How to Start a Franchise Business

Starting a franchise business means buying the right to run a proven business model under an established brand. You pay an initial franchise fee and ongoing royalties in exchange for the franchisor's name, systems, training, and support. It's a structured path to business ownership — but it comes with real costs and contractual obligations worth understanding before you commit.

A franchise is a business model where a franchisor grants a franchisee the right to operate under the franchisor's brand, systems, and support in exchange for fees and royalties. You're not building a brand from scratch — you're buying into one that already works. Brands like Subway, Dunkin', and Ace Hardware are all franchises.

The tradeoff is real: you get a proven playbook, but you give up a lot of independence. The franchisor sets the rules — from how you run daily operations to how you market the business. That structure is exactly what attracts some entrepreneurs and turns others away.

The franchise industry is large. There are roughly 800,000 franchise establishments across the U.S., employing nearly 9 million people and generating around $900 billion in revenue each year. That scale reflects how many entrepreneurs have found the model worth the investment.

Franchise startup costs typically range from $10,000 to over $1 million depending on the brand and location. The initial franchise fee alone commonly runs $20,000 to $50,000. On top of that, you'll need to budget for real estate, equipment, inventory, and working capital — all detailed in Item 7 of the Franchise Disclosure Document.

Ongoing royalty fees are usually 4% to 12% of monthly gross sales, paid to the franchisor for as long as you operate. That's a recurring cost that doesn't go away when business is slow, so it's worth modeling out what those payments look like at different revenue levels before you sign.

• Initial franchise fee: $20,000–$50,000 paid upfront to the franchisor
• Total startup investment: $10,000 to over $1 million depending on brand and location
• Ongoing royalties: typically 4%–12% of monthly gross sales
• Additional costs: real estate, equipment, inventory, and working capital

Before you sign anything, the franchisor is required by the Federal Trade Commission to give you a Franchise Disclosure Document — the FDD — at least 14 days before you sign an agreement or pay any fees. That waiting period exists for a reason: the FDD is dense, and you need time to read it carefully.

The FDD covers 23 disclosure items, including the franchisor's business history, any litigation or bankruptcy, your estimated startup costs, ongoing fees, and financial performance data from existing locations. Most people find the financial performance section — Item 19 — the most useful, though not every franchisor is required to include it.

Talk to a legal professional before signing the franchise agreement. The FDD tells you what the deal is — the franchise agreement is what locks you in. Those are two different documents, and the agreement is where the real obligations live.

Most franchisees form an LLC or a corporation to own and operate their franchise location. Running a franchise as a sole proprietor means your personal finances are fair game if the business gets sued — and franchise businesses carry real liability exposure. Forming a separate legal entity puts a wall between your business and your personal assets.

An LLC is the most common choice for single-location franchisees. It's flexible, has fewer formalities than a corporation, and gives you pass-through taxation by default. If you're planning to own multiple locations or bring in outside investors, a corporation may be worth discussing with a tax professional.

Check your franchise agreement before you form an entity. Some franchisors have requirements about what legal structure you use or how the entity is named. Getting that detail wrong early can mean extra paperwork to fix it later.

Franchise financing works differently than funding a startup from scratch. Because you're buying into a proven system, lenders treat franchise investments as lower risk — which means more options. The SBA's 7(a) loan program is one of the most common routes for franchisees, and many established franchise brands are already on the SBA's approved franchise registry.

Other funding options include conventional bank loans, franchisor financing programs (some brands offer in-house financing), and Rollover for Business Startups (ROBS) — a structure that lets you use retirement funds to invest in a franchise without triggering early withdrawal penalties. ROBS has specific IRS compliance requirements, so a tax professional should be involved if you go that route.

• SBA 7(a) loans: a common route for franchisees, with many brands already on the SBA franchise registry
• Conventional bank loans: available for franchisees with strong credit and collateral
• Franchisor financing: some brands offer in-house financing programs for qualified buyers
• ROBS: lets you use retirement funds to invest in a franchise — requires IRS compliance and a tax professional

If you're the franchisee — the person buying into an existing brand — trademark protection is the franchisor's responsibility, not yours. But you should verify it. The FTC's Franchise Rule requires franchisors to disclose their trademark registration status in the FDD. Before you sign, check that the brand you're buying into has valid, registered trademarks with the USPTO.

If you're the franchisor — building a system to license to others — trademark registration is non-negotiable. You need to own valid, protectable trademarks before you can legally offer franchises under federal law. Register your brand name, logo, and any slogans with the USPTO before you start selling franchise agreements.

Run a trademark search through the USPTO's TESS database before filing. A conflict with an existing registration can derail your entire franchise program — and catching it early is far less expensive than resolving it after you've already sold locations.

Once you've signed the franchise agreement and formed your legal entity, there are several practical steps to complete before you open. Most of these are standard business setup tasks — but the franchise context adds a few wrinkles.

Get your Employer Identification Number (EIN)

Your LLC or corporation needs an Employer Identification Number (EIN) from the IRS to open a business bank account, hire employees, and file taxes. Apply at irs.gov/ein — online applications are processed immediately. You'll need the EIN before you can do much else.

Open a business bank account

Keep your franchise finances completely separate from your personal finances. Mixing them can put your LLC's liability protection at risk — a court could decide your business isn't really a separate entity, and your personal finances become fair game. Open a dedicated business checking account before your first transaction.

Get the right licenses and permits

Franchise businesses need the same local, state, and federal licenses as any other business in their industry. Your franchisor will usually tell you what's required, but the responsibility for getting licensed falls on you. Check with your city and county for business licenses, and your state for any industry-specific permits.

Understand your ongoing obligations

Running a franchise means staying compliant on two fronts: your state's business requirements (annual reports, registered agent, taxes) and your franchisor's operational requirements (royalty payments, audits, brand standards). Missing either set of obligations can put your franchise agreement at risk. Build both into your calendar from day one.