Buying a franchise: how to check the promised payback

“Your investment will pay for itself quickly” is an attractive claim, but it is not enough to base a franchise purchase on. Outlets operating under the same franchise brand can achieve very different results. Before accepting a financial model, you need to establish which data it uses, what its authors mean by profit and whether it reflects the conditions in which your business will operate. The aim is not to secure a promise of success, but to distinguish documented results from estimates.

1. Find out whose results the franchisor is showing you

Start with a simple question: are these actual financial results from specific outlets, or a hypothetical calculation? Both can be useful, but they must not be confused. A spreadsheet prepared for an ideal outlet is not evidence that a new franchisee will achieve those results.

For actual results, ask for a description of the sample of outlets, the period covered and how the outlets were selected. It is particularly important to distinguish company-owned outlets from independent franchisees. A company-operated outlet may have different purchasing terms, or its accounts may not include all support costs.

In particular, ask:

• Do the figures include newly opened outlets and those that subsequently closed?
• Do they represent the network-wide average, the median result or the best-performing outlet?
• How long had the outlets been trading, and what were their opening hours?
• Are they comparable in size, type of location and range of services?
• Which items were excluded from the results as exceptional?

Ask for anonymised supporting records if the franchisor cannot share individual financial statements. Protecting confidential information may justify anonymisation, but it does not in itself establish the credibility of the resulting figure. If supporting records are unavailable, mark the figure in your model as an unverified assumption.

2. Translate profit into cash available to the investor

Turnover, operating profit and cash flow are not the same thing. High sales can go hand in hand with low margins. Accounting profit does not tell you how much cash will remain after repaying loan principal, replenishing stock or buying additional equipment.

Ask for an explanation of every subtotal in the presentation. If the model uses earnings before depreciation, interest and tax, do not automatically treat that figure as money you can withdraw from the business. Clarify how VAT is treated too: depending on your tax status, it may affect profitability and cash movements differently.

It is essential to put a value on your own work. If you will be managing the outlet full-time and the model does not include appropriate remuneration, part of the supposed investment return is actually payment for the hours you work. For comparison, prepare a version in which a paid manager does the same job.

Include all the funds needed to launch the business in your initial investment: not just the entry fee and equipment, but also design and planning work, training, opening stock and money tied up before opening. Distinguish a refundable deposit from an expense, but do not ignore it when tracking committed funds. Dividing the investment by annual profit may provide a rough indication of the payback period; assess the actual payback using cumulative cash flows and clearly defined assumptions.

3. What must be disclosed under Czech law

The Czech Republic has no specific franchise legislation and no mandatory, standardised pre-contractual disclosure document exclusively for franchises. A franchise agreement is usually concluded as an innominate contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. The Code’s general rules apply, along with provisions governing particular contractual obligations, depending on the substance of the relationship.

However, the absence of a specific disclosure form does not give franchisors free rein to present misleading figures. The Civil Code requires parties to act honestly in their dealings, and Section 1728(2) provides for the mutual disclosure of relevant factual and legal circumstances during negotiations. This does not, however, automatically establish a right to the complete accounting records of every member of the network, or a statutory guarantee of future profit.

The European Code of Ethics for Franchising is a self-regulatory code, not Czech law. Its relevance to a particular relationship depends chiefly on membership, commitments undertaken and whether it has been incorporated into the contract.

Keep presentations, spreadsheets and written explanations. Distinguish between documented historical figures, forecasts and express contractual commitments. Any legal consequences of a false statement depend on the circumstances, the evidence and its influence on your decision; failure to achieve a forecast does not automatically create an entitlement to compensation.

4. Turn the model into a decision-making test

Before signing, prepare a base case and a downside scenario. Test fewer transactions, lower average spending, weaker margins and higher staffing costs. Do not change sales figures alone: some costs remain unchanged even when sales fall.

For each key input, record its source, date and degree of uncertainty. This will make it easier for an accountant or financial adviser to identify missing items and figures that are not comparable. Send the franchisor specific discrepancies for explanation, then incorporate the answers into a revised model.

The practical takeaway: Base your decision on cash flow supported by evidence, after allowing for payment for your own work and all necessary expenditure—not on a single payback figure in a sales presentation.