Buying a franchise: check the basis of the profitability forecast

A profitability forecast presented by a franchisor may look convincing even if its assumptions do not suit your proposed location. A franchise network provides an established concept and shared operating practices, but you bear the financial risk of your own business. Before buying a franchise, find out where the forecast figures come from and what would need to happen for your business to achieve them.

1. Distinguish actual results from sales projections

Ask the franchisor for the financial model in an editable format, along with a written explanation of the underlying data. Annual turnover and a bottom-line profit figure are not enough. You need to know whether the figures represent actual results, averages across several outlets or assumptions about future performance.

Check at least the following:

• What period do the comparative figures cover, and how many outlets are included?
• Do they include new outlets or only established businesses?
• Does the data include outlets that have closed or performed poorly?
• Are the comparison outlets franchisee-operated or owned by the franchisor?
• Do the figures exclude VAT, and have they been calculated consistently?

An average can conceal considerable variation. Where possible, also ask for the median and range, and an explanation of how the outlets were selected. If individual results cannot be disclosed for confidentiality reasons, request an anonymised summary and an explanation of the calculation method.

An outlet owned by the franchisor may not pay the same fees as a franchisee. Its results therefore do not, on their own, demonstrate your business’s earning potential. Show separately in the model any adjustments needed to make the figures comparable.

If you are buying an existing franchise business, also compare the forecast with that business’s accounting records and monthly sales reports. Establish why the forecast differs from actual performance. Expected growth must be based on an identifiable change, not simply an assumption that a new owner will sell more.

2. Build the sales forecast on local assumptions

A well-known brand does not guarantee customer traffic. The forecast must reflect demand at your proposed location, not just the concept’s success elsewhere. Consider the location, accessibility, competition, customers’ purchasing power and seasonal variations in demand.

Break the sales forecast down into understandable components. For a shop, these might be daily transactions, average transaction value and trading days. For an appointment-based service, the key factors are available billable hours, utilisation and the hourly rate actually achieved. Use a calculation method that suits your business model and treat VAT consistently.

Check capacity at the same time. Can the planned staffing levels serve the projected number of customers? Will the premises, equipment and staff cover be sufficient at peak times? If the sales assumptions require additional employees, their costs must also appear in the model.

Prepare a month-by-month forecast for the first year of trading. Awareness of a new outlet may build gradually, and it may not immediately achieve the sales levels of an established comparison business. State clearly when you expect to reach normal sales levels and what that assumption is based on.

Record the basis for each key assumption alongside it: your own observations, information supplied by the franchisor or an estimate that has yet to be verified. This helps you distinguish checked information from optimism and identify what you still need to investigate before deciding.

3. Account for your own work and test a weaker outcome

Profitability can easily look too favourable if the owner’s work is treated as free. Establish how many working hours it would take to achieve the forecast and what remuneration you need for your own work. Allow for the appropriate treatment under your chosen business structure and, where applicable, the cost of Finnish self-employed persons’ pension insurance (YEL).

A sole trader’s drawings are not an expense in the profit and loss account. That does not mean you can ignore your living costs when deciding whether to buy. Alongside the accounting profit and loss forecast, estimate how much the business will leave available to you after taxes and other obligations.

Review depreciation, interest and loan repayments with an accountant. Depreciation affects profit without a cash payment at the same time, while loan principal repayments use cash without being expenses in the profit and loss account. A profitable business therefore does not automatically generate enough cash to meet all its payments.

Prepare a downside scenario alongside the base forecast. Consider, for example, slower growth in customer numbers, a lower average transaction value and higher staffing requirements than expected. Also change several assumptions at once: in practice, difficulties do not always arise one at a time.

Finally, calculate the sales level needed to cover the business’s costs and your target remuneration for your own work. Compare that threshold with a realistic number of customers. If profitability requires operating at almost full capacity from the outset, proceed with particular caution.

4. Document the information and understand the legal protection

Finland has no specific franchise legislation, mandatory franchise-specific pre-contractual disclosure document or dedicated franchise registration requirement. Franchise relationships are governed by general legislation, including the Finnish Contracts Act, Competition Act and Unfair Business Practices Act. EU competition rules may also apply.

The Contracts Act includes provisions on matters such as the invalidity of contracts and the adjustment of unreasonable terms. Subject to the conditions set out in the legislation, the Unfair Business Practices Act prohibits false or misleading statements concerning business activities. However, falling short of a forecast does not in itself establish unlawful conduct or create an automatic right to compensation.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation. Check whether the franchisor has committed to following it. The code does not replace your own financial due diligence or guarantee the forecast results.

Keep the financial models you receive, their dates and any written answers. Ask for discrepancies between presentation materials and the contract to be resolved before signing. If a financial promise is decisive for your decision, have a lawyer assess how it should be recorded in the contract and what the consequences of a breach would be.

Practical checklist: proceed only when you can explain the basis of the sales forecast, the cost of your own work and the impact of a weaker outcome. Have an independent accountant check the financial model before you commit.