When Greg Flynn graduated from Stanford Business School in 1994, when the dotcom boom was in full swing, his friends chose the obvious career path. But while they were all “making PowerPoint presentations… becoming paper millionaires,” he went on to help a friend open another restaurant. A few years later, seeing generous financing offered to prospective franchisees, Mr. Flynn purchased eight Applebee’s restaurants of his own. He now runs more than 3,000 franchise outlets across seven brands in three countries, and is reportedly worth more than $1 billion, making him possibly the first franchisee in the world to reach this milestone. On February 22, the International Franchise Association, a lobbying group, inducted him into its Hall of Fame – an honor once reserved for franchisors, innovators on the other side of the business who founded big chains, like McDonald’s Ray Kroc or KFC’s Colonel Harland Sanders.
Mr. Flynn’s story is one of slow and steady success. Similar is the franchise model, which began spreading across America in the 1950s. Nowadays there are about 850,000 franchise establishments in the country, run by about 250,000 owners, employing about 9 million people and generating about 3% of GDP. One in eight businesses with at least one employee are part of a franchise. All types of establishments are franchised, from Dunkin’ Donuts to UPS stores and most Marriott hotels. Recently this model has been expanding into new areas – such as boutique fitness, home services and child care – partly thanks to private-equity investors Who have become enthusiastic franchisors.
Owning a franchise can be the purest distillation of the American dream. About 95% of McDonald’s 14,000 US outlets are operated by franchisees, and the chain has created more millionaires than any other firm in history. “We’re not all going to be Steve Jobs or Elon Musk,” says Matt Haller, who runs IFA, “but many can imagine themselves saving up to go into the all-American business of “slinging hamburgers.” The proposition has long been particularly appealing to immigrants: About two-thirds of American motels are owned by Indians, many of whom are descendants of Gujaratis who bought Super 8 and Travelodge franchises in the 1980s.
Mr Haller says franchisees are now reporting increased interest from their children in succession planning. This is perhaps not surprising. A decade ago the path to prosperity for young Americans seemed certain: a college education and a white-collar “laptop” job. But rising tuition fees and the emergence of artificial intelligence have sparked renewed interest in trading and other pedestrian ways of earning a living. Personal business – teaching Pilates, cooking – looks like a safer option now. “There’s really no franchise you can run without people,” Mr. Haller says. Then again, many more young people may soon follow Mr. Flynn’s example. Will it benefit them?
To economists, the franchise is something of an oddity. As Paul Rubin of the University of Georgia wrote in a 1978 paper, they blur the boundary between a firm and the open market. Franchisors, who typically retain control over things such as the menu and opening hours, gain a network of motivated entrepreneurs willing to commit their own capital, allowing the company to scale quickly. In return, the franchisee is given the opportunity to run their own business with the security of an established brand.
This arrangement is most common in industries that require armies of physically dispersed employees—serving food to order at thousands of locations, or running hotels. Allowing franchisees to keep the profits after deducting royalties gives them the opportunity to work harder than a salaried store manager.
Local knowledge is another advantage. There are “dinner parties” and “breakfast parties” on the streets; Opening a coffee drive-thru where people pass by on the way home instead of going to work is a bad idea. Some locations are what Dinesh Goswami, who operates more than 100 outlets at Taco Bell, Dunkin’ Donuts and other chains, calls “Statue of Liberty” locations – highly visible but hard to reach. He opened a Popeyes in Nashville that customers could see from a mile away, but it was so difficult to navigate from ground level that revenues quickly dropped by 60%.
Mr. Flynn purchased his first eight Applebee’s outlets, in Washington state, from a Cleveland-based franchisee who insisted that “the way I do things in Ohio, I want to do them in Indiana and New Jersey and Washington.” When Mr. Flynn took over, Dan Krebsbach, a local employee, told him the restaurants could do better. In the Midwest, Applebee’s was a joint family affair; But in Seattle, Mr. Krebsbach told them there is “an opportunity for a great chain of bars.” He also wanted to raise the level of staff. Mr. Flynn agreed to do things Mr. Krebsbach’s way, and offered him a profit-sharing arrangement – a kind of franchise within a franchise.
“Clearly, the business turned on a dime,” Mr. Flynn recalls. Revenue increased by one third. On Mr. Krebsbach’s recommendation, he opened two more Applebee’s. They also jumped a lot. Mr. Flynn called the Cleveland owner and offered to buy the rest. “We bought 62 more. We went from 10 to 72 overnight.” Today Mr. Krebsbach runs all 460 of Mr. Flynn’s Applebee’s. Flynn Restaurant Group operates on what its owner calls a “state and federal” model: regional managers share profits and run their local markets, while the head office handles areas such as finance and training where there are economies of scale.
