Franchising an Existing Business: How to Prepare Sales and Profit Forecasts for Prospective Franchisees

When turning an existing business into a franchise, results from company-owned outlets provide valuable evidence. But figures supported by the founder’s personal contacts or favourable rent cannot simply be presented as a prospective franchisee’s future earnings. Protecting trust across a franchise network requires more than attractive numbers: candidates need forecasts whose assumptions they can check. This article focuses on preparing sales and profit models for franchise recruitment in Japan.

1. Distinguish between actual results, illustrative models and individual forecasts

Start by dividing the figures used in recruitment materials into three categories. Actual results are sales and costs recorded by a particular outlet. An illustrative financial model is a worked example based on assumed outlet conditions. An individual forecast estimates future performance based on a candidate’s proposed premises and operating arrangements. Make these distinctions clear in the headings of your materials.

For example, when presenting a company-owned outlet’s historical monthly sales, state the reporting period, outlet format, number of trading days and how long the outlet had been operating. If you apply those figures to a proposed opening in another area, you need to assess whether they provide a sound basis for a forecast, rather than treating them merely as historical information.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act state that projected sales or profits presented during franchise recruitment should be calculated using a reasonable method based on evidence such as results from existing outlets operating in similar conditions. The underlying facts and calculation method should also be disclosed. Recruitment claims that misleadingly suggest performance is substantially better or more favourable than actual results may raise concerns under the Act’s provisions on deceptive customer inducement.

In addition, businesses falling within the category of ‘specified chain businesses’ under Article 11 of Japan’s Act on the Promotion of Small and Medium-sized Retail Business must provide written disclosures and explanations before a contract is signed. Whether a business falls within this category depends not simply on whether it is labelled retail or food service, but on criteria such as ongoing supply or arrangement of goods, management guidance, use of branding and collection of payments on joining. Even businesses outside the scope of this Act must take account of the Antimonopoly Act. Simply stating that a forecast is not a guarantee does not remedy unreasonable calculations or misleading explanations.

2. Select comparable outlets and adjust for conditions unique to company-owned outlets

Forecasting starts with selecting comparable outlets, not setting a sales target. Do not select only high-performing outlets: identify similarities and differences between the existing outlets and the proposed location.

• Location: differences between sites near stations, residential areas, shopping centres and other settings
• Premises: floor area, seating capacity, opening hours, and the products or services that can be offered
• Operations: staffing levels, the manager’s experience and the owner’s working hours
• Customer acquisition: an established customer base, local brand awareness and advertising activity
• Reporting conditions: peak and quiet seasons, closure days and promotional periods immediately after opening

Keep a record of why any outlets are excluded. Explain separately any circumstances outside normal trading, such as closure for refurbishment or an unusually large one-off order. Excluding an outlet simply because it performed poorly makes it harder to judge whether results can be replicated.

Next, adjust company-owned outlet costs to reflect franchisee conditions. Include royalties, shared advertising contributions and mandatory system fees that company-owned outlets do not incur, and review any activities whose costs are covered centrally by the franchisor. If the founder provides customer service or management work without pay, establish who would do that work and what staffing costs would be required.

If only a few outlets are available for analysis, state that limitation clearly. Rather than presenting one outlet’s results as those of a ‘standard outlet’, distinguish between conditions you have observed and those you have not tested. This gives candidates a more useful basis for their decision.

3. Link sales calculations to profit and cash balances

Break sales down into components appropriate to the business format. For a walk-in business, this might be ‘customers per day × average spend per customer × trading days’. For an appointment-based business, it could be ‘available appointment slots × utilisation rate × average price’. Record whether each input comes from actual results, local research or an assumption.

Check capacity limits as well as customer numbers. Even if orders reach the forecast level, sales cannot be achieved without enough seats, equipment or staff. Conversely, leaving staffing or material costs unchanged as sales rise will overstate profit.

Separate costs that vary with sales from those incurred even when sales are low. List items such as purchases, payment processing fees, rent, staffing, utilities and payments to the franchisor, and use a consistent approach to including or excluding consumption tax. Whenever you use the term ‘profit’, specify which costs have been deducted.

In particular, accounting profit is not the same as cash left in the business. Loan principal repayments are not normally expenses in the profit and loss account, but they reduce cash. Depreciation, meanwhile, does not correspond to a cash payment in that month. Prepare a monthly cash flow forecast alongside the profit and loss model, including capital expenditure, security deposits and pre-opening expenditure.

You must also explain the owner’s living costs without confusing them with outlet profit. The treatment of remuneration and related items differs between sole traders and companies, so check how these should be presented with a tax adviser or another appropriate professional.

4. Test downside scenarios and the start-up period separately

Do not assume that a new outlet will achieve a mature company-owned outlet’s average monthly sales from its first month. Calculate the start-up period separately from established trading, allowing for the time needed to build awareness, staff productivity immediately after training and recruitment delays.

At a minimum, supplement the base case with scenarios in which sales fall short or costs rise. Set downside assumptions using evidence such as fluctuations at existing outlets, quotations for the proposed premises and unverified assumptions, rather than choosing a convenient percentage.

Useful questions to test include:

• If customer numbers fall short of expectations, when will cash run out?
• If recruitment difficulties increase staffing costs, how will the required sales level change?
• What happens to the financial position if the owner cannot work and a replacement must be hired?
• If opening is delayed, which payments will continue during the period with no sales?

Check not only the accounting break-even point, but also the sales level needed to maintain cash after loan repayments and other cash outgoings. If that level exceeds the outlet’s capacity, review the premises or operating model before asking the candidate to work harder.

5. Retain records that explain the basis of the figures

Attach a ‘basis of calculation’ sheet to forecast materials, summarising the preparation date, proposed premises, historical period used, key assumptions and unresolved matters. The records should allow someone to trace not just the calculations, but also why comparable outlets were selected and why costs were adjusted.

If no specific premises have been chosen, make clear that the figures are an illustrative model and that no site-specific research has been carried out. Once premises have been selected, do not simply replace the cover page of a generic model and present it as an individual forecast.

If a candidate asks you to change assumptions about rent or staffing, retain both the original and revised calculations. Distinguish between assumptions made by the franchisor and conditions requested by the candidate, and explain how the results differ under each. Do not remove necessary staff or expenditure without evidence merely to make profitability look better.

After presenting the figures, record the version supplied, the date of the explanation, and the questions and answers. Do not treat obtaining a signature of acknowledgement as the objective in itself. Give candidates materials they can review and discuss with independent professional advisers. Reassess recruitment models whenever assumptions such as rent, purchase prices, wages or franchisor charges change.

A practical first step is to prepare three separate sets of figures for one company-owned outlet: actual trading results, adjustments to franchisee conditions, and cash flow after opening. Where you cannot explain the basis of a figure, carry out further checks before recruiting franchisees.