

What is a franchise, and what do you buy?

A franchisor, the owner of the system, gives you as franchisee the right, and usually the obligation, to run a business under its brand and method in return for fees. You remain the owner of your business and carry its risk, but you commit to a way of working that is largely fixed.

Franchise disclosure rules by country

Where disclosure law exists, the principle is the same: the franchisor must tell you the material facts in writing, and you get time to study them before you are bound. The details differ.

Rules change, and in Canada look up the province where your unit will be. Before you commit, check:

• Law or code: is there a franchise law, a mandatory code or only self-regulation?
• Timing: how many days must pass, and does a deposit count as a payment?
• Figures: must the franchisor give earnings or location figures, or only if it chooses to?
• After signing: is there a cooling-off period, and are post-term non-competes limited?

How to evaluate a franchise in five steps

1. 01

   Ask for the figures you are entitled to

   Ask for figures of units like yours: the spread as well as the average, the first years of new units, and how many closed or changed hands. Compare the costs with industry figures.

2. 02

   Talk to franchisees you choose yourself

   Call units in towns like yours and at least one former franchisee, as the FTC also advises. Ask whether their opening forecast came true and which changes cost them money.

3. 03

   Model every fee

   Put each fee on its own line in your profit and loss forecast. Use your own revenue forecast and a downside case, not the brochure.

4. 04

   Have the contract reviewed

   A lawyer with franchise experience checks term and renewal, territory, goodwill at the end, the non-compete, the franchisor's right to change the system, and who keeps the name, phone number and website.

5. 05

   Arrange the financing

   A lender wants your own contribution, the franchisor's track record and a forecast for your unit. Work it out in your financing plan.

Worked example: a tutoring franchise unit

Daniel taught maths for 14 years and is considering a unit of a national tutoring franchise. It charges an initial fee of €18,000, a royalty of 8% and a marketing levy of 2% of revenue, on a five-year contract. A student pays €2,400 a year on average. With a fit-out of €17,000 and a buffer of €10,000, Daniel invests €45,000, of which €15,000 is his own money: one third.

The brochure assumes 90 students per unit. Five units in comparable towns had between 45 and 75 after their first full year. Daniel plans with 60, and with a downside of 45.

Fictitious Firmfocus example. Amounts per year. Tutors: 35% of revenue. Other fixed costs: energy, insurance, software and the franchise's student system. Depreciation: initial fee and fit-out (€35,000) over five years. Interest: 7% on a €30,000 bank loan. The logic works in any currency.

With 30 students fewer than the brochure, profit falls by more than half, because €43,600 of fixed costs stays put. In the downside the franchisor still receives €10,800 and Daniel keeps €15,800 before tax: a fee on revenue falls with revenue, but much more slowly than profit. Each student contributes €1,320 after tutors and fees, so break-even lies at 34 students.

Without the franchise, Daniel would pay no royalty or levy, but about €6,000 a year for his own marketing, materials and software, and he would borrow €18,000 less. Then about 52 students would earn him roughly what 60 earn inside the franchise. The brand and national marketing must bring him at least eight extra students a year to be worth it.

A small or a larger franchise

Pitfalls when buying a franchise

• Planning with the average: ask for figures of units that look like yours.
• Accepting time pressure: the legal minimum is a floor, not a deadline.
• Forgetting the end: earn back your investment within the term, and read what renewal costs.
• Ignoring the franchisor's finances: if the franchisor fails, the support and the brand go with it.
• An unprotected territory: check whether the franchisor may open a unit, or sell online, next door.

Starting with a partner? Read start with a co-founder. Taking over an existing unit is closer to buying a business. Agree who applies for permits and how you use the franchise name; see business name and licences. All starting points are in your starting situation, and the full theme in Start a business.