Buying a franchise can appear to be a safer route into business ownership. The brand is established, the operating model is already developed and the franchisor promises training, marketing and ongoing support. But the real test begins when the franchisee starts paying rent, recruiting employees and trying to attract customers.
A restaurant franchise might generate impressive sales but struggle with food cand labour expenses. A fitness studio may have a recognised brand but fail to build enough recurring memberships. Even a successful international franchise can struggle when its business model is transferred into a market with different consumer preferences and operating costs.
The US Federal Trade Commission (FTC) requires franchisors covered by its Franchise Rule to provide a Franchise Disclosure Document (FDD) containing 23 disclosure items. However, reviewing documents alone is not enough. Investors need to challenge the franchisor’s assumptions, speak to existing operators and understand the contractual obligations.
Here are 12 questions that can reveal whether a franchise is genuinely worth the investment.
1. Are Existing Franchisees Actually Making Money?
Forget the headline revenue figures. The first question should be about profitability.
Ask for average and median outlet sales, operating margins, labour expenses, rent, royalties and the time required to reach break-even.
A restaurant generating $100,000 in monthly sales may appear successful, but food costs, salaries, rent, utilities and delivery commissions can significantly reduce the final profit.
In the US, Item 19 of the FDD covers financial performance representations. However, franchisors are not obliged to disclose earnings information. Where figures are provided, investors should establish whether they represent average sales, gross profit or actual operating earnings.
Ask: What percentage of existing franchisees are profitable, and can I examine financial results from mature outlets?
2. What Is the Real Investment Beyond the Franchise Fee?
The advertised franchise fee is rarely the complete investment.
Property deposits, construction, equipment, technology, recruitment, initial inventory, insurance and working capital can substantially increase the amount required.
For example, a QSR franchise may require specialised kitchen equipment, extraction systems and a complete restaurant fit-out. A fitness franchise may need expensive training equipment, flooring, changing facilities and pre-opening membership campaigns.
International investors must also account for import duties, currency fluctuations and local property costs.
The important issue is whether the investor has sufficient capital to operate the business until it becomes financially sustainable.
Ask: What is the realistic opening cost, including working capital for the first six to twelve months?
3. How Many Franchisees Have Closed or Left?
A growing franchise network does not necessarily mean a healthy franchise system.
Investors should examine how many outlets have closed, how many agreements have been terminated and how many franchisees have chosen not to renew.
In the US, Item 20 of the FDD provides information about outlet openings, closures, transfers and ownership changes.
The reasons behind these movements matter. A franchisee retiring after building a successful business is very different from one exiting because of poor profitability.
Ask: How many franchisees have exited in the past three years, and can I speak to some of them?
4. Is My Territory Really Protected?
Territorial rights can become a major source of conflict between franchisors and franchisees.
An investor may believe they have secured an exclusive geographical area, only to discover that the franchisor retains rights to introduce company-owned outlets, alternative formats, online sales or delivery operations nearby.
This is particularly important in food, retail and fitness franchising, where neighbouring locations can compete for the same customers.
For international master franchisees, the agreement should clearly define whether territorial rights include sub-franchising, company-owned stores and digital channels.
Ask: Can the franchisor or another franchisee open a competing business within my territory?
5. What Support Continues After the Opening?
Initial training is only one part of the franchisor’s responsibility.
A franchisee may need ongoing assistance with recruitment, marketing, technology, customer retention and operational management.
For example, a fitness franchise needs more than an opening programme. It needs continuing support with membership acquisition, trainer recruitment and retention. A restaurant franchise requires regular assistance with food safety, menu development, supply chains and operational standards.
Investors should establish how frequently the franchisor conducts site visits and whether dedicated business consultants are available.
Ask: What support is contractually guaranteed, and how frequently will the franchisor provide it?
6. How Much Will Royalties and Marketing Fees Reduce My Margins?
Recurring fees can make a significant difference to franchise profitability.
Consider a hypothetical franchise generating $100,000 in monthly sales. A 6% royalty means $6,000 goes to the franchisor. An additional 2% marketing contribution takes the total to $8,000, before rent, salaries and other operating expenses.
Investors should examine royalty calculations, advertising contributions, technology fees, training charges and renewal costs.
Marketing contributions deserve particular attention. Franchisees should know where the money is spent and whether they receive regular financial reporting.
Ask: What are all the recurring fees, and how is the marketing fund managed?
