Franchising is entering a golden era – but not for everyone

Across interviews with franchise brands, franchisees, investors, lenders, landlords and advisers, one theme emerged: franchising is becoming institutionalised. For decades, franchising was viewed primarily as a capital-light growth mechanism. Brands expanded using third-party capital, franchisees gained access to proven concepts, and both sides benefited from accelerated rollout. That model is rapidly evolving.

Franchising has shifted from a network of entrepreneurs into an industry of sophisticated operating platforms. Global franchising revenues are forecast to grow by around 10% annually over the next five years, materially ahead of many consumer sectors. Private equity, family offices and institutional investors are increasingly backing franchisees directly, while leading brands are using their scale and royalty streams to invest heavily in technology, data and consumer capabilities. This is creating a new golden era for franchising.

Yet franchising is not a free lunch. Most CEOs still think franchising is primarily about capital. Many rush into franchising before unit economics are fully proven. They underestimate the importance of partnering with the right operator. They extract royalties rather than reinvesting into the brand. Often, brands that succeed will be those with exceptional economics, disciplined system design and the right operating partners. Those who view franchising as a shortcut to growth risk disappointment. As one franchise CEO told me: “The idea that you pay a fee and the business runs itself couldn’t be further from the truth.” Modern franchising will reward discipline, not optimism.

Rising Costs and Royalties Will Shake Out Weak Concepts
Modern franchising will only work with exceptional unit economics. Institutionalisation has raised the cost of entry. Weak concepts will struggle to survive. Franchising is fundamentally a margin-sharing model. Every pound generated must support labour costs, occupancy costs, franchise royalties, technology investments and returns for both the franchisor and franchisee. That equation is becoming harder. Labour inflation remains elevated. Technology investments are increasing. Marketing funds are growing. New digital and platform fees are becoming commonplace. At the same time, customers continue to expect convenience, digital integration and increasingly seamless omnichannel experiences, and franchisees are being asked to reinvest more frequently in estate refreshes, equipment and customer experience. The result is growing pressure on system profitability.

In my recent conversations, several franchise CEOs have described growing tension between themselves and the brand owner, with brands seeking additional income and franchisees facing declining returns. In response, franchisees are becoming increasingly selective over which brands they partner with. Concepts built on temporary consumer trends or fragile economics are exposed. The strongest systems recognise a simple truth: winning models will reinvest, innovate and maximise total system profitability, not simply corporate revenue.

Franchisee Entrepreneurs are Being Replaced by Operating Platforms
The traditional image of local entrepreneurs running one or two sites is becoming increasingly rare. Across many mature markets, franchise ownership is consolidating into larger multi-unit platforms. Many of these are backed by private equity or institutional family offices. For brands, this is often a deliberate strategy. Modern franchising demands capabilities that many smaller operators struggle to build: data analytics, labour management, property expertise, procurement and supply chain, technology implementation and organisational depth. In addition, managing hundreds of small operators can slow decision-making and lead to inconsistent customer experiences. The best franchise brands no longer view franchising as a capital-light growth strategy. They view it as a sophisticated operating model.

As one industry executive told me: “It’s much easier for us to manage a small number of scale partners, rather than hundreds of smaller one.” At the opposite end, some brands are prioritising company owned models and reclaiming control over locations that once require franchise partners. The rationale is both to retain greater control over operations and to keep full share of profits. Scale brings advantages, but some executives worry that institutional ownership can dilute the brand as they optimise for financial engineering rather than operational excellence.

So, what must franchisees do to stay relevant and avoid being bypassed? The key is for franchisees to demonstrate genuine operational superiority and to position themselves as long-term operating partners, not just a quick route to capital.

Value Creation is Shifting from Brands to Operators
Private equity has long been active within franchising. Historically, investors backed brands and franchisees supplied capital. Today, investors increasingly see the franchisee as the asset. The best franchisee platforms now possess capabilities, data, technology, talent and local market expertise that can be leveraged across multiple brands and is difficult to replicate.

Scaled franchisee groups offer predictable cash flows and consolidation opportunities are plentiful amongst highly fragmented industries. Investors recognise that headroom to scale a standout concept in a new market can be more valuable than the concept itself. One investor observed: “Franchise businesses now command comparable valuation multiples to the parent brand.” As founding entrepreneurs move towards retirement, questions around succession, liquidity and future growth are becoming increasingly prominent, and is likely to create a significant wave of transaction activity across the sector over the coming years. So for investors, the key investment question is no longer simply “Do I like the brand?”, but also “Can this operator scale profitably?”. This is where value is created.

Francise-led International Expansion is Mostly a Mirage
Few growth stories sound more attractive than franchise-led international expansion. Compared with directly operated growth, the model can significantly reduce capital requirements and risk while accelerating market entry. Unfortunately, reality is often very different. International franchise expansion destroys more value than it creates.

Many brands overestimate their unit economics in new markets. Revenue per site is typically 30-40% lower overseas due to weaker brand recognition, sub-optimal site locations and local consumer behaviours that can differ materially from the home market. Meanwhile, costs are often higher as operators establish supply chains, recruit talent and adapt operating models. The result can often be international unit economics that fall short of expectations. The industry tends to spotlight the handful of success stories – largely US coffee and QSR brands. However, these few successes mask a landscape of quiet failures.

The strongest franchise-led international examples tend to generate exceptional home-market economics, work with excellent local partners, and have minimal localisation requirements. These brands tend to view franchising as an accelerator, not a market-entry strategy. They often apply a simple hurdle test: would the economics work under direct ownership? If not, franchising will rarely be successful. As one CEO told me: “If we can’t get comfortable expanding with our own capital, we shouldn’t expect a franchisee to do so.”

Winning Systems will Balance Global Consistency with Local Flexibility
Standardisation has been a hallmark of franchising. Today, excessive rigidity is becoming a competitive disadvantage. One of the most common mistakes in franchising is to assume that rigidity guarantees brand consistency. In practice, consumer behaviour, labour requirements, real estate dynamics and competitive landscape are vastly different across markets. Successful franchises distinguish between true non-negotiables – ie hero SKUs that are globally recognised, versus areas where local adaptation is both necessary and commercially sensible.

Yet too much localisation creates a different problem. If every market requires extensive adaptation, the value of the franchise model begins to disappear. At its heart, brand identity, proposition and customer experience should remain consistent. Pricing, labour models, marketing activation and operational execution often require flexibility. One franchisee put it eloquently: “You want a brand that is already 80-90% right for your market. The final 10-20% is where localisation should happen.” Modern franchising will reward systems that codify what must be consistent while empowering local operators to adapt where appropriate.

A Golden Era, but Not a Passive One
Franchising has rarely looked more attractive. Growth is strong. Capital is abundant. Technology is strengthening competitive advantage. Investors are increasingly interested in the sector. Yet the bar for success is higher than ever before. As franchising becomes increasingly institutionalised, the winners will be those who treat it as an integrated economic system, not a capital-light shortcut to scale.