Franchise recruitment: substantiating claims about returns

The results of a successful company-owned business can be a compelling selling point when recruiting your first franchisees. But past profits do not automatically translate into a new franchisee’s future income. If you are building a franchise network from an existing business, establish rules before recruitment begins on which financial claims may appear in introductory materials, emails to prospects and face-to-face discussions.

1. Distinguish between facts, calculations and promises

The first step in communicating financial information is to classify your claims. Presenting results for a completed financial year requires different evidence from explaining the expected performance of a franchise outlet that has yet to open.

• Actual figures: the verifiable revenue or profit of a specified outlet over a stated period.
• Financial model: a profit projection built on assumptions, rather than a record of actual performance.
• Forecast: an estimate of expected performance, with the uncertainties explained.
• Guarantee: a commitment backed by an actual obligation and defined conditions for fulfilling it.

Do not describe a target as guaranteed. Phrases such as ‘rapid payback’ or ‘guaranteed monthly income’ can create misleading expectations even without figures. Instead, explain the type of business, costs and level of owner involvement behind the results.

It is particularly important to define what you mean by profit. Operating profit, profit after tax and the cash an owner can actually withdraw are not the same thing. Use consistent terminology rather than a single eye-catching figure.

2. Prepare an evidence sheet for every material claim

Prepare an internal evidence sheet for each financial claim you intend to publish. This is not marketing material: its purpose is to enable head office to demonstrate later which data it used and how it performed its calculations.

Record the data source, the outlet concerned, the period covered, the calculation method and the person responsible for checking it. Also state how long the claim may be used before it needs reviewing. When comparing revenue and costs, treat VAT consistently and make clear whether the figures include or exclude VAT.

Factors that may distort the results of a company-owned outlet include:

• work carried out by the owner without remuneration at market rates;
• the absence of rent because the premises are owned;
• a one-off grant or exceptional order;
• administrative work handled by head office;
• an established customer base that does not yet exist at a new location.

Do not hide these factors. Present the actual results separately from a version adjusted to reflect operation by a franchisee. Clearly label the latter as a model, particularly if you have included franchise fees and additional operating costs.

3. Calculate payback using the full funding requirement

A payback claim is meaningful only if the initial investment and the cash generated to recover it are clearly defined. The initial franchise fee alone is generally not the same as the franchisee’s total start-up funding requirement.

The model should include separate lines for fit-out, equipment, opening stock, the security deposit, pre-opening wages and a reserve to fund initial losses. A refundable deposit is not necessarily a permanent cost, but it still ties up the franchisee’s cash at the outset. Explain that distinction.

For ongoing operations, include recurring franchise fees, remuneration for the owner’s work, maintenance and asset replacement. Explain how you treat taxes and debt financing. Do not compare payback measures calculated using different methods.

Rather than presenting a single favourable outcome, prepare cautious, base-case and favourable scenarios. Examine what happens if sales build more slowly, rent is higher or demand is weaker. If the investment is not recovered within the period assessed under any of these scenarios, show that too. Prospective franchisees need a basis for making a decision, not just encouragement.

4. Comply with the Hungarian legal framework

Hungary has no general, separate requirement to register a franchise, nor a standalone law requiring a franchise disclosure document in a prescribed format. This does not mean the sector is unregulated. Act V of 2013 on the Civil Code expressly recognises franchise agreements, and its general provisions impose duties to cooperate and provide information during contract negotiations.

For communications aimed at prospective franchisees acting as businesses, Act LVII of 1996 on the Prohibition of Unfair Market Practices and Restriction of Competition is relevant, particularly its prohibition on misleading business partners. Advertising may also be subject to Act XLVIII of 2008. It is advisable to have a legal professional assess the specific campaign and its intended audience.

The European Code of Ethics for Franchising is an industry self-regulatory standard, not Hungarian legislation. Following it does not replace compliance with the law. Equally, a small-print statement that something ‘does not constitute a guarantee’ will not remedy an otherwise misleading message about returns.

5. Review spoken and written communications together

Appoint someone to approve financial claims. Your website, introductory presentation and staff speaking to prospective franchisees should all use the same verified figures. Prepare a short response guide for questions such as ‘How much will I be able to take home?’ and ‘When will I recover my investment?’

Keep copies of each version of the materials supplied and record when they were provided. If costs or operating conditions change materially, update the calculations and flag the changes in ongoing negotiations. A business plan prepared for a franchisee’s own location should not simply become a copy of the recruitment presentation.

Practical takeaway: before advertising results or payback, make sure you have verifiable data, clear calculations and explicitly stated assumptions and conditions. This provides a more reliable foundation for building a franchise network than even the most attractive promise that cannot be substantiated.