7. Can I Speak to Franchisees Without the Franchisor Present?
This is one of the most valuable parts of franchise due diligence.
Do not rely exclusively on franchisees selected by the sales team. Speak to new operators, established franchisees, multi-unit owners and former franchisees.
Ask whether the business opened within budget, whether sales matched expectations and whether the franchisor delivered the support promised during recruitment.
One particularly revealing question is: Would you invest in this franchise again?
The US FTC also recommends contacting current and former franchisees before making an investment decision.
Ask: Can I independently contact existing and former franchisees, including those who have experienced difficulties?
8. Can I Sell the Business or Exit the Agreement?
Investors often spend considerable time understanding how to enter a franchise but overlook the conditions for leaving.
Franchise agreements generally contain specific provisions covering renewals, transfers and termination. The franchisor may have approval rights over a potential buyer, while transfer fees, refurbishment requirements and post-termination restrictions can affect the value of the business.
A profitable franchise is not necessarily easy to sell.
Ask: Can I transfer ownership, what approval is required and what financial obligations apply when the agreement ends?
9. Is the Franchisor Financially Strong?
A franchisee depends on the franchisor for technology, training, marketing and operational support. If the franchisor faces financial difficulties, the entire network can be affected.
Investors should examine audited financial statements, debt obligations, litigation history and the company’s dependence on franchise recruitment revenue.
For international expansion, the financial position of the local master franchisee is equally important. A globally recognised brand does not guarantee that its regional development partner has sufficient resources.
Ask: Can I review the franchisor’s latest financial statements and assess its ability to support the network?
10. Will the Business Model Work in My Market?
A successful franchise in one country does not guarantee success elsewhere.
A US restaurant brand entering India, for example, may need to adapt its menu, pricing, sourcing and restaurant format. A European fitness brand entering Southeast Asia may need a different membership strategy and operating structure.
Labour costs, property availability, consumer preferences and regulations can all change the economics.
Master franchise partners should be particularly careful about accepting development projections based entirely on the franchisor’s home market.
Ask: What market research and comparable operating results support the proposed expansion?
11. Who Controls Suppliers and Product Pricing?
Franchisors often require franchisees to purchase from approved suppliers to maintain consistency. However, these arrangements can also affect margins.
A restaurant importing ingredients may face higher costs because of currency movements, customs duties and shipping delays. A retail franchise may have limited flexibility to source products locally.
Investors should understand whether supplier rebates are paid to the franchisor, whether local sourcing is permitted and who absorbs price increases.
Ask: Can the franchisor change suppliers or introduce mandatory purchases without consulting franchisees?
12. What Happens If the Business Underperforms?
No franchise guarantees commercial success. Sales may fall, costs may rise or a location may struggle to attract customers.
Investors need to understand what happens when a franchisee misses performance targets. Does the franchisor provide additional operational support, or can it impose penalties and eventually terminate the agreement?
Check default provisions, performance benchmarks, additional expenditure requirements and termination rights.
Ask: What support is available when a location struggles, and what contractual action can the franchisor take?
Global Franchise Laws: What Investors Need to Know
The legal framework governing franchising differs significantly between markets.
In the United States, the FTC Franchise Rule requires covered franchisors to provide a 23-item FDD, generally at least 14 calendar days before signing or payment.
In Australia, the revised Franchising Code of Conduct came into effect on 1 April 2025, with additional requirements introduced on 1 November 2025. These include greater disclosure of significant capital expenditure, marketing-related funds and other franchise obligations.
In the United Kingdom, there is no equivalent comprehensive franchise-specific disclosure regime. General contract, competition and consumer protection laws apply.
In India, there is no single comprehensive franchise-specific law or central franchise regulator. Franchise agreements operate under several legal frameworks, including contract, intellectual property, competition and consumer protection legislation.
For cross-border investments, independent legal advice in both the franchisor’s home country and the operating market is essential.
The Real Test Is the Business, Not the Brand
A recognised name, an impressive expansion pipeline and promises of attractive returns can make a franchise opportunity difficult to resist. But investors are buying into a business model, not simply purchasing the right to use a logo.
A network opening 50 new locations may attract attention. A network with profitable franchisees, strong renewal rates and transparent financial reporting may offer a more compelling investment proposition.
The strongest franchisors do more than sell franchises. They build businesses that existing operators can sustain and new investors can realistically evaluate.
Before signing, ask one final question: If the brand name were removed, would the underlying business still be a good investment?
