Franchising works, when it works, because franchisee and franchisor incentives point in mostly the same direction. But "mostly" is doing real work in that sentence. Understanding the specific places where the relationship's incentives genuinely diverge isn't cynicism — it's the same kind of structural literacy you'd want in any long-term contract where you're financially dependent on a counterparty who also has other priorities. This isn't an argument that franchising is rigged against franchisees. It's a map of where to plan ahead rather than assume alignment that isn't actually there.
Where the incentives genuinely line up
Start with what's real about the alignment, because it is real. A franchisor's brand is only as valuable as the collective performance of its units — a system full of struggling, poorly run locations damages the brand's reputation and makes future sales harder, which the franchisor has every reason to avoid. Both sides benefit when a location is profitable: the franchisee earns a return, and the franchisor collects royalties reliably and gets a reference customer for future franchise sales. Both sides also benefit from genuinely useful training and operational support — a well-trained franchisee runs a better unit, which reflects well on the system as a whole. This shared interest is why franchising can work well for both parties when it's functioning as designed, and it's the foundation the whole model depends on.
Royalties are usually based on revenue, not profit
Here's where the first real divergence shows up. Most franchise systems charge ongoing royalties as a percentage of gross revenue, not net profit. That structure means the franchisor gets paid whether or not the individual unit is actually profitable after the franchisee covers labor, rent, cost of goods, and everything else. A location that's running thin margins or even losing money still generates royalty income for the franchisor as long as it's generating sales. This isn't necessarily bad faith — it's simply a structural fact of how most agreements are built — but it does mean the franchisor's short-term financial interest in your unit is tied to your top line, not your bottom line, which is not quite the same thing as being tied to your success.
More units can mean more revenue for the franchisor, even when it hurts existing franchisees
Franchisors also generate revenue from selling new franchises — initial franchise fees, plus the incremental royalty stream each new unit adds to the system. That creates a real incentive to keep growing the number of locations, including in markets that already have franchisees operating nearby. A new unit placed too close to an existing one can meaningfully cannibalize the existing franchisee's sales, even if it technically respects the territory boundaries defined in the agreement. This is one of the most common sources of franchisee frustration and litigation in the industry, and it's a direct consequence of a structural incentive: the franchisor benefits from system-wide unit growth in a way that doesn't always match what's best for any specific existing franchisee's territory.
National ad fund spending doesn't always help your specific location
Most systems require franchisees to contribute a percentage of revenue into a national or regional advertising fund, which the franchisor typically controls and directs. That fund's spending priorities are set with the whole system's brand-building in mind — national campaigns, brand refreshes, sponsorships that raise general awareness — and those priorities don't always translate into direct, measurable benefit for a struggling individual location that might be better served by hyperlocal marketing instead. A franchisee paying into the fund has limited say over how it's spent, and the franchisor's incentive is to build the brand broadly, which is a legitimate goal but isn't the same as maximizing foot traffic at any one specific address.
Mandated upgrades benefit the system; the bill lands on you
Franchise agreements typically give the franchisor authority to require periodic remodels, new equipment, or updated point-of-sale and technology systems, sometimes on a set cycle written into the contract. These requirements genuinely can benefit the brand system-wide — a consistent, modern look across locations supports the overall value of the brand and can lift performance in the long run. But the immediate cost of a mandated upgrade lands squarely on the individual franchisee's balance sheet, often on a timeline the franchisor sets rather than the timeline that best fits the franchisee's own capital position. A franchisee two years from wanting to sell, for example, may have very different views on the value of a forced remodel than the franchisor does.
Planning around the structure, not fighting it
None of this means the franchise model is a bad deal or that franchisors are acting in bad faith by default — plenty of franchisors manage these tensions responsibly, and a well-run system tries to balance system-wide growth against protecting existing franchisees' territory and profitability. But the underlying incentive structure is real, and pretending it doesn't exist doesn't make it go away. Before signing, read the territory, advertising fund, and capital-improvement provisions of the FDD and franchise agreement specifically with this lens: where does this clause serve the system broadly, and where does it serve my specific unit? Asking current franchisees how the franchisor has actually behaved on unit growth, ad fund allocation, and mandated upgrades gives you real-world evidence of how these structural tensions have played out in practice, which tells you more than the contract language alone.