Franchising is one of the most powerful ways to grow a business, but how exactly do both franchisors and franchisees make money? Whether you’re looking to expand your business as a franchisor or operate a profitable franchise location as a franchisee, understanding the revenue streams is essential.

In this blog, we’ll break down exactly how money is made in franchising for both parties, offering real-world examples, key strategies, and expert insights.

Table of Contents

1. How Franchisors Make Money
2. How Franchisees Make Money
3. Key Factors to Maximize Earnings in Franchising
4. Conclusion: Unlocking Profit in Franchising

How Franchisors Make Money

As a franchisor, your income comes primarily from licensing your business model and brandto franchisees. The revenue streams for franchisors include:

1. Initial Franchise Fees

When a franchisee joins your franchise, they typically pay an initial franchise fee. This fee grants them the right to open and operate a franchise using your established system. Depending on the brand and industry, these fees can range substantially.

A premium brand for example will cost around $45,000.

2. Ongoing Royalties

The most consistent revenue stream for franchisorscomes from royalties. Typically, these are a percentage (usually 4-10%) of the franchisee’s gross sales. These royalties are paid monthly or annually and provide franchisors with continuous revenue as long as franchisees are operating.

3. Marketing Fees

Franchisors often require franchisees to contribute a percentage (typically 1-3%) of their sales into a marketing fund. This fund is used for national or regional advertising campaigns to strengthen the brand and increase sales across all locations.

4. Selling Products or Equipment to Franchisees

In some cases like coffee shop franchises, the franchisor will require the franchisee to purchase their major products like the coffee itself and other branded items such as branded coffee cups from them,which is in my opinion perfectly acceptable.

However, while many franchisors also profit indirectly from the sales of restaurant equipment and products, I personally am of the opinion that such activity is problematic and raises questions as far as franchise ethics are concerned. See my blog on Franchise Ethics.

How Franchisees Make Money

For franchisees, the path to making money lies in running a successful location, managing operations effectively, and generating consistent sales. Here are the primary ways franchiseesearn revenue:

1. Revenue from Sales

As a franchisee, you make money by selling goods or services under the franchisor’s brand. Your revenue depends on the success of your marketing efforts, customer base, and location.

2. Profit After Expenses

After paying for rentcost of goods (COG), utilities, employee salaries, royalties, advertising and financing costs the remaining income is your profit. Successful franchisees focus on reducing operating costs while maintaining quality and good service. The net profit can range from anything between 10-30% depending upon the industry. 

Remember that at the end of the day, we work for money and not percentages, therefore a high revenue business yielding only 10% net profit (moneywise) can be more profitable than a low revenue business with 30% net profit. It's important to check the business related “profit & loss” analytics of the business you are interested in entering, such as “return on investment”, and other KPI`s.

3. Multiple Units and Scaling

One way franchisees increase their earnings is by owning multiple units. Multiple locations ownership allows franchisees to generate revenue from several locations, providing economies of scale and higher profits.

4. Selling the Franchise Business

If you’ve built a successful franchise location, in some cases, you can sell it for a profit. The sale price depends on factors like profitability, brand reputation, and location.

Key Factors to Maximize Earnings in Franchising

To unlock the full potential of franchising, both franchisors and franchisees need to focus on a few key areas:

1. Location, Location, Location

For both franchisors and franchisees, selecting the right location is critical. A high-traffic area with strong customer demand can significantly boost sales.

2. Brand Strength and Market Recognition

A well-established brand with a loyal customer base is one of the biggest assets a franchisorcan offer. Strong brands can demand higher fees and attract more franchisees, while franchisees benefit from the brand's existing reputation.

3. Operational Efficiency

Franchisees who streamline operations and control costs are more likely to generate higher profits. This includes managing inventory, reducing waste, and optimizing labor costs.

4. Franchise Support and Training

Franchisors that offer valuable ongoing support and comprehensive training will help franchiseesrun their businesses more effectively, leading to higher success rates and profitability.

Conclusion: Unlocking Profit in Franchising

Franchisorsmake money by charging initial franchise fees, ongoing royalties, marketing contributions, and selling products or equipment to franchisees. Franchisees, on the other hand, generate revenue through sales, effective management, and potentially owning multiple locations.

Franchising offers a win-win scenario for both parties: franchisors expand their brand and revenue, while franchisees benefit from a proven system with ongoing support.

If you’re a franchisor looking to maximize profitability, or a franchisee eager to scale, it’s essential to understand how money flows within the franchising model. With the right strategy, both sides can achieve sustainable success.