Buying a Franchise in Canada: Checking Revenue Forecasts

An attractive turnover figure is not enough to justify buying a franchise. You need to know where it comes from, which outlets it represents and under what conditions your business might achieve it. In Canada’s franchise sector, thorough due diligence means turning every sales forecast into a documented assumption, then having it reviewed by an independent accountant.

1. Identify what the quoted figure actually measures

Start by distinguishing between three things: the historical results of existing outlets, a projection prepared for your proposed outlet and a simple sales target. They do not carry the same weight as evidence. A sales target does not prove that a comparable location has already achieved it.

Ask the franchisor to explain in writing what each figure represents. Does it refer to one outlet’s annual sales, an average across the network or the results of a few selected outlets? Does it include taxes, refunds or sales through channels you will not have access to?

Also check the period covered. Sales achieved in an exceptional year, or after several years of trading, are not automatically a valid benchmark for your first year.

For each figure, record:

• its source and date;
• the precise definition of the revenue being measured;
• the number of outlets represented;
• how long they have been trading and their format;
• any exclusions applied in the calculation.

A figure that cannot be clearly defined should not become the central assumption in your budget.

2. Check whether the outlets are comparable

An average can conceal substantial differences. Where this information is available, ask for the median and the distribution of results rather than a single overall figure. The median marks the middle of the results, but it is no more a guarantee of your future performance.

Look particularly closely at the make-up of the group presented. Does it mix franchisor-owned outlets with independently operated franchises? Drive-through restaurants with counter-service outlets? Recently opened units with well-established businesses?

Also ask whether outlets that have closed, changed hands or temporarily stopped trading have been excluded. A sample limited to outlets that are still open can give an overly favourable picture of the results a new buyer might achieve.

The comparison should cover practical factors: floor area, service capacity, opening hours, staffing requirements and the proportion of sales delivered or made online. It is not simply a matter of finding an outlet in a similar town or city, but of understanding how it generates its sales.

The franchisor may face confidentiality constraints. If so, suggest using anonymised or aggregated data. If no meaningful comparison is possible, treat that uncertainty as a risk rather than replacing it with an optimistic estimate.

3. Build up the sales figures and test the assumptions

With your accountant, break the projected revenue down into factors you can verify. For a retail business, you might multiply the number of daily transactions by the average transaction value and the number of trading days. For a service business, start instead with billable appointments, the average price and the team’s actual capacity.

This exercise can reveal inconsistencies hidden by an annual total. Does the projected volume require more customers than the team can serve? Does it assume a fully booked schedule from opening day? Is the average transaction value based on prices your outlet can realistically charge?

Then prepare a base-case scenario and a cautious scenario. Vary the number of transactions, the average transaction value and the pace of the start-up period separately. Avoid arbitrarily reducing the total without explaining what would cause the decline.

Finally, distinguish sales from financial performance. Additional revenue may bring extra staffing, stock or delivery costs. Your accountant should translate each scenario into operating profit or loss and cash flow, without treating turnover as your personal income.

4. Check the forecasts against the applicable disclosure requirements

The rules depend on the province. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exceptions, a disclosure document to be provided at least 14 days before signing a franchise-related agreement or making a franchise-related payment. This document must contain the required material facts and the information needed to make an informed decision.

This does not mean that the franchisor guarantees your turnover or must always provide a revenue forecast. Ask your lawyer to review the financial representations actually provided and the disclosure obligations associated with them.

Quebec has no specific legislation requiring a franchise disclosure document comparable to Ontario’s. The general provisions of the Civil Code of Québec, particularly those concerning good faith and consent, remain relevant.

Keep the presentations, emails and spreadsheets you receive, along with their dates. Flag any differences between a sales projection and the contractual documents to your lawyer.

Key takeaway: before committing, insist on an identifiable source, a comparable group of outlets and testable assumptions. If the revenue figures remain unverifiable, do not take them for granted.