Franchisors, Put Your Money Where Your Mouth Is

By Tam Goldsmith

Tam asks a simple question: would franchisors invest their own money on the same terms they offer franchisees?

You’re asking somebody to risk their savings, sign a lease and guarantee the debt. Tam asks a simple question: would you buy the franchise yourself?

There is a question I would like to ask every franchisor before they sit down with another prospective franchisee: if the money had to come out of your own bank account, would you buy the franchise you are selling today?

I don’t mean whether you believe in the brand. I mean taking the same investment figure given to candidates, borrowing on the same commercial terms and paying the same royalty, marketing contribution and technology fees. Add the lease, equipment, payroll and refurbishment obligations, and assume that any personal guarantees are yours.

It is a much harder question when your own money is involved, and I suspect some franchise sales meetings would become rather uncomfortable if the people selling the opportunity had to answer it.

Yesterday’s Success Does Not Pay Today’s Loan

One of the great strengths of franchising is that a buyer can invest in a business that has already been tested. The brand exists, customers know it, suppliers are in place and other franchisees have already opened locations.

The problem is that those franchisees may not have bought the same investment being offered today. A restaurant opened eight years ago may have cost considerably less to build. Its lease may have been signed on better terms, its franchisee may have borrowed more cheaply, and the business has had years to build sales, repay debt and develop an experienced management team.

A new franchisee gets the brand and the operating system, but they also get today’s bill.

Jersey Mike’s provides a useful example of the amount of capital now involved in a major restaurant franchise. Its 2026 franchise disclosure puts the estimated investment for a new restaurant at approximately $436,000 to $1.16 million. Average annual revenue among the traditional franchised restaurants included in its disclosure was approximately $1.37 million.

The revenue figure is useful, but it does not tell an investor whether the investment is attractive. Labor, food, rent, royalties, advertising, debt and other operating expenses still have to be paid. What remains after those costs determines whether putting hundreds of thousands of dollars into the business was worthwhile.

That calculation deserves at least as much attention as the sales number.

Put the Bosses Through Their Own Sales Process

Every franchise company should consider putting its CEO, CFO and franchise development leadership through its own buying process once a year. Give them the current franchise disclosure document, assume they are opening the next location and require them to assess the deal on exactly the same terms as an outside investor.

There should be no corporate balance sheet behind them, preferential financing or special arrangement with the landlord. If the investment is $800,000, they need to account for $800,000. If the bank requires a personal guarantee, that risk belongs in the calculation. If the franchise requires an owner to work full time in the business, the owner’s labor should be given a proper market value rather than quietly treated as free.

The Federal Trade Commission already tells prospective franchisees to examine these costs carefully. Its guidance covers premises, equipment, inventory, royalties, advertising and continuing operating expenses. It also warns prospective buyers that royalties may remain payable even when a franchisee is losing money.

Franchisors know these costs exist. The more revealing exercise is to put all of them into one investment case and ask whether management would accept the resulting return on its own capital.

When Brand Decisions Land on the Franchisee’s P&L

The interests of franchisor and franchisee are closely connected, but the economics are not identical. The franchisor typically receives royalties calculated on sales. The franchisee has to pay the operating expenses and live on what remains.

That distinction becomes particularly important when franchisors make decisions that increase the cost of opening or operating a location. A new store design may look better. More technology may improve the customer experience. A larger location may increase capacity, and a refurbishment programme may keep an established network looking fresh. Each decision can have merit, but the franchisee ultimately funds much of it.

If a new specification adds $100,000 to the cost of opening a franchise, management should be able to explain what financial benefit the operator is expected to receive from that additional investment. If the extra expenditure cannot reasonably improve sales, margins, labor efficiency or another measurable part of the business, requiring the franchisee to spend it becomes difficult to defend.

This is where franchisors need to be careful about judging expenditure primarily by what it does for the brand. The same expenditure also has to make commercial sense for the person whose capital is paying for it.

Selling More Franchises Does Not Answer the Question

The International Franchise Association expects the United States to add more than 12,000 franchised establishments in 2026, taking the total to approximately 845,000. Investors are clearly still willing to put substantial amounts of capital into franchised businesses.

For an individual brand, however, continued development does not prove that the economics of the next location are as attractive as those of the last one. Development teams can continue selling territories while construction costs increase. Existing operators can report strong sales from locations opened under different cost conditions, and system revenue can rise while the amount required to build the next unit becomes substantially larger.

There is also an obvious incentive to keep developing. More locations produce more system sales and, eventually, more royalty revenue. That is how the franchise model is supposed to grow, provided the new locations also produce an acceptable return for the people financing and operating them.

The danger is using the fact that franchises continue to sell as proof that they remain good investments. A signed franchise agreement proves that somebody was prepared to buy. It does not tell us whether they should have.

The Best Franchisors Have Nothing to Fear From This

Asking whether management would personally buy the franchise is deliberately uncomfortable, but it is not an argument against franchising. Strong franchisors should be able to use the exercise to their advantage.

If management looks at the current investment, realistic sales, operating costs and financing and concludes that it would happily invest its own capital, that says something meaningful about the opportunity. It also gives the franchisor a reason to protect those economics as the system grows.

Where the answer is less convincing, the exercise can expose what needs fixing. The footprint may need to shrink, construction may have become too expensive, equipment specifications may need another look, or technology and labor costs may have moved beyond what the original model was designed to support.

None of those problems necessarily means the franchise is a bad business. It means management has work to do before asking the next investor to write the cheque.

Would It Pass Your Own Investment Committee?

Franchisors routinely expect candidates to conduct extensive due diligence before signing an agreement. There is no reason management should apply a lower standard to the opportunity it is asking them to buy.

Once a year, take the midpoint of the current investment range and use realistic rather than exceptional unit performance. Add current financing costs, mandatory fees and expected reinvestment. If the owner has to work in the business, compensate that person properly before calculating the return on their capital.

If management would reject the investment on those terms, increasing the franchise sales budget does not solve the problem. The economics need attention.

If management would invest, however, the franchisor has a far more convincing message than another presentation about unit growth. It can demonstrate that the business being offered to franchisees still makes financial sense at the price required to enter it today.

Franchisors spend a great deal of time asking candidates whether they have enough money to buy the franchise. Candidates might learn considerably more by asking whether the people selling it would put their own money into the same deal.

What We Can Learn From This

Every franchisor should evaluate its current franchise opportunity annually using the same terms offered to a new investor, including current opening costs, borrowing costs, mandatory fees, realistic sales and proper compensation for the owner’s labor. If management would not accept the resulting return on its own capital, it should identify what has made the investment less attractive and address it before pushing harder for development. For brands that can genuinely answer yes, the exercise provides something far more valuable than another sales claim: evidence that the people who know the business best would still be prepared to buy it.

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