Buying a franchise: How to verify the earnings figures

An impressive budget is not proof of a sound investment. When you buy into a franchise network, you need to understand where the earnings figures come from and whether they are relevant to your proposed business. This guide explains how to verify the franchisor’s financial information and use it to make an informed decision before you commit.

1. Understand the rules on pre-contract disclosure

Denmark has no dedicated franchise legislation and no franchise-specific requirement to provide a standardised disclosure document before a contract is signed. Nor is there a special public franchise register that approves the business model or confirms its profitability. General requirements, such as business registration, still apply.

Franchise agreements are governed by the Danish Contracts Act and general principles of contract law. Other legislation, including the Danish Marketing Practices Act and Competition Act, may also be relevant. The absence of specific disclosure requirements does not mean that franchisors are free to provide false or misleading information. Depending on the circumstances, doing so may have consequences for the agreement or give rise to liability for damages.

Section 36 of the Danish Contracts Act allows unreasonable agreements to be amended or set aside, but it does not protect you against a poor investment. As an independent business owner, you should have key information checked and documented before signing.

There are also ethical standards for franchising based on the European Code of Ethics for Franchising. These are neither legislation nor official approval. Ask whether the franchisor subscribes to such a code and what specific obligations this places on them.

Your starting point should therefore be: Ask for the information you need and agree on sufficient time to review it with an independent accountant and lawyer.

2. Establish what the figures actually show

Start by distinguishing between a sales forecast, historical results and an illustrative financial example. These carry very different weight as evidence. Ask for each document to state the period covered, the data source and the key assumptions.

Then ask these questions:

• Do the figures come from franchisor-owned outlets or independent franchisees?
• Do they cover all relevant outlets or only selected success stories?
• Are closed, transferred and newly opened outlets included?
• Is turnover stated excluding VAT and after discounts and refunds?
• Is profit shown before or after the owner’s remuneration, franchise fees, depreciation and interest?
• How many hours does the owner work in the business shown?

An average can conceal substantial differences. Ask for the range of results and, ideally, the median: the middle result. If the information covers only a small number of outlets, this should be clearly stated.

Compare outlets that resemble your planned business in size, customer profile, location and opening hours. An established outlet with a loyal customer base is not a reliable benchmark for your first year of trading. Results from outside Denmark also need to be adjusted for Danish wages, prices and costs.

3. Cross-check the information

Ask for anonymised profit and loss accounts or an accountant-verified summary if the franchisor cannot share individual accounts. Confidentiality may be a legitimate concern, but the solution should be suitable supporting evidence rather than unsupported assurances.

Review the franchisor’s publicly available annual reports, where these exist. Look at trends in equity and profit, and any comments from the auditor. Remember that the franchisor’s finances do not necessarily reflect franchisees’ earnings. A head office can make money from initial fees and ongoing charges even when some businesses in the network are struggling.

Speak to both newer and experienced franchisees. Ask whether it is possible to contact former franchisees too. Ask specifically about:

• how long it took to achieve stable turnover;
• additional investment needed after opening;
• the owner’s actual working hours;
• differences between budgeted and actual results;
• the quality of the support assumed in the budget.

Record the date, source and any inconsistencies. If the accounts and your conversations tell different stories, the discrepancy needs explaining. Missing documentation is not, in itself, proof of a poor business model, but it increases the uncertainty surrounding your decision.

4. Build your own budget and set your walk-away threshold

Prepare your own operating budget and monthly cash flow forecast with your accountant. Include all mandatory payments: the initial franchise fee, ongoing franchise fees, marketing contributions, software licences, training and any minimum purchase requirements. Pay particular attention to how variable fees are calculated.

Include realistic remuneration for your own work. Otherwise, a seemingly profitable business may actually depend on you working without an adequate income.

Test both a base case and a cautious scenario with a slower start, lower sales and higher costs. Identify when cash reserves will be at their lowest and whether your funding covers that point with a suitable buffer. Loan principal repayments, for example, reduce cash flow even though they are not an operating expense.

Have key financial information and assumptions recorded in writing in the agreement or an appendix. Historical results are not an earnings guarantee. Ask your lawyer to assess the implications of qualifications attached to forecasts and clauses stating that earlier sales materials do not form part of the agreement.

Practical takeaway: Only sign once you can explain where the figures come from, the total payments you will need to make and your funding needs under a cautious scenario. If crucial information cannot be verified, put the purchase on hold.