Buying a franchise: how to verify the promised payback period

A brand’s presentation may promise attractive turnover and a quick return on your investment. But before deciding to buy a franchise, you need to know what evidence underpins the calculations and whether they reflect the business you will actually run. Sharing experiences within the franchise community is valuable, but it is no substitute for your own due diligence. The following steps will help you distinguish documented results from sales promises before you pay the initial franchise fee.

1. Establish exactly what the figures represent

Start with a simple question: Are these actual results from specific outlets, an average across the network, or merely a forecast? Each tells you something different. The results of an established outlet cannot simply be applied to a new business that is still building its customer base.

Ask the franchisor to explain the following points in writing:

• What period do the figures cover, and how many outlets are included?
• Do they include loss-making outlets and those that have closed?
• Are these company-owned outlets or businesses run by independent franchisees?
• Are the figures inclusive or exclusive of VAT?
• Does the profit shown account for remuneration for the owner’s work and all franchise fees?

Do not settle for an average alone. Ask for the range of results and an explanation of differences between locations. If the franchisor shows only its best-performing outlet, the figures may be accurate but unrepresentative for your planning purposes.

Record the source, period and assumptions behind every important figure. Follow up verbal explanations with an email summary and ask for confirmation. This will give a financial adviser a clear basis for reviewing the model independently.

2. Compare the model with supporting records and franchisees’ experiences

Request anonymised monthly financial reports for comparable outlets. Annual totals can conceal seasonal fluctuations and a lengthy start-up period. Pay particular attention to sales, the cost of goods or materials, staffing costs, ongoing fees and operating cash flow.

Check the underlying logic, not just the spreadsheets. If the model assumes a certain number of purchases per day, that figure must be credible given customer footfall, service capacity and opening hours. Similarly, a high margin needs to be supported by current purchase prices and a realistic product mix.

Ask to speak to several current franchisees, ideally with different lengths of experience. If possible, also speak to someone who has left the network. Ask specific questions:

• Which costs surprised you when you started?
• When did income begin to cover operating payments consistently?
• How many hours do you personally work, and do you allow for remuneration for that time?
• How did actual results differ from your original plan?

Respect trade secrets and personal data. A non-disclosure agreement may make it easier to share records, but it does not automatically entitle you to another business’s accounts. If supporting evidence is unavailable, mark the relevant assumption as unverified; do not fill the gap with optimism.

3. Recalculate the payback period using actual cash flows

Recovering your investment is not the same as making an accounting profit. A business can report a profit yet still lack the cash to pay for stock, loan repayments or wages. Prepare a monthly cash-flow forecast covering the period from your first expenditure through to stable trading.

Alongside the licence and equipment, include training, travel, opening stock, recruitment, launch marketing and a cash reserve for the start-up period in your initial funding requirement. Include mandatory software, marketing fund contributions, maintenance, insurance and other contractually required services in your ongoing costs. Check whether franchise fees are charged on sales even in months when you make no profit.

Do not forget to put a value on your own work. A model that only works if the owner works unpaid over the long term does not reflect the same economics as an outlet with a paid manager.

Prepare a base case and a downside scenario. In the downside scenario, allow for slower sales growth, higher staffing costs or a delayed opening. Base these adjustments on specific risks associated with the location and business concept, rather than an arbitrary percentage.

If you use a loan, include both interest and principal repayments in your cash-flow forecast; repayment of the principal is not itself an accounting expense. Distinguish between the payback period for the total investment and that for your own funds. Then compare the payback period with the contract term: renewal may not be automatic.

4. Record key assumptions before signing

The Czech Republic has no dedicated franchise law and no general requirement to provide a standardised franchise disclosure document within a fixed statutory timeframe. Nor is there a specific mandatory registration system for franchise offers. This does not, however, mean that pre-contractual negotiations fall outside the law.

The main legal framework is the Czech Civil Code, Act No. 89/2012 Coll. Franchise agreements are generally concluded as contracts not specifically defined by statute under Section 1746(2). General rules on fair dealing and the pre-contractual duty to provide information under Section 1728(2) also apply. Their precise scope depends on the circumstances; they do not create an automatic right to obtain all of a brand’s internal financial information.

The European Code of Ethics for Franchising is a self-regulatory code, not Czech law. Check whether the franchisor subscribes to it and how its commitments are reflected in the documentation.

Work with a lawyer to distinguish non-binding forecasts from contractual commitments. Key supporting documents, their dates and underlying assumptions can be recorded in an appendix. Also check any rights to change fees unilaterally and the conditions for refunding any reservation payment. Failure to achieve an estimated payback period does not, in itself, automatically give rise to a claim for damages.

Practical takeaway: Before paying, insist on traceable supporting evidence, prepare your own monthly cash-flow forecast and have the key promises reviewed by a lawyer. If the projected payback depends on figures you cannot verify, resolve that uncertainty first — and only then buy the franchise.