Franchise Unit Economics: COGS, Labor, and Margin by Category
Revenue is a headline. Margin is the business. Here's what each dollar of franchise revenue actually costs to produce — and why the same $1M means very different things in QSR vs. fitness vs. home services.
Item 19 of the FDD is the most-read section in every franchise disclosure document. It shows revenue — sometimes averages, sometimes medians, sometimes tiered by geography or unit tenure. What it almost never shows is the cost structure underneath that revenue. Two franchise systems can both report $900,000 in average unit revenue while one generates $120,000 in owner income and the other generates $30,000. The difference isn't revenue. It's unit economics.
The Three Cost Pillars: COGS, Labor, Occupancy
Every franchise unit — regardless of category — has three dominant cost categories that together consume 65–85% of gross revenue. Understanding their relative weight is the difference between evaluating a franchise like a buyer and evaluating it like an operator.
| Category | COGS | Labor | Occupancy | Fee Stack | Residual |
|---|---|---|---|---|---|
| QSR (drive-through) | 28–35% | 28–33% | 8–12% | 8–12% | 8–15% |
| QSR (inline/food court) | 28–35% | 30–36% | 10–15% | 8–12% | 2–12% |
| Fast casual | 30–38% | 25–32% | 8–12% | 6–10% | 8–18% |
| Fitness (boutique) | 3–8% | 30–40% | 15–22% | 5–8% | 22–35% |
| Home services | 15–25% | 35–50% | 2–5% | 6–12% | 8–25% |
| Senior care | 5–10% | 50–65% | 3–8% | 5–10% | 7–20% |
| Education/tutoring | 5–12% | 35–45% | 10–15% | 6–10% | 18–30% |
The "Residual" column is what's available for debt service, insurance, utilities, repairs, and owner income — combined. At 8% residual on $800K revenue, you're working with $64,000 before paying yourself or servicing any SBA loan. At 25% residual on $600K, you have $150,000. The category determines the math more than the brand.
COGS: The Fixed-Variable Trap
In food-based franchises, COGS (cost of goods sold) is the most visible cost and the least controllable. Franchisor-mandated suppliers, recipe specifications, and portion sizes mean you cannot meaningfully reduce food cost per unit sold. You can reduce waste, negotiate delivery schedules, and optimize inventory turns — but the per-item cost is largely fixed by the franchise system.
This creates a counterintuitive problem: as revenue grows, food cost grows proportionally. Every additional $100,000 in revenue brings $28,000–$38,000 in additional food cost. There is no economy of scale on the COGS line in a single-unit QSR. Scale benefits only emerge at the multi-unit level through consolidated purchasing and distribution optimization.
Non-food franchises have a structural advantage here. A fitness studio's COGS is primarily consumables (towels, cleaning supplies, equipment maintenance) at 3–8% of revenue. The marginal cost of adding one more member to a class is near zero — every additional dollar is overwhelmingly margin. This is why fitness franchises can show higher percentage margins despite often having lower absolute revenue.
Labor: The Cost That Breaks Unprepared Owners
Labor is the largest single expense in most franchise categories — and the one that moves fastest in the wrong direction. Minimum wage increases, overtime regulations, benefits mandates, and competition for workers in tight labor markets all push labor cost upward. Unlike rent (locked by lease) or COGS (locked by supplier agreements), labor cost can spike 10–15% in a single year if your market raises minimum wage or you lose a key manager.
The labor model also differs fundamentally by category:
QSR: High headcount (15–35 employees per unit), predominantly hourly workers, high turnover (130–150% annually). The cost is steady but the management burden is enormous. A single missed shift cascade on a Saturday lunch rush can cost $2,000–$5,000 in lost revenue and emergency labor.
Home services: Smaller teams (5–15 technicians) but higher per-employee cost. Skilled trades command $18–$35/hour, and the cost of a bad hire is amplified — one technician who damages a customer's property costs more than their annual salary in liability, reputation damage, and lost clients.
