Buying a franchise: check the break-even point

A well-known brand and a proven concept do not guarantee that your future business will be profitable. Before joining a franchise network, calculate the turnover needed to cover its costs, then check whether that sales target is realistic. This exercise is not about putting together a persuasive business plan: it is about deciding whether the business is worth your investment.

1. Start with your business, not the network average

An average turnover figure provided by a franchise brand is a benchmark, not a forecast for your business. It may combine established and recently opened businesses, very different locations or outlets operated directly by the franchisor.

Ask what each figure covers: the period measured, the number of businesses, how long they have been trading, their floor area, opening hours and operating model. Without these details, an average cannot tell you what your business could achieve.

To build a useful forecast, look for businesses comparable to yours. In particular, examine:

• the customer base and reasons for buying;
• customer or production capacity;
• opening days and hours;
• the size of the team required;
• the role of delivery and online sales.

Also distinguish between the performance of an established business and its first-year results. An existing loyal customer base cannot simply be assumed for a new opening. Every turnover assumption must have a clear justification, rather than merely repeat a stated target.

2. Calculate a margin that reflects the requirements of the concept

The break-even point is the turnover needed to cover all the costs included in your calculation. To estimate it, work with your accountant to separate variable costs from fixed costs.

Variable costs change with sales: goods used or sold, packaging, certain commissions and royalties calculated as a percentage of turnover. Fixed costs include rent, insurance, subscriptions and the wages needed to run the business as planned.

Some costs need to be broken down more carefully. A royalty with a guaranteed minimum is not entirely variable. Hiring an extra person once sales exceed a certain level creates a step increase in costs. Product wastage and promotions also reduce the margin you actually retain.

The basic calculation is:

Break-even turnover = fixed costs ÷ contribution margin ratio.

The contribution margin ratio is turnover minus variable costs, divided by turnover. Use a consistent basis, generally excluding VAT, and have the VAT treatment applicable to your activity checked.

Explicitly allow for your own remuneration and the associated social security contributions, according to your legal status. A business that only breaks even because its owner works unpaid will not necessarily meet your financial objectives.

3. Translate the result into a realistic daily workload

An annual break-even figure may look achievable while implying an unrealistic pace of sales. Divide it by the number of trading days, then by the expected average transaction value. This gives you an indicative number of transactions required each day.

For a service business, think instead in terms of jobs, billable hours or appointments. Then check actual capacity: available workstations, service duration, travel, administrative time and cancellations.

Build three scenarios: base case, downside and upside. In the downside scenario, test lower customer numbers, reduced margins and higher staffing costs separately. Then combine plausible difficulties.

Take care not to confuse accounting profitability with cash flow sufficiency. Repaying the principal on a loan uses cash but is not an expense in the profit and loss account. Conversely, depreciation and amortisation are expenses without an immediate cash outflow. Ask your accountant to supplement the accounting break-even calculation with a check of the cash payments you need to fund, keeping the two calculations separate.

4. Document your assumptions before committing

In France, pre-contractual disclosure is governed notably by Article L. 330-3 of the Commercial Code, introduced by the Doubin Law, and Article R. 330-1. Where the statutory conditions apply, the franchisor must provide a pre-contractual disclosure document, known as the DIP, and the draft contract at least twenty days before the contract is signed or any advance payment is made.

These rules require truthful information, but do not oblige the franchisor to provide an individual forecast profit and loss account. The market overview included in the DIP is therefore no substitute for your own financial analysis.

If the franchise brand supplies projections, ask for the underlying assumptions and keep dated copies of the documents. Have your accountant check the forecast costs against the contractual commitments, with help from a lawyer where clauses are ambiguous.

Key takeaway: before signing, make sure your financial model answers three questions: what turnover covers your costs, what daily activity that represents, and what happens if sales fall short. If the answers remain unclear, investigate further before committing.