The Franchisor’s Business Model: What You Should Be Evaluating (But Probably Aren’t)

When prospective franchisees evaluate opportunities, they tend to focus on the unit economics—how much revenue a location can generate, what the margins look like, and how quickly they can break even. That’s important, but it’s only half the story.

What often gets overlooked is the franchisor’s business model. Understanding how the franchisor makes money, and where their incentives lie, can tell you a lot about the level of support you’ll receive, how risks are managed, and whether the system is designed for long-term success.

Why the Franchisor’s Economics Matter

A franchisor’s revenue mix drives their decisions. If most of their income comes from selling new territories rather than royalties, you may be looking at a growth-at-all-costs model. That can mean less attention on existing franchisees once your check clears. On the other hand, if royalties based on sales are the primary driver, the franchisor’s success is directly tied to your success.

Similarly, required vendor programs and technology fees can add up quickly. If the franchisor earns rebates or markups from suppliers, their financial interest may be more about maximizing those streams than minimizing your costs. That doesn’t make it inherently bad, but it’s worth understanding who ultimately benefits.

Key Areas to Examine

When reviewing the Franchise Disclosure Document (FDD), don’t just focus on Item 19 or the projected income statement. Dig deeper into these areas:

1. Revenue Mix (Item 21 – Financial Statements)

   • What percentage of revenue comes from royalties, franchise fees, vendor rebates, or corporate-owned units?

   • A heavy reliance on upfront fees may be a red flag.

2. Support vs. Sales Incentives

   • If the franchisor is focused on selling new units, how much investment do they really make in ongoing training, marketing, or operations?

3. Supplier and Technology Relationships (Item 8 – Restrictions on Sources of Products and Services)

   • Who profits from the required systems you must use?

   • Are costs competitive in the open market, or are you paying a premium that benefits the franchisor?

4. Franchisor Expenses

   • Are they reinvesting in support infrastructure, field staff, and brand-building—or is most of the cash flowing to executives and investors?

Questions You Should Ask

• What percentage of your revenue comes from royalties versus new franchise sales?

• How do you reinvest royalties into franchisee support?

• Do you receive rebates from suppliers, and if so, are those shared with franchisees?

• What is your average franchisee turnover rate, and how does that impact your revenue?

The Bottom Line

Evaluating a franchise isn’t just about whether you can make money at a single location. It’s also about whether the franchisor’s business model creates alignment—or conflict—with your success.

A healthy franchisor model is one where the system wins when you win. Anything less should give you pause.