Buying a franchise: check the profit forecasts

A spreadsheet showing attractive profits is no proof that your investment will deliver a return. Before entering the Greek franchise market, you need to understand where the figures come from, what they include and what conditions must be met for them to hold true. Meaningful due diligence is not about seeking a promise of success, but about establishing a sound basis for your decision.

1. Distinguish actual results from estimates

Ask for every financial table to be clearly labelled: does it show historical results from actual outlets, a budget for your proposed outlet or an illustrative operating model? These are different types of information and should not be presented as though they carry the same evidential weight.

For historical figures, ask for clarification on:

• The reporting period and the number of outlets included.
• Whether they are company-owned or franchisee-operated outlets.
• Whether the figures include new outlets, loss-making outlets and those that closed during the period.
• Whether the amounts come from accounting records or figures reported by franchisees.
• Whether turnover is shown inclusive or exclusive of VAT.

“Average turnover” alone does not describe a typical outlet. A few particularly strong performers can push up the average. Where the data is available, ask for the median and the range of results. If only selected examples are presented, treat them as examples rather than as a representative picture of the entire network.

2. Clarify what “profit” means

Before comparing different proposals, make sure you are comparing the same financial measure. Gross profit, operating profit and net profit are not interchangeable terms. A table may look particularly encouraging because it stops short of significant costs.

Ask your accountant to check whether all relevant expenses have been included: rent, wages and employer contributions, ongoing royalties, advertising contributions, software, energy, insurance, maintenance and payment processing fees. Also check how depreciation, interest and tax are treated.

The owner's labour deserves particular attention. If the model assumes that you work in the business every day without putting a value on your time, part of the reported profit is effectively a return on your own labour. For a like-for-like assessment, allow for a reasonable cost of employing someone to replace you, without confusing this with an expense that must be recorded in the accounts.

Finally, distinguish profitability from cash flow. Repaying the principal on a loan, for example, reduces your available cash without being an expense in the profit and loss account. Conversely, depreciation affects accounting profit without a corresponding cash payment at that point.

3. Test the assumptions, not just the final figure

Ask for a detailed breakdown showing how sales translate into profit. How many transactions are forecast? What is the average transaction value? How many trading days are assumed? When is the outlet expected to reach a stable level of trading?

An established outlet is not automatically a suitable model for a new business's first year. Likewise, differences in opening hours, rent or service models can substantially change the cost structure, even where sales are similar.

Work with your accountant to prepare a base case and a downside scenario. In the latter, test lower sales, a slower build-up of customers and higher expenses. The changes should be justified, rather than chosen simply to produce a reassuring result.

Also calculate the break-even point. If there are additional variable charges, do not calculate the contribution margin using only the difference between a product's selling price and purchase cost. This will help you see how sensitive the investment is to even a small deviation from the original estimates.

4. Keep records and understand the legal framework

Greece has no specific law regulating franchising as a distinct type of contract, nor a statutory pre-contractual disclosure document. There is also no specific statutory minimum period for providing financial information before the agreement is signed or the initial franchise fee is paid.

This does not permit misleading presentations. The general provisions of the Greek Civil Code on contracts and obligations apply. In particular, Articles 197–198 concern good faith in negotiations and pre-contractual liability. Depending on the circumstances, misleading statements or material omissions may give rise to liability. However, a result differing from a forecast does not, in itself, prove a breach.

Keep presentations, messages and every version of the financial model, together with dates and clarifications. Ask for the basis of significant assumptions in writing, and have a lawyer review any contractual disclaimers. A statement that “forecasts are not a guarantee” is no substitute for checking the accuracy of the underlying data.

Practical takeaway: Proceed only when you can explain how the forecast profit is calculated, what evidence supports it and what happens if the key assumptions do not hold true.