Compare what you keep per year, not what you spend up front
Short answer: buy the franchise if the system will produce enough extra profit, every single year, to cover the royalty and still leave you ahead. Start your own if you can build demand yourself, because then the royalty is just rent you pay forever for a logo. That's the whole decision. Everything else is decoration.
Most people compare the wrong number. They look at the franchise fee versus what it costs to open independent, decide the franchise is expensive, and stop there. Wrong frame. The fee is a one-time hit you amortize. The royalty is a permanent slice off the top of every dollar that walks in your door for the life of the agreement, which is usually ten years with a renewal.
Here's the math in one hypothetical. Say you do $700,000 in revenue. A 6% royalty is $42,000. A 2% marketing fund is another $14,000. That's $56,000 a year off the top, before rent, labor, food cost or your own pay. Over a ten-year term at flat revenue, $560,000. The franchise doesn't have to be better than going independent. It has to be $56,000-a-year better, every year, or you're subsidizing somebody else's brand.
Sometimes it clears that bar easily. A brand with real search demand, a proven buildout, national supply contracts and a phone that rings on day one can absolutely beat a cold start by more than $56,000. But you should make them prove it, not tell you.
What the fee and the royalty actually buy you
Rule of thumb across most retail and service franchises: an initial fee somewhere in the tens of thousands, ongoing royalties in the 5-8% of gross revenue range, plus a national or regional ad fund at 1-3%. Some charge on gross, some on net, and the difference matters. Read which one.
What you're actually buying, in order of real value:
- Demand you didn't create. People search the brand name. That's the biggest item and it's the only one worth a permanent percentage.
- A buildout spec and a vendor list. Real money saved on the mistakes you don't make. I've rehabbed enough properties to tell you a proven floor plan is worth something.
- Training and a playbook. Worth a lot if you've never run this kind of shop. Worth much less if you have.
- Purchasing power. Verify this one. Sometimes the approved supplier costs more than what you'd source locally, because the franchisor takes a rebate on the back end.
What you're not buying: customers who won't leave, protection from a bad location, or an exemption from the fact that you still have to run the place at 6 a.m. when somebody calls out.
Item 19 is the page that tells the truth
Under the FTC's Franchise Rule, a franchisor has to hand you a Franchise Disclosure Document at least 14 calendar days before you sign anything or pay them a dollar. It has 23 items. Nearly everyone reads Item 7 (estimated initial investment), skims the rest, and signs.
Go to Item 19 first. That's the Financial Performance Representation, and here's the thing most buyers don't know: it's optional. A franchisor is allowed to say nothing about how much their locations make. If Item 19 is blank, that's your answer about how the units are performing. A brand with strong numbers publishes them, because it sells franchises.
When Item 19 does have numbers, read them like a skeptic:
- Is it revenue or profit? Usually revenue. Revenue is not a result.
- How many units are in the sample, and how many total units exist? If they report on the top 30 of 200, you're reading the highlight reel.
- Is it a median or an average? Averages get dragged up by a few monsters. Ask for the median and the bottom quartile.
- How old are the units? First-year numbers and mature-unit numbers are different animals.
Then flip to Item 20, the outlet table. It shows openings, closures, transfers and terminations over the last three years. Closures and transfers are the score. If a chunk of owners sold out or walked away, no marketing deck fixes that.
Then call the franchisees. Item 20 also gives you a list, including former ones. Call ten current owners and every former owner you can find. Ask one question: "What do you keep at the end of the year, and what surprised you?" I've spent years reading disclosure documents and nonprofit 990s on discovery calls, and the pattern is always the same. The real number is never in the pitch. It's three layers down, in a footnote, in a table nobody reads out loud.
What independents pay for instead, and why it's usually less
Independents don't get out of paying. They just pay differently, and mostly once instead of forever.
Your costs going solo: figuring out the menu or service mix (mistakes, spoilage, a few months of guessing), building your own brand from zero, buying your own equipment without a negotiated vendor deal, and marketing on your own dime. Call it a real number. If you'd spend $30,000 in year one and $18,000 a year after that on marketing, that's your honest comparison to the ad fund plus royalty.
When I built escape rooms, franchise offers were everywhere in that category. I built from scratch. The buildout cost me time and mistakes I'd rather not repeat. But nothing came off the top after that. Every dollar past break-even was profit, was profit, was profit. And when I wanted to change the theme, change the pricing, change the hours, I changed them on a Tuesday without asking anyone.
That's the real trade. A franchise converts uncertainty into a fixed permanent cost. An independent converts a permanent cost into up-front uncertainty. If you already know the trade cold, you're buying insurance you don't need.
Territory, resale rights, and the exit you're signing up for
Along the I-25 corridor, territory pitches are flying. Johnstown, Windsor, Timnath, north Loveland. Development is real out here, and territories are getting priced on rooftops that haven't been framed yet. Somebody will show you a map with growth projections and a five-mile radius and tell you to move fast.
