How to Assess Sales Forecasts and Financial Models Before Joining a Franchise in Japan

When considering joining a franchise network, the sales forecasts and financial models supplied by the franchisor are important decision-making tools. However, the results of a successful outlet are not the same as the prospects for one you are about to open. Before committing, look beyond the headline profit: establish which outlets the figures come from, what period they cover and what assumptions underpin them. Then recalculate them using the conditions that will apply to your own outlet.

1. Distinguish between actual results, models and forecasts

Start by establishing what the documents you have received actually show. Existing outlets’ results describe past performance; a financial model illustrates calculations under specified assumptions; and a forecast for your proposed outlet estimates future performance. Even a document labelled a ‘business plan’ may not incorporate research into your intended location.

Ask the franchisor the following questions about the figures:

• Are they actual results or calculations based on assumptions?
• Do they cover company-owned outlets or franchised outlets, and the whole network or only selected locations?
• What period do they cover? Are newly opened outlets separated from those with established trading patterns?
• How many outlets are included in the average? Can you also see the median and the spread of results?
• Are sales inclusive or exclusive of Japanese consumption tax? How are discounts, returns and similar adjustments treated?

Average sales alone will not tell you whether a small number of high-performing outlets are pulling the figure upwards. Figures covering only outlets still trading also need to be interpreted differently from those that include outlets which closed during the period. If any outlets or periods have been excluded, ask why.

If the franchisor cannot disclose individual outlet information, you could request anonymised outlet-level figures or summaries grouped by relevant characteristics. A lack of access to documents does not, by itself, establish that anything is improper. The key is not to treat figures you cannot verify as certain in your own plan.

2. Identify differences between comparable outlets and your proposed location

Even accurate historical results may not apply directly to your location. Being part of the same brand is not enough: you need to compare the conditions that generate sales. Ask why the franchisor selected its reference outlets and, at a minimum, compare location, outlet size, opening hours and time since opening.

An outlet near a railway station and one in a residential area will attract customers at different times and for different reasons. For an outlet in a shopping centre, the centre’s overall ability to attract visitors matters. For a street-front outlet, visibility and ease of parking may also affect performance. If company-owned outlet results are used, check whether they include support from head-office staff, special promotions or other advantages that a franchisee could not replicate.

Where possible, break the sales forecast down into ‘customers per day × average spend per customer × trading days’. For appointment-based services, also examine available appointment slots, utilisation rates and cancellations. If customer numbers are based on pedestrian traffic, ask where and when it was measured, including the days of the week, times of day and survey period. Also ask what supports the assumed proportion of passers-by who will become customers.

Visit the proposed location yourself on weekdays and at weekends, at several different times. Observe your intended customer groups and how busy competitors are. However, avoid accepting or rejecting the franchisor’s forecast solely on the basis of brief observations. Use what you see to request further explanations of the forecast’s assumptions.

3. Translate modelled profit into your own cash flow

Next, check not only sales but also which expenses are included. Labels such as ‘operating profit’, ‘owner’s income’ and ‘cash left over’ do not necessarily mean the same thing. You need to establish, item by item, what has been deducted to arrive at each figure.

Pay particular attention to the owner’s working arrangements. In a Japanese sole-trader business, payments to the owner are not treated as salary expenses in the same way as employees’ wages. Nevertheless, the business will be difficult to sustain if it cannot cover your living costs. Do not confuse profit that depends on the owner working long hours with profit that would allow you to employ someone to run the outlet.

Replace the model’s costs with your own figures, using the rent for your proposed premises and quotations you have obtained. Check whether utilities, insurance, payment processing fees, repairs and similar costs are included. Do not simply assign a zero to items missing from the franchisor’s calculations: obtain estimates or clearly identify them as costs yet to be confirmed.

Then prepare a monthly cash-flow forecast separately from your profit and loss projections. Depreciation does not correspond to cash paid out in that month, while repayments of loan principal are not normally expenses in the profit and loss account. Even a profitable business can run short of cash because of loan repayments, tax payments or differences in payment timing.

Rather than relying on a single outlook, compare these three scenarios:

• Base case: Use sales figures whose basis you have verified and your own cost estimates.
• Lower-sales case: Calculate what happens if customer numbers or average spend fall short of expectations.
• Delayed start-up case: Allow for low sales in the early months or expenditure arising from a postponed opening.

Set the scale of the downside using the variation between comparable outlets and the uncertainties surrounding your location, rather than a convenient, arbitrary percentage. For each scenario, identify the month when cash and bank balances reach their lowest point and how much additional funding would be needed. Use these findings as decision criteria before signing the agreement.

4. Check the requirements for explaining forecasts and their legal status

Japan does not have a single comprehensive law imposing uniform disclosure duties on every franchise. However, Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors operating a ‘specified chain business’, as defined by that Act, to provide prospective franchisees with written information on certain matters and explain it before a contract is signed. Whether a business falls within this category depends on the statutory criteria, not simply on what the business calls itself. This statutory disclosure framework does not guarantee the proposed outlet’s sales or profits.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also apply to a range of franchises, not just retail and food service. They state that, where a franchisor presents projected sales or earnings, those projections must be based on substantiated facts—such as the actual results of existing outlets in similar environments—and reasonable calculation methods. The franchisor must also explain that basis and those methods.

Where modelled earnings are presented, the franchisor must make clear that they are not a forecast of earnings for the proposed outlet. Using false or exaggerated information to create a materially misleading impression that the franchise is more advantageous than it really is, and thereby improperly induce someone to join, may raise concerns under the Antimonopoly Act’s prohibition on ‘deceptive customer inducement’. However, actual results falling below a forecast do not, on their own, make the conduct unlawful.

Keep the financial projections you receive in a form that preserves their preparation date, version and calculation assumptions. Also retain records of explanations given and any revisions. If statements such as ‘you are guaranteed to make a profit’ contradict caveats in the documents, do not proceed to sign without resolving the discrepancy. Ask for the supporting evidence and, where necessary, consult a lawyer or a Japanese tax accountant.

Practical takeaway: Do not simply adopt the franchisor’s financial model. Verify where the figures come from, replace the assumptions with your own circumstances, and calculate your remaining cash under downside scenarios. Complete these three steps before deciding whether to join.