Buying a Franchise: Testing the Reliability of Sales Forecasts

A convincing sales forecast is not proof that a location will be commercially viable. Before joining a franchise network, you should understand which operating data underpin the figures presented to you and what assumptions lie behind them. It is not enough for a forecast to add up: it must reflect your location, your start-up period and the time you will actually put into the business. A structured review will help you identify where evidence ends and expectations begin.

1. Keep historical results and forecasts separate

Start by asking what kind of figures you are being given. Historical sales from an existing business, averages across several locations and a financial model for your proposed business provide different types of information. Mixing them together can quickly make a projection appear more reliable than it really is.

For every material sales figure, ask for the following details:

• Source: Does the figure come from completed financial years, current management reports or a forecast?
• Period: Does it cover a full year, individual months or an extrapolation?
• Basis: How have VAT, returns, cancellations and discounts been treated?
• Stage of development: Does it relate to a newly opened or an established location?
• Selection: Which businesses were included and which were excluded?

Pay particular attention to terms such as ‘typical sales’ or ‘average location’. An average drawn from a handful of exceptionally successful businesses tells you little about the franchise network as a whole. Ask about the number of businesses, the selection criteria and the spread of results. The median — the middle value in an ordered set of data — can also be useful. This does not, however, automatically give you a right to every statistical analysis you might request.

2. Check whether comparison businesses are relevant to your location

A business with similar floor space is not necessarily a suitable comparison. Demand, competition, accessibility, opening hours and sales channels can all have a substantial impact on sales. It also matters whether a location is run by someone already well known locally or still needs to build its customer base.

Create a table comparing your proposed business with the reference businesses. Include, at a minimum, the type of location, how long the business has been operating, opening days, staffing levels, capacity and the share of sales generated through each channel. Record any missing information alongside these details.

Pay particular attention to the start-up period. A forecast should not quietly assume that an established business’s monthly sales will be achieved from the first day of trading. Ask how long comparable new openings took to reach a stable level of trading and how seasonal fluctuations have been taken into account.

Businesses that have closed or changed hands are relevant too. An analysis limited to locations that are successful today can give a distorted picture. Ask how these cases have been treated in the underlying data. This does not necessarily require disclosure of individual records containing personal information; anonymised comparison data with clear explanations can also be useful.

3. Rebuild the sales forecast from the bottom up

Do not simply take the annual sales figure as your starting point. Reconstruct it using the factors that drive the business. In retail, for example, this could mean multiplying the number of purchases per trading day by the average transaction value excluding VAT and the number of trading days. For services, billable appointments, capacity utilisation and revenue per appointment excluding VAT may be the key factors.

Then check whether the business can actually deliver those sales:

• Are there enough staff hours and workstations available to handle the projected sales or appointments?
• Have preparation time, breaks, absences and non-billable activities been allowed for?
• Is the assumed demand realistic given the catchment area and competition?
• Do additional sales channels bring additional costs?

Use the same framework to build a base case and a cautious scenario. Adjust specific, justifiable factors, such as slower customer acquisition or a lower average transaction value, rather than simply applying an across-the-board reduction.

Use these scenarios to calculate the contribution margin and monthly cash requirements. High sales do not automatically mean adequate profits. Allow for variable costs, sales-based fees and fixed costs. For self-employment to be viable, the business must also support your living costs and, where applicable, loan repayments. Have an independent financial adviser or accountant review the calculations.

4. Understand the legal significance of the figures

Germany has no dedicated franchise law and no legally prescribed, standardised franchise disclosure document. Nor is there a franchise-specific government registration or approval that validates the quality of a sales forecast. The general provisions of the German Civil Code (Bürgerliches Gesetzbuch, or BGB) are particularly relevant; commercial law and other rules may also apply, depending on the circumstances.

Duties to have regard to the other party’s interests and to disclose relevant information arise during contract negotiations under sections 311(2) and 241(2) BGB. A culpable breach of these duties may give rise to a claim for damages under section 280(1) BGB. The precise financial information that must be provided depends on the individual case. In any event, information presented must not create a false impression through incorrect facts or misleading presentation.

A forecast is, however, generally not a sales guarantee. Falling short of a projection later on does not, by itself, prove a breach of duty. Relevant factors may include the factual basis available at the time, identifiable uncertainties and how the forecast was presented to the prospective franchisee.

Keep a copy of the version of the financial projection you were given, together with its supporting explanations. Have any unresolved inconsistencies clarified in writing before signing, and seek legal advice if verbal promises about sales differ from the contract documents.

Practical conclusion: Sign only when you can explain the sales forecast yourself, using traceable operating data, suitable comparison locations and realistic capacity assumptions. If the underlying basis remains unclear, the forecast is not a reliable foundation for your decision.