Franchising your business: building a model profit and loss account

A profitable business is not automatically a concept whose financial performance can be replicated. Before offering your brand to prospective franchisees, build a model profit and loss account: a documented breakdown of the income and expenses of a future franchised outlet. This tool helps you check that your franchise network can grow on a viable footing, without confusing the founder’s historical performance with what a new operator can achieve.

1. Start with actual accounts and adjust for specific advantages

The starting point is not a sales target, but your business’s actual results. Gather annual accounts, interim accounts and relevant monthly data: sales, cost of goods used or sold, staffing levels, rent, marketing expenditure and operating costs.

Use periods that allow you to identify seasonal patterns, and assess locations separately if you operate more than one. An overall average can conceal a loss-making site or, conversely, an exceptional location that drives the results of the whole business.

Then adjust for advantages that a franchisee will not necessarily enjoy:

• a particularly favourable rent under a longstanding lease;
• fully depreciated equipment that a new operator would have to buy;
• supplier discounts linked to your own purchasing volumes;
• unpaid help from family members;
• an understated cost for the owner’s work;
• one-off income unrelated to day-to-day trading.

Keep two columns: actual results and adjusted results. For each adjustment, record the reason, the calculation and the supporting evidence. This gives you a verifiable baseline rather than an artificially favourable spreadsheet.

2. Reconstruct the costs of a franchised outlet

The model account should reflect the future operator’s business, not simply reproduce your own accounts. Add the costs specific to joining the network: contractual franchise fees, advertising contributions, mandatory software and recurring services required by the concept.

Check less obvious costs too: insurance, maintenance, payment processing fees, consumables, transport, stock losses, travel for training and cover for absent staff. Do not count a cost twice if it is already included in a service charge.

For the owner-operator, set out an explicit assumption for remuneration and the associated social security contributions, appropriate to the proposed status. Although the accounting treatment varies according to the legal structure, the model must allow you to assess whether the business can afford to pay its operator.

Present the figures in a clear order: turnover excluding VAT, cost of goods used or sold, gross profit, staff costs, other operating expenses, then operating profit after depreciation and amortisation. Show finance costs and applicable taxes separately after that.

Do not confuse capital expenditure, expenses and cash payments. Buying equipment is generally not an expense charged in full in the year of purchase; repaying the principal of a loan is not a profit and loss expense. Have a qualified accountant check these treatments and supplement the model with a separate cash flow forecast.

3. Test the minimum conditions for viability

A useful model account does not offer just one possible outcome. Build a documented base case and downside scenarios: a slower start, lower average transaction value, higher payroll costs or increased purchasing costs.

Link each assumption to an operational measure. Turnover can, for example, be broken down into trading days, number of transactions and average transaction value. For a service business, use available capacity, utilisation rate and average price charged. Check that projected volumes remain achievable with the planned staffing and equipment.

Calculate the break-even point using fixed costs and the contribution margin ratio, explaining how you have classified costs. Also examine step changes in costs: higher activity may require an additional employee before it generates more profit.

Finally, distinguish the start-up year from a year of established trading. A model that is profitable at maturity may require substantial cash reserves while the business builds up. If its viability depends on an unattainable rent or an owner who remains unpaid over the long term, rethink the format before recruiting franchisees.

4. Set clear boundaries for using the model in France

France has no comprehensive legal regime specifically governing franchise agreements. General contract law, competition law and intellectual property law apply, among others.

Pre-contractual disclosure is, however, governed by Articles L. 330-3 and R. 330-1 of the French Commercial Code, under the framework commonly known as the ‘Doubin Law’. Where the relevant conditions are met—notably the right to use a distinctive sign, such as a trade name or trade mark, coupled with an exclusive or near-exclusive commitment—the pre-contractual disclosure document (DIP) and draft agreement must be provided at least twenty days before signing or before any required advance payment.

These provisions do not require you to give a prospective franchisee a financial forecast. If you do provide projections, however, they must be based on sound, consistent assumptions. Date the model account, specify its scope and clearly distinguish historical data from assumptions. It is no substitute for the location-specific forecast prepared by the prospective franchisee with their advisers.

Key takeaway: before recruiting any franchisees, have an adjusted model profit and loss account reviewed, stress-test it and check that it genuinely allows the operator to be paid for their work.