Buying a Franchise: How to Check Earnings Projections

A spreadsheet showing attractive profits can be a persuasive part of a franchise sales pitch, but it is not proof that you will achieve the same results. Before joining a franchise network, check how the projection was prepared, whose results it presents and what it leaves out. The aim is not to secure a promise of guaranteed earnings, but to understand how realistically you could replicate the results in your own circumstances.

1. Establish whether the figures show results or expectations

Start by distinguishing between three things: outlets’ actual results, the franchisor’s budget and your own business plan. A document may look precise yet contain nothing more than assumptions. For every significant figure, ask for an explanation of its source and the period it covers.

Ask the franchisor specific questions:

• Are the figures taken from accounting records, or are they illustrative?
• Do they relate to outlets operated by the franchisor or by independent franchisees?
• How many outlets are included, and how were they selected?
• Are closed and loss-making outlets included?
• Do the figures show the first year of trading or the results of an established business?

The average performance of successful, long-established outlets is not the same as the result a new franchisee can expect. Nor is a franchisor-operated outlet necessarily comparable: it may have different purchasing terms, shared staff or costs covered by head office.

Ask for a range of results and the median, if available, rather than just the best example. The median is the middle value in the results being examined and is less affected by a single exceptionally successful outlet. If confidentiality prevents the data from being shared, suggest an anonymised summary or verification by an independent professional subject to appropriate confidentiality obligations.

2. Translate ‘earnings’ into a comparable financial measure

The term ‘earnings’ may refer to turnover, gross margin, operating profit or the cash available to the owner. Without a clear definition, the figure is not a reliable basis for a decision.

Ask an accountant to break down the projection from revenue through to the bottom line. Income and expenses must be presented on a consistent basis, with the treatment of VAT clearly explained. In particular, check whether deductions have been made for goods, staff, premises, energy, delivery, card payment processing, franchise fees and mandatory digital systems.

Include reasonable remuneration for your own work at market rates. If the owner runs the outlet day to day without accounting for the cost of their labour, the stated profit represents not only a return on invested capital but also payment for their work.

Check depreciation, interest, taxes and loan principal repayments separately. Repayment of loan principal is not an expense in the profit and loss account, but it reduces available cash. Buying new equipment can also require a substantial cash outlay that is not fully recognised as an expense in the same year.

Prepare two separate forecasts: expected profit or loss and expected cash flow. This will help you avoid assuming that an accounting profit automatically means cash available for personal spending.

3. Test the assumptions, not just the final figure

Break turnover down into its components: the number of transactions, average transaction value and number of trading days. For a service-based business, check the available appointment slots, service duration and capacity utilisation. A projection that requires near-full capacity from the first month needs further explanation.

Next, check whether the planned staffing and equipment can realistically handle that workload. Sales growth often brings additional shifts, maintenance or delivery costs, so expenses will not necessarily stay the same.

Prepare a base case and a downside scenario. In the downside scenario, test slower sales growth, a lower margin and higher labour costs together. Do not choose percentages arbitrarily: base the changes on supplier quotations, recruitment and employment costs, and available data from comparable outlets.

Also calculate the break-even point: the revenue needed to cover the costs you have included. Clearly state whether this calculation includes remuneration for your work and financial commitments. If breaking even requires turnover close to the outlet’s maximum capacity, there is very little room for error.

4. Keep a record of claims and clarify their legal significance

Croatia has no dedicated franchise law and no specific statutory requirement for a standardised pre-contractual franchise disclosure document. Nor is there a specific obligation for franchisors to provide every prospective franchisee with a standardised earnings projection. That does not, however, mean that negotiations fall outside the law.

Croatia’s Civil Obligations Act applies, including the principle of good faith and fair dealing and the rules on liability during negotiations. Depending on the circumstances, inaccurate claims may raise issues of fraud, mistake or compensation for loss. A result below expectations does not, in itself, establish the franchisor’s liability.

Keep presentations, emails and different versions of the calculations. Request written confirmation of the data sources, assumptions and limitations of the projection. Have a lawyer review how the contract treats earlier statements and any promises about results. A franchisee entering into a contract for business purposes should not assume that consumer protections will apply.

Practical takeaway: before signing, ask for a verifiable source for every key figure, include all costs and test a downside scenario. Assess the purchase on the basis of sustainable performance, not the most attractive spreadsheet.