Bert Albertse, boss of Jetset Pilates, a chain of more than 100 studios, also sees the benefits of franchising firsthand. “No single corporate entity is a top-quartile performer,” he says directly of the studios his company owns. “Every single one of them is performing below average compared to our franchises today.” “There’s no way we would have opened three studios within a 12-month period” without being part of the franchise, says Justin Clonts, one of Mister Alberts’ franchisees, who works in private equity while owning and operating three Jetset studios in Manhattan with his wife. For example, he points to guidance from the series on recruiting and digital marketing.
chain reaction
It is remarkably easy to look up the terms and conditions offered to a franchise: any business selling a franchise in the US must produce a Franchise Disclosure Document (FDD), and many states publish their own registries. FDDs disclose the many fees a franchisee pays – including both upfront and ongoing payments – and may include detailed data on how existing franchisees are performing.
A scan of about a dozen FDDs reveals that they have a lot in common. Ongoing royalty payments to the franchisor are typically made as part of sales. Other charges like marketing are also similar. Combined, food-service businesses probably account for 5-7% of sales and beauty and fitness 10-12%. The initial fee paid to a franchisor for opening a single outlet is typically thousands of dollars, and often $50,000 or more with discounts for multi-unit purchases. That’s before any money is invested in renovations or equipment. Total opening costs vary widely: a food-service restaurant runs north of $1 million; A fitness studio $300,000-800,000.
That’s serious money. Some franchisees raise it from friends and family, like Gujarati motel-owners; Others use career savings first. Franchise analyst Patrick Buckley says that most of the successful franchisees he has found have funded themselves through a mix of loans and raiding their retirement savings.
Like all business ventures, there is a good chance of failure. When comparing franchises and independent businesses, “the difference in survival rates is small,” says Francine LaFontaine of the University of Michigan, and it exists only for the first year or two. The chances of staying in business after that are about the same.
Yet the risks vary considerably depending on the type of franchise. “The chances of being successful with a new restaurant are much higher if you’re part of a franchise that has worked out the system, has high brand awareness and has a big marketing budget helping you,” says Mr Flynn. And even if it doesn’t meet the franchisee’s expectations, there is often an option to sell the business. “There are liquid markets for franchises,” explains Mr Flynn. However, this is less true for new franchises that are still establishing their brands. The rewards may be much bigger (early adopters get better territory) but the risks are the same.
The structure of the franchise arrangement also matters. When Ray Kroc took the helm of McDonald’s, most other franchisors at the time made their money by selling supplies or charging licensing fees, rather than the revenue-sharing model prevalent today. Kroc argued, “Once you get into the supply business, you become more concerned with what you’re making your franchisee on sales, not how his sales are going.”
This approach also creates problems when it arises. Many franchises failed under the model run by Exponential Fitness, the former owner of fitness chain CycleBar, which required them to purchase expensive equipment at a profit. In March the Federal Trade Commission announced that the company would return $17 million to franchisees as part of a settlement with the regulator over violations of franchising rules.
Another criticism of franchises focuses on their impact on the many low-wage workers they employ. Brian Calassi of the Open Markets Institute, a think-tank focused on competition policy, argues in his new book, “Chain of Command,” that the distinction between franchisee and employee is a legal fiction because of the extent of control exercised by the franchisor. And given how little power they have, according to Mr. Kailasi, the only way franchisees can make money for themselves is to pay their workers as little as possible.
division of labor
The clearest evidence that franchising has harmed low-wage workers comes from the no-poach clause that once prohibited hiring between outlets in the same chain. In 2018 the late Alan Krueger published a paper showing how common such clauses were in franchises and arguing that they stifled salary competition. Several states initiated investigations and the practice was eventually abandoned. Research conducted by Mr. Kailasi in 2024 found that eliminating the no-poach clause increased wages of affected workers by 4-6%.
However, beyond the example of poaching, evidence of widespread harm to workers is difficult to find. In another paper Krueger found that front-line staff wages were about 2% lower at franchised outlets than at company-owned outlets – a difference he called “insignificant”. And the suggestion that franchisees are employees in disguise sits awkwardly with the existence of operators like Mr Flynn. (For his part, Mr. Calassi says that where franchisees have more power, employees earn slightly more.)
In 2015, during the Obama administration, a “joint-employer rule” was introduced, which makes franchisors jointly liable for their franchisees’ employees. But it was never upheld in court, and the rule was limited to cases of “direct and immediate control” in 2020 during the first Trump administration. An effort to relax the more restrictive definition failed during the Biden administration in 2023, and it was formally reinstated by the second Trump administration in February this year. Mr Flynn argues that franchising is “an engine of opportunity”. American politicians would be wise not to tamper with it.
Correction (May 29): An earlier version of this article stated that one in six US businesses with employees are part of a franchise. In fact, it’s one in eight.
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