Franchising in Denmark: Calculate a Unit’s True Profitability

A profit in your existing business is not necessarily one a franchisee can replicate. You may work without taking a full salary, own the premises or receive special supplier discounts. Before expanding into a franchise network, you should therefore calculate what an independent unit could realistically earn on terms also available to a new franchisee. The task here is to adjust the existing accounts, not simply copy them.

1. Identify the profit that actually belongs to the unit

Start with a separate profit and loss account for the business operation you intend to replicate. If the business has several activities, separate them. A shop, for example, should not appear more profitable because income from the owner’s consultancy work or a separate online shop is recorded in the same accounts.

Choose a period that includes both busy and quiet months. Also note any circumstances that make the period unusual: a temporary rent discount, a large one-off order, prolonged roadworks or exceptionally low staffing costs. Avoid excluding poor months simply because they make the model less attractive.

Then prepare a summary with three columns:

• Reported profit: What do the business accounts show?
• Adjustments: Which income and costs are not representative?
• Comparable profit: What would the operation look like on terms a new unit could realistically secure?

Every adjustment should have a reason and supporting evidence. A quotation, a payroll statement or an existing contract carries more weight than an assumption that something will probably be cheaper. Retain unfavourable adjustments too: the aim is to test the economics, not improve the presentation.

2. Put a price on the owner’s work and special advantages

The owner’s work is often the largest hidden cost. Record your tasks and the time you spend on them: serving customers, preparing staff rotas, purchasing, bookkeeping, local sales and troubleshooting. Include evening and weekend work too.

Next, calculate a realistic cost of having those tasks carried out. Use appropriate pay rates and employment terms, including pension contributions, holiday pay and other employer costs where relevant. If the franchisee will do the work personally, the calculation should still include a reasonable allowance for their labour. This is an item in the financial model, not necessarily a salary recorded in the accounts under every business structure.

Distinguish between payment for work and a return on investment. A business that merely pays its owner for long working weeks has not thereby demonstrated that it generates a profit sufficient to provide a return on the capital the owner has put at risk.

Review owner-specific advantages as well:

• Is the rent low because the premises are owned personally or by a related company?
• Do family members work for free or on special terms?
• Do purchase prices depend on personal relationships that will not extend to new units?
• Does another part of the business handle administration without charging the unit?

Replace these advantages with realistic costs unless you can document that the franchisee will receive equivalent terms.

3. Calculate the economics on the franchisee’s terms

Once the accounts have been adjusted, incorporate the ongoing costs of belonging to the franchise network. These may include royalties, contributions to joint marketing, mandatory systems and local administration. Use the proposed contractual terms and flag any amounts that have not yet been settled.

Avoid double counting. If a shared service replaces a local expense, the model should show both the new charge and the expense that genuinely falls away. Conversely, do not remove a local expense simply because the franchisor offers advice in that area.

Keep start-up costs separate from day-to-day operations, but make the need for ongoing maintenance and equipment replacement visible. State clearly whether the profit figure is before or after depreciation, financing costs and the allowance for the owner’s labour.

Then prepare a base case and a cautious scenario. Test, for example, lower turnover, higher staffing requirements or a higher cost of goods sold. Also examine the turnover needed to cover ongoing costs, including the calculated allowance for labour. This provides a more useful basis for a decision than a single attractive profit figure.

4. Use the calculation responsibly before signing an agreement

Denmark has no dedicated franchise law and no franchise-specific registration requirement. Nor is there a legal requirement for the concept to have been profitable for a particular period before you enter into franchise agreements. General business registration requirements still apply.

Franchise agreements are governed, among other things, by the Danish Contracts Act and general principles of contract law. The Danish Marketing Practices Act and Competition Act may also be relevant. Section 36 of the Contracts Act allows unreasonable agreements to be amended or set aside, in whole or in part.

There is no statutory, franchise-specific disclosure document. Nevertheless, general duties of good faith and disclosure may require material information to be provided before the agreement is signed. Depending on the circumstances, misleading financial information may give rise to liability or other consequences under contract law.

If you show the calculation to prospective franchisees, therefore, distinguish clearly between historical accounting figures, your adjustments and future expectations. A forecast is not an actual result, and a general disclaimer is no substitute for a sound basis for the calculation.

Practical takeaway: Ask your accountant to review an adjusted set of accounts for one unit before you proceed. If the economics only work with unpaid owner labour or special personal advantages, improve the operating model before expanding the franchise network.