Franchising your business: building reliable financial forecasts

Your business is profitable, but its accounts alone cannot demonstrate the viability of a future franchised outlet. Before expanding your franchise network, develop a forecasting method that distinguishes observed results, local circumstances and assumptions that remain uncertain. The aim is not to sell a financial return: it is to enable an informed decision.

1. Adjust the existing business’s accounts

Start by gathering annual accounts, monthly sales data and the main cost items over a representative period. A single good year may conceal significant seasonality, deferred maintenance or an exceptional commercial advantage.

Establish the true cost of running an operation that can be replicated. Your outlet may benefit from a long-standing lease at a favourable rent, premises you own, help from family members or your daily involvement for little pay. A franchisee will not necessarily have these advantages.

For each adjustment, keep a record of the original amount, the adjustment and its justification. In particular, examine:

• remuneration reflecting the work actually done by the owner-manager;
• the full cost of employees and cover for absences;
• expected rent and property-related costs;
• maintenance, stock losses and equipment replacement;
• the sales and marketing expenditure needed to attract customers.

Then add the costs specific to operating as a franchise: contractual royalties, mandatory tools and any advertising contributions. Without recalculating their level at this stage, check that none has been omitted or counted twice. Also separate the franchise network’s head-office expenditure from the costs each outlet will actually bear.

2. Turn results into local assumptions

The turnover of your original outlet is not a forecast for another town. Its reputation, established presence and loyal customer base must be distinguished from the potential of a new outlet.

Build revenue projections from observable factors. For a retail business, these might be the number of transactions and average transaction value; for a service business, the number of services delivered, their price and available capacity. Always check operational feasibility: a fully booked diary cannot accommodate more appointments without additional resources.

Prepare a record for each significant assumption:

• Source: internal historical data, quotation, local observation or estimate;
• Scope: the outlet concerned, the period and operating conditions;
• Adaptation: why the data could be applicable to the new outlet;
• Uncertainty: factors that could change the outcome.

Develop several internally consistent scenarios, including a cautious one. Do not simply reduce sales: also consider a delayed opening, higher recruitment costs or a slower build-up in customer numbers. The aim is to understand the conditions under which the project remains resilient, not to present an artificially reassuring range.

3. Check cash flow, not just profit

A positive forecast profit and loss account does not guarantee that the business will be able to pay its bills on time. Supplement it with an initial funding plan and a monthly cash-flow budget covering the start-up period and seasonal fluctuations.

List the payments required before opening: a security deposit, fit-out works, equipment, stock, the initial franchise fee and business formation costs, as applicable. Distinguish amounts excluding and including tax, then have the VAT treatment checked. In France, the “franchise en base de TVA” is a VAT exemption scheme and is unrelated to membership of a franchise network.

Allow for payment terms, loan repayment schedules and the owner-manager’s personal financial needs, depending on how they are remunerated. Repaying the principal of a loan uses cash without being an expense in the profit and loss account.

Identify the lowest projected cash balance and the reserve needed to cover any shortfall. If financial stability depends on an immediately optimal start, review the funding or the project before making any commitment.

4. Set clear standards for communicating projections

France has no single statutory regime covering all aspects of franchising. General contract law applies, including a general duty to provide pre-contractual information. The framework introduced by the Doubin Law is set out in Articles L. 330-3 and R. 330-1 of the French Commercial Code.

Where its conditions are met — making a trade name, trade mark or trading identity available in return for an undertaking of exclusivity or near-exclusivity for the activity — the pre-contractual disclosure document and draft agreement must be provided at least twenty days before signing or, where applicable, before any advance payment.

These provisions do not, as such, require a forecast profit and loss account to be supplied to the prospective franchisee. However, if you provide projections, they must have a sound basis and must not be misleading. A “non-contractual” disclaimer does not cancel out a misleading presentation.

Date each version, explain the assumptions and clearly distinguish historical results from estimates. Encourage the prospective franchisee to build their own forecast with their accountant and an analysis of the local market: this does not relieve the franchisor of its responsibilities.

Key takeaway: before communicating a profitability figure, prepare a clearly documented file bringing together adjusted accounts, local assumptions, scenarios and cash-flow forecasts. Have its financial and legal soundness checked.