Franchise systems are built on a simple financial structure:

  • Franchisees invest capital, run local centers, and carry most of the business risk.
  • Franchisors collect up-front fees and ongoing royalties and fees, usually a percentage of gross sales (often in the 4–12% range in services franchises), plus required contributions to brand and advertising funds.

In early childhood education (ECE), these basic franchise incentives intersect with private equity ownership and public policy shifts, creating real tension between what’s best for the franchisor and what’s best for individual franchisees.

  1. Franchisors earn on gross revenue; franchisees live and die on net profit
  • Franchisor revenue comes primarily from:
    • Initial franchise fees
    • Ongoing royalties on gross sales
    • Required advertising fund contributions
    • Sometimes required vendor, technology, or curriculum fees
  • Franchisee income comes from what’s left after:
    • Wages and benefits
    • Rent or mortgage and taxes
    • Insurance and utilities
    • Supplies, food, curriculum, technology
    • Debt service and taxes on principal repayment
    • Local marketing
    • Franchise fees and royalties

This means a franchisor can see growing system revenue and royalty income even if many franchisees are experiencing flat or declining profits.

  1. Growth vs. saturation: unit count matters more to franchisors

Public sources note that many of the largest for-profit childcare chains and franchise systems in the U.S. — including KinderCare, Learning Care Group, The Goddard School, and Primrose — are backed or controlled by private equity (PE) investors.

PE-backed franchisors and large chains are typically rewarded for:

  • Increasing system-wide revenue
  • Growing unit count and market share
  • Demonstrating footprint expansion to investors or future buyers

By contrast, individual franchisees are rewarded only if:

  • Their specific location(s) are profitable
  • Their local market is not over-saturated
  • Policy and competitive dynamics still support premium tuition

This creates a structural tension:

  • A franchisor (and its investors) may favor opening additional locations, entering new markets, or pushing capacity growth, even when existing franchisees see those moves as saturation that erodes their margins.
  1. Policy and de-privatization risk are felt differently

Franchisors:

  • Can reposition the brand, add products, shift emphasis, or expand into more favorable geographies
  • Can show investors growth in some states even as others become less attractive
  • May support participating in UPK or public partnerships to show “alignment” with policy trends, even when reimbursement is weak

Franchisees:

  • Are tied to one or a few specific trade areas
  • Carry the local real estate risk
  • Absorb the full earnings impact of Full-day Kindergarten (FDK), Universal Pre-Kindergarten (UPK), Universal Preschool (UPS), Universal Child Care (UCC), or nonprofit competition if it undermines enrollment and pricing

Research and reporting on UPK and other public expansion initiatives shows that private providers often lose older children and revenue, face quality-vs-viability tradeoffs, or close altogether as public options grow.

Franchisors may acknowledge this but still promote public partnerships or expansion strategies that look good at the brand or investor level, even if individual unit economics are weakening.

  1. Support vs. cost: who pays when conditions worsen?

When labor costs, insurance, and regulations increase — or when de-privatization shrinks enrollment — franchisors can:

  • Maintain or even raise royalties and fees — if allowed by Franchise Agreements (FAs)
  • Introduce new required programs or vendors — if allowed by FAs
  • Market “solutions” that cost money but may not fix core economics

Franchisees:

  • Must pay these fees – if included in their FAs — regardless of whether their net income is growing
  • Have limited leverage to renegotiate terms
  • May feel squeezed between policy pressures, wage inflation, and franchisor requirements

Academic work on franchise contracts and royalties notes that service-sector franchises often carry higher royalty percentages and complex fee structures, which can materially affect franchisee profitability.

  1. PE ownership can amplify these incentive differences

Recent analyses highlight that PE ownership has a significant presence in for-profit childcare chains and large franchise systems.

PE investors:

  • Seek returns over defined time horizons
  • Often emphasize growth and margin expansion at the corporate level, and eventual exit (sale or IPO)
  • May prioritize moves that increase the franchisor’s Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) — sometimes through higher fees, vendor arrangements, or cost-cutting at the support level, because every dollar of EBITDA may be multiplied 15-20 times when valuing the franchisor for sale

Franchisees:

  • Need long-term local stability, not just short-term system metrics
  • Depend on sustained local demand, realistic tuition levels, and practical support

The result: strategic decisions that make sense for a PE-backed franchisor can feel misaligned with what’s needed for individual centers to remain viable in de-privatizing markets.

Bottom Line

Franchisors and franchisees are formally “on the same team,” but their financial incentives are not aligned:

  • Franchisors win on system-wide sales, unit growth, and royalty streams.
  • Franchisees win only when local centers remain sustainably profitable after all costs, including fees and royalties, are paid.

In a stable, growing market, those interests can co-exist without friction. In a de-privatizing, high-cost, policy-driven market, the differences become much more apparent — and much more important for franchisees to understand and plan around.