Three questions before you buy a map:
- What is protected, exactly? Does the territory stop the franchisor from opening a company store two miles away? Does it cover delivery, catering, kiosks, online orders shipped into your zip codes? Modern agreements carve out channels. Read the carve-outs.
- Is the territory based on today's population or projected population? If it's projections, you're paying today for demand that arrives in 2032, if the water taps and the subdivisions land as promised. Growth here is real but the timing slips.
- Can you sell it, and what does the franchisor take? Most agreements require approval of your buyer, charge a transfer fee, and make the buyer sign the current agreement, not yours. If royalties went up since you signed, your buyer inherits the higher number, and that lowers what they'll pay you.
When I sold the bakery, I carried part of the price myself. That flexibility is what got the deal done. In a franchise you may not have it, because your buyer has to clear the franchisor first. Know your exit before you sign the entry.
Who should buy one, and who shouldn't
Buy the franchise if: you've never operated in this category and the learning curve would cost you more than the royalty; you're a strong operator who wants a system to run rather than a system to invent; or you need the bank to say yes, because SBA lenders are generally more comfortable with a brand that has an SBA franchise directory listing and a track record.
That third one is not small. Financing access is a legitimate reason to pay a royalty.
Don't buy the franchise if: you've already run this kind of business and know the customer; you want to change pricing, hours, offerings or vendors on your own judgment; or you're buying it because you're scared and you want somebody else to be responsible. That last one is the expensive mistake. A franchise agreement does not make anyone else responsible for your P&L. It just makes them a creditor.
The one page I'd build before you decide
Two columns. Franchise on the left, independent on the right. Five rows.
- Cash to open. Franchise: Item 7 high end, then add 20% for the oopsie fund. Independent: your real buildout quote, same 20% added.
- Year-three revenue. Franchise: the Item 19 median for units your age and size, not the average. Independent: your own bottom-up forecast, built from transactions per day and average ticket.
- Off-the-top costs. Franchise: royalty plus ad fund plus any tech and required-supplier premium. Independent: your own marketing budget.
- Owner take-home in year three. The number that actually matters.
- What it sells for and how easily. Franchise: transfer terms and approval rights. Independent: whatever a buyer will pay, on terms you can shape.
If the franchise column doesn't win row four by more than the royalty, you have your answer. If it does win, sign with your eyes open and stop apologizing for the fee.
How do you eat an elephant? One bite at a time. Get the disclosure document, block two hours, and read Items 19, 20, 7 and 12 in that order. Then make ten phone calls. That's the week. If you want a second set of eyes on the math before you commit ten years, take the free Business Checkup or grab a 30-minute call and we'll build the two-column page together. I'm not trying to blow smoke up your butt about either option. I just want the number on the table before the pen is.
A franchise royalty is a permanent 6-8% off the top plus a marketing fund, so the franchise doesn't have to be better than going independent, it has to be that much better every year for ten years. Item 19 and Item 20 of the disclosure document will tell you whether it is.
Questions I get about this
Is it better to buy a franchise or start your own business?
It depends on whether the brand's demand and system produce more extra profit each year than the royalty and ad fund cost you. If you've never operated in the category, or you need bank financing, the franchise often wins. If you already know the customer and want control over pricing and vendors, going independent usually keeps more money in your pocket.
What do franchise fees and royalties typically cost?
As a rule of thumb, expect a one-time initial fee in the tens of thousands, ongoing royalties around 5-8% of gross revenue, and a marketing or ad fund of roughly 1-3%. The exact figures are disclosed in Items 5 and 6 of the Franchise Disclosure Document. Check whether royalties are charged on gross or net revenue, because that changes the number a lot.
What is Item 19 and why does it matter?
Item 19 is the Financial Performance Representation section of the Franchise Disclosure Document, where a franchisor may share how much existing units earn. Under the FTC Franchise Rule it is optional, so a blank Item 19 tells you something. When it has numbers, check whether they are revenue or profit, how many units are in the sample, and whether it's a median or an average.
How long do I have to review a Franchise Disclosure Document?
The FTC Franchise Rule requires the franchisor to give you the FDD at least 14 calendar days before you sign an agreement or pay them any money. Use every one of those days. Read Items 19, 20, 7 and 12, and call current and former franchisees from the Item 20 list.
Are franchise territories in growing areas like Windsor and Timnath worth the premium?
Only if the demand is here now or the price reflects that it isn't. Territories along the I-25 corridor are sometimes priced on projected rooftops rather than existing households, and development timing slips. Ask whether the territory math uses current population or projections, and what channels the exclusivity actually protects.
If you've got a disclosure document on your desk and ten years on the line, let's put the two-column math on the table together before you sign it.
Thirty minutes, no pitch. If I can't help, I'll tell you who can.
Book a 30-minute call or start with the free Business Checkup →