Senior care: The highest labor intensity in franchising. Caregiver wages ($12–$20/hour) appear modest, but volume is the killer — a home care franchise with 40 clients requires 50–80 caregivers to cover shifts, vacations, and no-shows. Turnover exceeds 60% annually in the industry. The business is essentially a staffing operation that happens to bill healthcare rates.
Occupancy: The Commitment You Can't Undo
Occupancy costs (rent, CAM charges, property taxes, utilities) are the most rigid cost in the franchise P&L. A 10-year lease signed at $8,000/month doesn't adjust when revenue drops 20% in a recession. The franchisor's site selection guidance and real estate team can help you choose a strong location — but they don't co-sign the lease. You carry the full occupancy risk for the duration of the agreement.
Two benchmarks matter:
Home services franchises have a structural advantage in occupancy: many operate from small office/warehouse spaces at $2,000–$4,000/month rather than retail storefronts at $8,000–$15,000/month. The work happens at the customer's location, so the office is administrative overhead, not revenue-generating real estate. This lower fixed cost base is one reason home services franchises show more resilient margins during economic downturns.
Building Your Own Unit Economics Model
- Start with Item 19 revenue — use the median, not the average (averages are skewed by top performers)
- Apply category COGS benchmark from the table above to estimate gross profit
- Subtract the full fee stack from Item 6 (all ongoing fees, not just royalty)
- Estimate labor cost: ask existing franchisees for headcount and average wage, then add 20–25% for payroll taxes, workers' comp, and benefits
- Model occupancy at the specific rent for your target location — not a national average
The residual after these five deductions is your pre-debt, pre-owner-income margin. If it's under 10% of revenue, the P&L depends on everything going right — no equipment failures, no key employee departures, no revenue dips. If it's over 20%, the business can absorb setbacks and still generate meaningful owner income. Between 10–20% is viable but requires tight operational discipline.
Compare your model against the brand's Item 19 data using our investment calculator, which overlays real FDD data with scenario-based cost modeling. For franchise-specific fee stack analysis, see the real cost of franchise fees.
Unit Economics Shift Between Year One and Year Five
Most franchise buyers model unit economics using the FDD's current numbers — but those numbers describe a mature system average, not a new location's trajectory. Year-one revenue typically runs 60-75% of the Item 19 median while fixed costs (rent, insurance, loan payments) are already at 100%. A QSR unit doing $900K at maturity might generate $585K-$675K in year one against $350K-$400K in fixed obligations. The EBITDA margin that looks comfortable at full revenue — say 18% — drops to 3-8% during ramp-up. By year three, assuming normal growth curves, revenue reaches 85-95% of mature levels but labor efficiency improves as the team stabilizes: same headcount handling 15-20% more throughput. The unit economics inflection point where the business shifts from "surviving" to "generating real owner income" typically hits between months 18 and 30. Model three separate P&Ls — year one, year three, and year five — before evaluating any brand.
Multi-Unit Economics Are Not Linear Multiples
Franchisors present multi-unit ownership as a scaling play: "If one unit earns $120K, three units earn $360K." The math is wrong in both directions. On the cost side, a multi-unit operator saves 8-15% on labor (one GM across two locations, shared back-office), insurance (multi-location policies at 10-20% discount), and marketing (pooled local spend). On the revenue side, cannibalization between proximate locations reduces per-unit revenue by 5-12% depending on territory overlap and category density. The net effect for a three-unit operator at $900K average unit revenue: total revenue runs $2.4M-$2.55M (not $2.7M), total operating costs run $1.95M-$2.1M (vs $2.25M at single-unit rates), producing aggregate EBITDA of $300K-$600K. The owner also needs a district manager by unit three ($55K-$75K salary), which doesn't appear in single-unit models. Run a consolidated P&L for the multi-unit entity, not three copies of your single-unit pro forma.