Building a Franchise: How to Disclose Pilot Figures Properly

If you want to turn your existing business into a franchise network, you must be able to explain its financial viability clearly. However, a successful company-owned operation alone does not prove that a new franchisee will achieve similar results. What matters is how you present pilot figures, highlight differences and document assumptions. This guide explains how to create a sound financial information base for initial contract discussions.

1. Understand the legal framework for disclosure

Germany has no dedicated franchise legislation or special government franchise register. Nor does the law require a standardised disclosure document with a uniform franchise-specific deadline for providing it. This does not, however, mean that franchisors are free to pick and choose which financial information they disclose.

Pre-contractual duties of care and disclosure can arise as soon as contract negotiations begin. Sections 311(2) and 241(2) of the German Civil Code (BGB) are particularly relevant. A culpable breach of duty may give rise to claims for damages under section 280(1) BGB. Which information must be provided without being requested depends on the circumstances. In all cases, information about financial viability must be accurate, and omissions must not create a misleading overall impression.

Other general rules may also apply, depending on the circumstances, including the German Commercial Code, competition law and, where personal data is involved, the General Data Protection Regulation. The European Code of Ethics for Franchising provides an additional industry benchmark, but is not legislation. It may become binding, particularly through membership of an industry association or incorporation into a contract.

In practice: Have your financial documentation and disclosure process reviewed by a franchise law specialist before you begin recruiting partners. A general disclaimer is no substitute for proper disclosure.

2. Turn accounting records into a transferable pilot financial model

Start with a clearly defined dataset: which operation does it cover, over what period and at what stage of development? A long-established original business is not a neutral comparison for a newly opened franchise location. Identify start-up periods, seasonal fluctuations and exceptional events.

Then prepare two separate presentations:

• Historical actual figures: the revenue actually generated and costs incurred by your own operation.
• Adjusted financial model: a presentation, explicitly labelled as a model, based on the proposed conditions for a franchise operation.

This separation prevents modelled additions from appearing to be observed business results. Reconcile the actual figures with your accounting records and explain any differences between management accounts and annual financial statements.

Pay particular attention to advantages enjoyed by the original operation that new partners will not automatically have. These include favourable legacy contracts, owned premises, unpaid work by family members, the founder’s personal customer relationships or administrative work handled centrally. Show which additional costs could arise in an independently managed franchise operation.

Include franchise fees, compulsory advertising contributions, software costs and necessary training in the model. Allow a reasonable, clearly explained notional remuneration for the owner’s operational work, unless that work is already included in staff costs. Also explain that this notional allowance does not automatically constitute an expense in the accounts.

3. Make location assumptions and cash flow explicit

Pilot figures describe past performance at a particular location. A forecast for a new location therefore needs its own supporting rationale. Do not simply copy the original operation’s revenue into a prospective franchisee’s business plan.

In particular, document the following factors:

• catchment area, competition and relevant indicators of demand;
• the location’s size, visibility, accessibility and opening hours;
• lease terms, staffing requirements and local procurement costs;
• the expected start-up period and timing of major payments;
• the conditions needed to reach customers and generate repeat purchases.

Identify the basis for each material item in the plan: an observed pilot figure, a specific quotation, external market data or an assumption that has yet to be substantiated. Where reliable experience is lacking, state that gap explicitly. Young franchise networks, in particular, should not infer a supposedly proven likelihood of success from a single successful operation.

Use clearly explained scenarios rather than presenting only a favourable forecast. Show, for example, how a delayed opening, slower revenue growth or higher staff costs would affect results. The assumptions must be justified; simply adding optimistic, central and pessimistic columns does not make a plan robust.

Also distinguish profitability from cash flow. Deposits, opening stock, capital expenditure and loan repayments can tie up cash without having an equivalent impact on ongoing operating profit. The plan should therefore show when additional funding will be needed and what reserve has been allowed for it. Forecasts are not promises of profit, but labelling them as such does not remedy assumptions that cannot be substantiated.

4. Document delivery, questions and changes

Bring the information together in a version-controlled documentation pack. This should include a description of the pilot operation, an analysis of actual results, a reconciliation showing the adjustments used to produce the financial model, the location assumptions and a complete overview of known costs arising from participation in the franchise system. Record the date to which the information is current, who prepared it and any outstanding issues.

Provide the documents early enough for prospective franchisees to review them with legal and business advisers before making a binding decision. What constitutes a reasonable period depends on the volume and complexity of the information. Do not put those asking questions under artificial pressure to sign.

Keep a record of which version was sent and when, what questions arose and how you answered them. An acknowledgement of receipt documents delivery, not the accuracy of the information or the recipient’s understanding of it. If material errors or changes come to light before the contract is signed, correct or supplement the documents and allow time for a further review.

Practical takeaway: Keep documented operating figures clearly separate from assumptions. Pilot figures provide a sound basis for responsible franchise decisions only when costs, limitations on their applicability and cash-flow risks have been explained clearly.