Franchising: checking turnover forecasts

A turnover forecast is not a promise of profit. Before joining a franchise network in Italy, you need to understand how the brand’s estimates were put together and how relevant they are to your own business. The aim is not to obtain a reassuring figure, but to establish a line of reasoning you can verify: what sales, generated by which customers, under what conditions and over what timeframe.

1. Ask what the stated turnover represents

When a presentation quotes “average turnover”, the first question is: an average of what? The figure may cover all outlets, only those that have been open for several years, or a selected group of particularly successful shops. These tell very different stories.

Ask for a breakdown specifying:

• the reference period and number of businesses included;
• the distinction between company-owned and franchised outlets;
• how long the businesses have been operating and the number of months they were actually open;
• whether businesses that have closed are included or excluded;
• how VAT, returns, discounts and cancellations are treated;
• whether online sales are included and how they are attributed to each outlet.

The mean and the median are not interchangeable. A few shops with very high sales can push up the mean without reflecting the most common experience. The median, by contrast, is the middle value in the distribution. Asking for both, alongside information on how widely results vary, helps you assess the data rather than focus on the most favourable figure.

If you are shown only the best results, do not automatically assume they are false: treat them as examples, not as a sufficient basis for forecasting your own sales.

2. Build up the sales forecast using testable assumptions

A useful forecast must be capable of being broken down. For a shop, a simple model is: number of daily transactions × average net transaction value × number of trading days. For an appointment-based business, the relevant factors may instead be available hours, appointment occupancy and average revenue per service.

Note the source for each variable. Is the average transaction value based on actual sales at comparable businesses or on list prices? Does the customer count take local competition into account? Are the trading days consistent with the planned staffing levels?

Pay particular attention to these points:

• Operating capacity: can the assumed number of sales be handled with the available workstations, equipment and staff?
• Start-up period: does the forecast distinguish the first few months from established trading?
• Seasonality: are annual results spread in line with actual demand, rather than simply divided by twelve?
• Promotions: are the discounts needed to attract customers already reflected in the average transaction value?

Then prepare a cautious scenario by adjusting assumptions for clear reasons, rather than applying an arbitrary reduction to the total. For example, assess what happens if attracting customers takes longer, while keeping the shop’s capacity limits unchanged.

3. Compare genuinely comparable businesses

An outlet in a tourist area is not automatically a useful benchmark for one in a residential neighbourhood. Likewise, a company-owned outlet may benefit from staffing, campaigns or organisational resources that will not be available to a franchisee on the same terms.

Create a table covering a few decisive characteristics: customer catchment area, format, operating floor space, opening hours, stage of business development, competitive pressure and sales channels. Ask the franchisor to explain why the selected businesses provide a relevant comparison.

You can request anonymised reports that can be reconciled with accounting or management records, without asking for customers’ personal data. The key is to understand the source, period and methods used to compile the figures. A screenshot of a sales dashboard without this information does not provide a sound basis for verification.

Have an independent accountant review the model. Even plausible turnover can be accompanied by inadequate financial results: sales, margin and profit are different measures. This check helps prevent a sales forecast from being interpreted as a promise of profitability.

4. Clarify the status of statements before signing

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 4 requires a complete copy of the contract and the prescribed annexes to be supplied at least thirty days before signing. The law does not generally require a personalised turnover forecast, nor does it guarantee the franchisee’s financial results.

Article 6 does, however, require loyalty, fairness and good faith during negotiations. The franchisor must promptly provide information that the prospective franchisee considers necessary or useful, except where it is objectively confidential or its disclosure would infringe third-party rights; any refusal must be explained.

Send precise questions in writing and keep presentations, messages and versions of financial projections. If a figure is described as “guaranteed”, ask your lawyer to check whether the contract actually contains a commitment, with defined conditions and remedies. Article 8 provides for annulment on the grounds of false information, subject to the conditions set out in that provision, as well as potential damages. However, a missed forecast does not, on its own, establish that false information was supplied.

In practice: before deciding, insist on a forecast whose calculations you can reconstruct, relevant comparisons and a written distinction between historical data, assumptions and contractual commitments.