Buying a Franchise: How to Check Promised Earnings

An attractive earnings projection can make buying a franchise seem an easier decision, but it is not proof that your outlet will achieve the same results. Before joining a franchise network, you need to check where the figures come from, what they leave out and how relevant they are to the Croatian market. This guide explains how to assess financial promises before paying a fee or signing binding documents.

1. Clarify what Croatian law requires

Croatia has no dedicated franchise law or general requirement for a specific franchise pre-contractual disclosure document. Nor is there a specific statutory deadline for providing such a document before signing. Do not therefore assume that a sales presentation contains all the information you need to make a decision.

A franchise agreement is generally an innominate contract, meaning it is not a contract type specifically defined by law. Negotiations and contractual relationships are governed by the Croatian Civil Obligations Act, including the principle of good faith and fair dealing and the rules on liability for negotiations conducted contrary to that principle. A projection that fails to materialise does not, in itself, automatically entitle you to damages: what matters is what was represented, on what basis and in what circumstances.

The Companies Act, Trade Mark Act and Competition Act are also relevant, alongside applicable EU competition rules. How they apply in practice depends on the agreement and the business.

The European Code of Ethics for Franchising is a self-regulatory standard, not Croatian law. Check whether the franchisor is bound by it through membership or contract. The Croatian Chamber of Economy (HGK) Franchise Register can be a starting point for finding brands, but it is neither a compulsory state register of approved franchises nor confirmation of their profitability.

2. Ask for the supporting evidence, not just the headline figure

Ask the franchisor for a written explanation of every claim about turnover, profit or return on investment. In particular, distinguish actual results from existing outlets from estimates for a future location. Labelling something an “example of business performance” does not tell you whether it is based on real data or a sales illustration.

Ask the same questions about every projection:

• What period does it cover, and how many outlets does it include?
• Does it include only successful outlets, or closed locations as well?
• Does it show the average, the median or the best-performing outlet’s result?
• Are the outlets company-owned or run by franchisees?
• Are revenue and costs shown inclusive or exclusive of VAT?
• Does the profit figure allow for paying the owner a market-rate wage for their work?

Ask for anonymised monthly figures from comparable outlets, with an explanation of the main costs and seasonal variations. A confidentiality agreement may enable the sharing of sensitive data, but it does not guarantee that you will receive it. If the franchisor has no Croatian outlets, ask how results from other countries have been adjusted to reflect local prices, wages and buying habits.

3. Check franchisees’ experiences and publicly available information

Ask to speak to several current franchisees, including those operating in a market or location similar to yours. If possible, speak to former franchisees too. Contacts selected by the franchisor are useful, but they may not reflect the experience of the whole network.

Ask how long it took to get established, which costs were not obvious at the outset and how much additional money was needed after opening. One useful question is: “Which budget item would you increase in your initial business plan if you were starting today?” This often reveals more than a general question about satisfaction.

Check the identity of the contracting party and its authorised representatives in Croatia’s Court Register, or the relevant register if the business is not a company. For Croatian companies, review the available annual financial statements in the Register of Annual Financial Statements maintained by the Croatian Financial Agency (FINA).

Bear in mind that a company’s results are not necessarily those of a single outlet. It may operate several locations, have other sources of revenue or carry out related business activities. Use public accounts as a consistency check, not as a substitute for data relating to the specific franchise format.

4. Turn the projection into your own cash flow plan

Work with an accountant to prepare a monthly cash flow forecast. Profit on paper is not the same as available cash: opening stock, payment terms, tax liabilities and loan repayments can deplete funds before the business becomes established.

Include the initial and ongoing franchise fees, marketing contributions, compulsory software, training, travel, maintenance, insurance and equipment replacement. Check whether each fee is calculated on turnover, whether a minimum amount applies and whether it remains payable when you are making a loss.

Prepare a base case and a downside scenario. In the latter, assume slower sales growth, higher labour costs and a delayed opening. Clearly identify these assumptions as your own, rather than facts about the brand. Calculate how much additional capital you will need before the business can meet its ongoing obligations.

5. Document your decision before paying

Keep presentations, emails, versions of projections and written explanations. Show your lawyer the sales claims as well as the draft agreement. Pay particular attention to clauses stating that the franchisor does not guarantee results or that the agreement supersedes earlier statements.

Before paying a reservation fee, establish in writing what it covers, whether it is refundable and what happens if your checks reveal an unacceptable risk. If key information is missing, postpone the decision rather than fill the gaps with optimism.

Practical takeaway: only consider buying once you can explain the basis of the projection, all significant costs and how you would fund the downside scenario. A recognisable brand is no substitute for a verifiable business plan.