Buying a franchise: check the franchisor’s profitability forecast

When joining a franchise network, you may receive a ready-made profitability forecast from the franchisor. It can help you assess the opportunity, but it does not prove that your own outlet will be profitable. Before signing a franchise agreement, establish where the figures come from, what they leave out and how local conditions would affect the outcome. This guide focuses on checking a new franchise outlet’s profit forecast before you commit.

1. Establish what the franchisor’s figures actually represent

Start by distinguishing between actual results, the network’s targets and the forecast for your own outlet. The phrase ‘typical sales’ in promotional material does not, on its own, tell you whether it refers to an average across all outlets, the best-performing unit or a modelled target.

Ask the franchisor to explain at least the following in writing:

• What period do the figures cover, and how many outlets are included?
• Do they include new and established outlets, as well as those that have closed?
• Are the comparison outlets franchisee-operated or company-owned?
• What types of towns, areas and trading locations are they in?
• Do the profit figures allow for the cost of the franchisee’s own work?

Where possible, ask for the median and range as well as the average. A single exceptionally successful outlet can push the average up considerably. Nor should a new outlet’s first few months be compared directly with the performance of a business that has been trading for years.

The franchisor may not be able to disclose individual franchisees’ financial information. An anonymised summary and an explanation of how the figures were calculated can still help. If essential information is unavailable, treat that gap as uncertainty, not as evidence of strong profitability.

2. Understand the limits of disclosure obligations in Finland

Finland has no specific franchise legislation, no legally prescribed pre-contractual disclosure document and no special registration system for franchise agreements. There is also no statutory disclosure deadline that applies to all franchise agreements. This does not mean that a franchisor is free to provide misleading information.

The relationship is governed by legislation including Finland’s Contracts Act and Unfair Business Practices Act. The Contracts Act contains provisions on matters such as invalidity and the adjustment of unreasonable contract terms. The Unfair Business Practices Act prohibits false or misleading statements used in business that may affect demand for or supply of goods or services, or harm another business.

Duties of loyalty and good faith under general principles of contract law also affect contract negotiations. Depending on the circumstances, withholding material information may have legal consequences. The scope of the duty to disclose is assessed case by case, and prospective franchisees also have a responsibility to investigate the information available to them.

The European Code of Ethics for Franchising is a form of self-regulation, not Finnish law. Check whether the franchisor has committed to it. The code emphasises providing material written information in good time before any commitment is made. Other aspects of the contractual relationship may also be governed by Finland’s Competition Act and Trademarks Act.

3. Build the forecast around your own outlet

Rather than starting with the franchisor’s turnover figure, examine how that figure is built up. Estimate customer numbers, average transaction value, purchase frequency and trading days. For a service business, also check how many billable hours staff can realistically deliver. The forecast must not assume capacity that the premises or staffing arrangements cannot support.

Base local assumptions on evidence: observe customer footfall, assess competitors and obtain an actual rental quotation. Ask existing franchisees specifically about the start-up period and which costs surprised them. General satisfaction with the network is no substitute for checking the numbers.

Give each cost its own line. Include at least:

• the initial franchise fee, fit-out, equipment and opening stock;
• ongoing franchise, marketing and systems fees;
• rent, deposits, insurance and accountancy;
• wages and associated employment costs, plus the franchisee’s living costs and pension insurance;
• wastage, maintenance, payment processing and local marketing.

Check the agreement to see what amount percentage-based fees are calculated on and whether minimum fees apply. Also investigate mandatory purchasing arrangements and any future refurbishment or upgrade requirements. A low initial franchise fee tells you little about the total cost of the relationship.

Keep the profit and loss forecast separate from the cash flow forecast. Loan principal repayments use cash even though they are not an expense in the profit and loss account. Payments for capital investments, the timing of VAT payments and customers’ payment terms all affect when cash is needed.

4. Test a slow start before committing to finance

Prepare a cautious scenario alongside your base forecast. For example, test slower customer acquisition, a lower average transaction value and higher staffing costs. Use reasoned assumptions and record their sources: the aim is not to invent a gloomy scenario, but to identify vulnerabilities.

Calculate your monthly cash position from the pre-opening stage onwards. This will reveal the largest funding shortfall and how long the available cash will last. Set aside separate funds for your living costs in case the business cannot immediately pay you as planned.

Review the forecasts with an independent accountant and your finance provider. A potential guarantee from Finnvera, Finland’s state-owned financing company, does not replace a profitability assessment or remove the obligation to repay. Clarify any personal guarantees and their limits before committing to finance.

5. Document the assumptions before signing

Create a table showing the source, date and any outstanding question for each material assumption. Send queries to the franchisor and request written answers. Keep promotional materials and the different versions of the forecasts as well.

If the forecast relies on launch marketing, training or other support promised by the franchisor, check that the agreement specifies what will be provided and who is responsible for what. A forecast does not become a profit guarantee simply because it is attached to the agreement. Ask a solicitor to review any qualifications and limitations of liability relating to the forecasts.

Practical takeaway: commit only once you understand where the figures come from, have adapted them to your own outlet and have funding that can withstand a reasonably cautious scenario.