Franchising in Canada: setting boundaries for earnings projections

A profitable business does not guarantee that its future franchises will be profitable too. Before presenting potential earnings to a prospective franchisee, a business owner must distinguish between what their outlet has actually earned and what a franchisee might achieve. To build a sustainable franchise network, financial information should inform decisions, not turn local success into a sales promise.

1. Separate historical results from forecasts

Start by classifying every figure you intend to share. Historical turnover describes past trading over a defined period. A budget sets out operating assumptions. A forecast estimates a future result. These documents are not interchangeable, even when they relate to the same outlet.

Prepare a record for each figure: the period covered, the outlet concerned, the accounting source, the calculation method and any known limitations. In particular, specify whether amounts include taxes, whether sales have been annualised and whether the outlet experienced a temporary closure or exceptional trading conditions.

Above all, avoid presenting turnover as personal income. Prospective franchisees must be able to distinguish between sales, margins, operating expenses, loan repayments and any remuneration they might receive.

Checkpoint: an outside reader should understand what each figure measures without needing a verbal explanation that changes its meaning.

2. Reconstruct the conditions a franchisee would face

Your existing business accounts are a starting point, not a model that can be transferred directly. Your outlet may benefit from a long-standing rental agreement, loyal customers or a founder whose work is not fully remunerated. Conversely, certain personal or exceptional expenses may obscure its underlying performance.

With your accountant, prepare a reconciliation between actual results and the conditions envisaged for a franchisee. In particular, examine:

• the pay needed to replace the owner's labour;
• the proposed royalties and advertising contributions;
• rent and associated charges in the target market;
• staffing, insurance and software costs;
• start-up losses and working capital requirements;
• equipment maintenance and replacement.

Keep historical results unchanged and present adjustments separately. An adjusted result must not appear to be one that was actually achieved.

Next, test the model's sensitivity: what happens if sales build more slowly, wages rise or margins fall? These scenarios help show which economic factors the business depends on. They do not become reliable simply because a spreadsheet calculates them precisely.

3. Have financial communications reviewed before sharing them

Canada has no specific federal franchise disclosure regime. Relevant obligations arise notably under provincial legislation, and the requirements must be checked for each proposed location.

In New Brunswick, for example, the Franchises Act requires a disclosure document containing material facts, along with the information and documents prescribed by regulation. Subject to applicable exceptions, the prospective franchisee must receive it at least fourteen days before signing the franchise agreement or any other agreement relating to the franchise, or paying any consideration. The Act requires the information to be accurate, clear and concise.

A financial presentation that could influence a purchasing decision should therefore not circulate as a sales pitch detached from the legal documentation. Ask a lawyer to review the rules applicable to projections, their supporting basis, the explanations required and their place in the disclosure document. A statement that ‘results are not guaranteed’ does not remedy misleading assumptions.

Quebec has no franchise-specific legislation. The Civil Code of Québec applies, including its duties of good faith and pre-contractual disclosure. The absence of a disclosure document prescribed by specific legislation does not permit false expectations about profitability.

4. Maintain a single approved version of the figures

Establish an internal procedure before the first discussions with prospective franchisees. Appoint someone to take responsibility for the data, a financial approver and a legal adviser to review how it is used. Date every presentation and withdraw superseded versions.

Apply controls across all communications: brochures, emails, video presentations, meetings and off-the-cuff answers. A representative should not quote an investment payback period that does not appear in the approved documents. A new question should receive a verified answer, not an impromptu estimate.

Retain the supporting calculations and a record of the documents shared. Encourage prospective franchisees to prepare their own budgets with an independent accountant, without presenting that review as a substitute for your own obligations.

Key takeaway: before discussing potential earnings, document actual results, separate out adjustments and have a single presentation reviewed and approved. It is better to explain a model's limitations than to sell certainty it cannot provide.