How to Check the Basis of Sales Forecasts Before Joining a Franchise in Japan

When considering joining a franchise network, checking the franchisor’s sales forecasts is just as important as assessing brand recognition. Figures such as ‘average sales at existing outlets’ or ‘model outlet results’ can be useful, but they do not guarantee performance at your proposed location. Before committing, look beyond the headline figures: establish the conditions behind them and how those conditions differ from those of your own outlet.

1. Distinguish between actual results, forecasts and targets

Start by dividing the figures in the franchisor’s materials into three categories. ‘Actual results’ are sales recorded in the past; ‘forecasts’ are estimates of future sales calculated under specified conditions; and ‘targets’ are levels the business aims to achieve. Even when they appear in the same table, they serve different purposes in your assessment.

If a figure is labelled only as ‘model monthly sales’, ask whether it represents the actual results of one existing outlet, an average across several outlets, or an estimate built from assumptions. Do not settle for a verbal explanation from the representative: ask for a note in the documents or a response by email.

Also establish consistent definitions for the following:

• What period do the figures cover? Do they include only the busiest season?
• Do sales include or exclude consumption tax? How are discounts and returns treated?
• Are in-store sales combined with deliveries, corporate orders or other channels?
• Do the figures relate to the promotional period immediately after opening, or to a more established stage of trading?
• Are company-owned outlets distinguished from franchised outlets?

Comparing figures with different definitions risks measuring differences in reporting methods rather than the relative strengths of the brands. When comparing several franchisors, first put the figures on a consistent basis.

2. Understand Japan’s disclosure rules and the status of sales forecasts

Japan does not have a single comprehensive franchise-specific law governing all franchise agreements. However, certain retail, food service and similar franchise arrangements that meet the criteria for a ‘specified chain business’ are subject to pre-contractual written disclosure and explanation requirements under Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business. These cover matters such as an overview of the franchisor’s business and the main terms of the agreement. Whether the rules apply depends not simply on the name of the arrangement, but on criteria including ongoing supply or procurement arrangements for goods, management guidance, use of trade marks and payments collected when joining.

However, mandatory disclosure and a guarantee of an individual outlet’s sales are separate matters. Receiving a disclosure document does not, in itself, establish that the forecast is sound.

The Japan Fair Trade Commission’s Guidelines Concerning the Franchise System under the Antimonopoly Act are also important. These explain the approach under the Antimonopoly Act and are not limited to retail and food service. They state that, when providing sales forecasts or similar figures, franchisors need to use a reasonable calculation method based on substantiated facts, such as the results of existing outlets operating in similar conditions, and disclose those facts and methods to prospective franchisees.

Distinguish between the statutory duty to provide written disclosure and the role of these guidelines. Recruitment practices that misleadingly present earnings as substantially better or more favourable than they really are may raise concerns under the Antimonopoly Act. The Civil Code is also relevant to liability relating to explanations and contracts. However, missing a forecast does not automatically establish illegality or an entitlement to damages: the particular circumstances, including what was explained and the basis of the calculations, matter.

3. Check how comparable outlets were selected, not just the average

When reviewing existing outlets’ results, ask how many outlets were included and what kinds of outlets they were. Figures drawn only from top-performing outlets mean something quite different from figures covering all outlets with comparable characteristics.

Key factors to check include location, floor area, opening hours, time since opening, sales channels and staffing and management arrangements. Be cautious about applying the results of a company-owned outlet near a station, with extensive support from head-office staff, directly to a lightly staffed franchised outlet in a residential area.

The following sequence of questions can help structure your discussion with the franchisor:

1. What criteria were used to include or exclude outlets from the comparison?
2. How many outlets were covered, and over what period?
3. Can you provide the median and the range of sales, as well as the average?
4. Are temporarily closed, permanently closed and recently opened outlets included?
5. How does the forecast account for differences between these outlets and the proposed location?

Looking only at outlets still trading can obscure the experience of those that did not succeed. There is no need to assume that every closure resulted from poor sales, but you should know whether closed outlets have been excluded from the figures.

Detailed outlet-level information may not be available for reasons such as confidentiality. In that case, request alternatives, such as anonymised summaries or sales distributions grouped by operating conditions. You do not necessarily have a legal right to demand all these materials. A practical approach is to ask why information cannot be provided and what the franchisor can explain instead.

4. Test the assumptions at your proposed location

Once you have reviewed the franchisor’s calculations, separate the assumptions you can check on site from those that remain uncertain. For a business that customers visit in person, for example, breaking sales down into ‘number of visitors × purchase conversion rate × average spend per transaction’ can reveal where the forecast relies on demanding assumptions. If you use passing footfall rather than visitor numbers, you will also need a separate rate for the proportion of passers-by who enter the outlet.

Do not limit site research to a weekday lunchtime. Observe differences between weekdays and weekends or public holidays, and between mornings, afternoons and evenings, in line with your intended opening hours. Alongside footfall, record the direction people are travelling, how easy the road is to cross, how visible the entrance is and how easy it is to park. A busy location does not necessarily mean plenty of customers for that particular business.

If you can speak to existing franchisees, avoid asking them to disclose confidential information. Instead, ask questions such as ‘Did the customer base match your expectations before opening?’ or ‘What made it difficult to establish steady sales?’ Successful outlets introduced by the franchisor can be useful, but so can outlets with locations and operating conditions closer to your own.

After checking the assumptions, prepare scenarios in addition to the base forecast, including lower-than-expected customer numbers and weaker average spending. Rather than applying an arbitrary standard reduction, use the variation among similar outlets and your site research to set the downside assumptions. If the projected sales depend on several optimistic conditions all being met at once, explicitly record this as a risk in your decision.

5. Compare the explanations with the contract and keep a decision record

Finally, review the recruitment materials, sales forecast tables, disclosure documents and draft agreement side by side. Even if you were told during recruitment that the figures were ‘readily achievable’, the agreement may contain clauses stating that forecasts are not guaranteed or that you must exercise your own judgement. Do not draw a conclusion solely from whether such clauses exist: ask how they align with the representative’s explanations.

Keep a record of each document’s date and version, the date you received it, who explained it, your questions, the answers and any outstanding points. If figures change later, record the reasons. When important additional information is given verbally, summarise your understanding by email and ask the franchisor to confirm it.

A practical decision note can be organised under three headings:

• Verified facts: The characteristics of comparable outlets, the period covered by actual results and the calculation method.
• Unverified assumptions: Acquisition of new customers, the impact of competition and sales growth after opening.
• Issues to resolve before signing: Conflicting explanations, missing information and reasons for forecast changes.

If the basis of the calculations remains unclear, do not rush into signing. Consult a tax accountant or another suitable financial professional about the figures, and a lawyer familiar with franchise agreements about explanations or contractual issues. Trust in a franchise network comes not from avoiding questions about the numbers, but from a relationship in which the evidence behind them can be shared.

Key practical point: Do not ask only ‘How much will the outlet sell?’ Ask ‘Which actual results underpin this forecast, what method was used, and how was it adapted to my location?’ Avoid committing while material assumptions remain unverified.