Buying a franchise: checking profitability forecasts

An attractive profit forecast does not prove that your future outlet will achieve the same returns. Before joining a franchise network in Greece, you need to examine where the figures come from, which costs they include and how closely they reflect your circumstances. The aim is not to demand certainty about the future, but to distinguish an evidence-based estimate from an optimistic sales pitch.

1. Separate actual results from estimates

Ask for a clear distinction between historical outlet figures and forecasts. A table may combine actual sales with estimated rent or staffing costs without making this obvious at first glance.

For every financial presentation, note:

• The reporting period and whether it covers a full year of trading.
• The number of outlets included and how they were selected.
• Whether they are company-owned outlets or independently operated franchises.
• Whether sales figures include or exclude VAT.
• Whether outlets that closed or performed poorly have been excluded.

The average alone is not enough. Where data is available, ask for the median and the range of results. One exceptionally successful outlet can push up the average significantly without reflecting the day-to-day experience of most franchisees.

2. Check whether the outlets are comparable

The performance of an established outlet in a tourist destination does not automatically translate to a new business in a residential neighbourhood. Compare floor area, the location’s commercial appeal, opening hours, seasonality, competition and time since opening. Also consider how much the owner personally contributes to the day-to-day work.

Ask for separate figures for the start-up phase and established trading. A forecast that assumes an established outlet’s sales from the first month can substantially distort the expected returns.

You can cross-check the figures using anonymised monthly sales reports, profit and loss statements and discussions with existing franchisees, while respecting confidentiality. Ask what differed most from their original plan and how long it took to build a regular customer base. There is no automatic right to inspect another business’s financial records; however, a lack of adequate supporting evidence makes your decision more uncertain.

3. Reconstruct the profit forecast with your accountant

The word ‘profit’ can refer to different measures. Clarify whether the presentation shows gross profit, operating profit or profit after tax. Do not treat operating profit as money you can automatically withdraw for personal use.

Ask an independent accountant to reconstruct the forecast from sales through to the bottom line, checking in particular:

• Product costs, wastage, returns and discounts.
• Wages, employer contributions and cover for staff leave.
• Rent, service charges, energy, insurance and maintenance.
• Ongoing royalties, other contractual charges and payment processing or platform fees.
• Depreciation, interest and tax treatment.

If you will be working in the business every day, allow separately for reasonable remuneration for your work, even if it does not appear as a salary in the accounts. Otherwise, you may mistake what is effectively pay for a full-time job for a return on your investment. Also distinguish accounting profit from cash outflows: repaying the principal on a loan is not an operating expense, but it does reduce the cash available.

4. Turn the forecast into assumptions you can test

Break projected sales down into the number of transactions, average transaction value and trading days. This allows you to check whether the required customer volume is realistic for the location and whether the staff and equipment can handle it.

Prepare a base case and a downside scenario, making evidence-based changes to sales, margins and the main costs. Calculate the break-even point: the level of sales needed for the contribution margin, after variable costs, to cover fixed costs.

If a payback period is presented, ask for the exact calculation. What initial investment does it include? Does it deduct remuneration for your work? Does it account for tax and necessary equipment replacements? Without a consistent definition, you cannot reliably compare two proposals.

5. Keep a record of what you were told

Greece has no dedicated law providing a comprehensive framework for franchising, nor a specific mandatory pre-contractual disclosure form. The general rules of the Greek Civil Code apply: Articles 197 and 198 concern good faith in negotiations and potential pre-contractual liability. Freedom of contract, good faith in the performance of obligations and the prohibition on the abusive exercise of rights are also relevant.

The European Code of Ethics for Franchising provides for essential written pre-contractual information to be supplied within a reasonable timeframe. However, it is a self-regulatory framework, not a Greek law of universal application.

Keep dated copies of forecasts, assumptions and written clarifications. Ask a lawyer to review how these relate to the contract and any disclaimers. A forecast falling short does not, by itself, prove unlawful conduct, while any assessment of misleading information depends on the facts of the case.

Practical takeaway: Proceed only when you can explain how the projected profit is generated, what evidence supports it and under what conditions it would no longer be sufficient for you.