Franchise profitability: how to test projected returns

A sales presentation may show attractive turnover and a quick return on your investment. But those figures only help you choose a brand if you understand how they were calculated. Within the same franchise network, individual businesses can achieve different results. Before buying, turn the promise of profitability into a projection you can verify, tailored to your chosen city and the outlet you intend to open.

1. Find out where the figures came from

Ask the franchisor for the calculations behind the projection: the data sources, the period analysed, the number of outlets included and the selection criteria. An average without this information can conceal important differences between new outlets, established businesses and exceptional locations.

Check whether the results presented relate to company-owned or franchised outlets. Their cost structures may differ. Also confirm that the sample matches the format on offer: a kiosk, a high-street shop and a home-based business should not be treated as equivalent.

Request written answers to these questions:

• Is the turnover quoted an average, a median or the result of one selected outlet?
• Does the sample include outlets performing below expectations?
• Do the figures cover a full annual cycle, including quieter months?
• How long had the outlets analysed been operating?
• Does the stated profit already account for the owner’s remuneration and taxes?

If confidentiality restrictions apply, ask for aggregated or anonymised data. A lack of figures for individual outlets does not rule out meaningful analysis, but unclear assumptions make the projection less reliable.

2. Rebuild the financial picture for your future outlet

Do not start with the advertised profit. Start with achievable sales at your intended location and in your chosen format. A simple estimate combines the number of transactions, the average spend per purchase and the number of trading days. For services, also consider service capacity, appointment utilisation and cancellations.

Check this demand against operational limits. A projection that requires more customers to be served than the team can handle is not sustainable, even if there is sufficient interest.

Then, with an accountant’s help, prepare a monthly financial breakdown:

Component	What to check
Revenue	Sales volume, discounts, cancellations and seasonality
Variable costs	Goods, supplies, taxes on sales, commissions and payment processing fees
Fixed expenses	Premises, staff, systems, insurance and outsourced services
Owner’s remuneration	Pay for the owner’s work, known in Brazil as pró-labore, at a level appropriate to the work required
Reinvestment	Maintenance and equipment replacement over time

Include franchise network charges using the calculation basis specified in the documents. Avoid counting the same expense twice or leaving costs out because they appear under a different heading in another report.

Turnover, profit and cash are not the same thing. Sales paid in instalments may be recognised in the accounts before the money arrives. Equipment purchases use cash, although their accounting treatment differs. To assess returns, examine both operating results and cash flow.

3. Test the payback period under different scenarios

The payback period — the time needed to recover your investment — should account for all the money committed to getting the outlet up and running. Include spending before opening and any additional funds needed while sales build up.

Dividing the investment by the monthly profit of an established outlet can give a misleading impression. A new outlet usually needs time to build a customer base and fine-tune its operations. Use a month-by-month projection instead, tracking when cumulative net cash flow recovers the amounts invested.

Build three scenarios: a base case, an optimistic case and an adverse case. Do not apply arbitrary variations simply to fill in the spreadsheet. Ground your assumptions in local demand, operating capacity, quotations and available evidence.

In the adverse scenario, test lower sales, a delayed opening, costs above budget and slower growth. Also examine the break-even point: how much must the outlet sell to cover its costs and expenses?

If borrowing is involved, distinguish the performance of the business from the return on your own funds. Interest and loan repayments affect the cash available to you as the buyer. Finally, compare the projected payback period with the term of the franchise agreement, without assuming it will automatically continue after expiry.

4. Document the assumptions before deciding

In Brazil, Law No. 13,966/2019, the Franchise Law, requires the Franchise Disclosure Document, known locally as the Circular de Oferta de Franquia (COF), to state, among other things, the estimated initial investment and applicable fees. It does not provide a general guarantee of profit or require a standardised profitability projection.

The COF must be provided at least ten days before the contract or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. This is a minimum notice period, not a deadline for completing your assessment.

Keep presentations, spreadsheets and written responses from the sales team. If a specific performance promise is made, ask for clarification of its conditions and contractual implications, and have these reviewed by a lawyer. Do not confuse an estimate with a binding commitment.

In practice: only proceed once you can explain where sales will come from, which expenses have been deducted and what happens if results take longer to materialise. A useful projection does not eliminate risk; it enables you to make an informed decision about it.