Checking Franchise Sales Forecasts: How to Assess the Evidence and Profitability Before Signing

It is difficult to justify signing a franchise agreement simply on the assurance that “this location will generate plenty of sales”. What matters is not how impressive the figure looks, but how it was calculated. Prospective franchisees entering South Korea’s franchise market should ask for verifiable evidence behind the franchisor’s forecasts and assess them against their own rent and staffing arrangements. Checking sales forecasts is not an exercise in distrusting the brand: it is a way to align expectations before signing.

1. Distinguish sales forecasts from guarantees of profit

The sales figures presented during discussions may refer to very different things. Average sales across all franchised outlets, actual sales at a particularly successful outlet and projected sales for your proposed location are not interchangeable. Even if a high-performing outlet’s results are genuine, that does not mean your outlet will replicate them. Start by noting beside each figure whose performance it represents and which period it covers.

Article 9 of South Korea’s Fair Transactions in Franchise Business Act, commonly known as the Franchise Act, prohibits false, exaggerated and deceptive information. When a franchisor provides information about expected future performance, such as projected sales or profits, it must do so in writing. It must also keep the supporting calculation materials at its office, and prospective franchisees may request access to inspect them.

Franchisors that meet the statutory criteria are also subject to a separate duty to provide a written sales projection statement. Do not assume that every brand is subject to the same requirement: check whether it applies to the franchisor you are considering. Being exempt from the statement requirement does not permit a franchisor to provide false or exaggerated information. Even where certain exemptions apply to small franchisors, Article 9’s prohibitions still apply.

However, the existence of a sales forecast does not itself guarantee a particular level of sales. Nor does actual performance falling below the forecast automatically establish a breach of the law. The key questions are whether there was supporting evidence when the information was given, whether important conditions were omitted and whether the figures were presented more favourably than the evidence justified. Keep a clear distinction between “forecast” and “guarantee” in your records of discussions.

2. Check the sources and comparable outlets

Ask the franchisor, “What data was used to calculate these sales figures?” and request a written answer rather than a verbal explanation. Also check when the document was prepared, the address covered by the projection and the period covered by the underlying trading data. Even within the same brand, residential-area outlets and business-district outlets differ in customer visiting patterns and demand, so a brand-wide average is not enough to assess your proposed location.

Putting the following questions into a single checklist makes it easier to identify differences between the materials provided.

• Are these actual trading results or estimates based on assumptions?
• Does the comparison cover all outlets or only a selected group?
• Are both company-owned and franchised outlets included?
• What period do the sales figures cover, and how many days did each outlet actually trade?
• Do the figures include sales generated by opening promotions or temporary discounts?
• How have VAT, cancelled orders and refunds been treated?
• Can dine-in, takeaway and delivery sales be separated?

Also examine the comparable outlets’ floor areas, seating capacity, opening hours and local demand. Applying a large outlet’s sales to a small premises, or comparing sales achieved over long opening hours with those of an outlet operating shorter hours, can distort the forecast. Even accurate sales data may be unsuitable for an investment decision if the operating conditions differ.

The franchisor may explain that it cannot disclose detailed records for individual outlets. In that case, discuss whether anonymised aggregate data or an explanation of the calculation process would allow you to verify the forecast. Privacy and commercial confidentiality concerns are different from a complete failure to explain the basis of a calculation. It is safer to mark anything you cannot verify as “unverified” rather than fill the gap with an assumption.

3. Translate projected sales into your outlet’s cash flow

Even if the sales data looks credible, it does not establish that the business will be profitable for you. Rather than copying the franchisor’s profit and loss forecast, prepare a separate spreadsheet using the conditions at your proposed outlet. Base rent and service charges on the actual lease terms, and staffing costs on your planned rota. If you intend to work in the business yourself, show an allowance for your own labour separately.

Separate costs that vary with sales from those that continue even when sales fall. Ingredients and materials, payment processing fees and delivery-related costs may change with the sales mix. Rent, core staffing costs and recurring charges are harder to reduce immediately when sales decline. Calculate royalties using the basis specified in the actual agreement.

In particular, ask what has been deducted from the franchisor’s “net profit” figure. If it excludes payment for your own work, taxes, depreciation or loan interest, it is not an amount you can simply use for household living expenses. Loan principal repayments are not expenses in a profit and loss calculation, but they still take cash out of the business. Prepare a profitability calculation and a monthly cash-flow plan separately.

Do not rely on just one sales forecast. Compare the franchisor’s projection with a more conservative sales scenario and one that allows for the initial settling-in period after opening. Make clear that any assumed reduction is a way of testing the risk you can bear, not an objective prediction. The key is to identify when each scenario would require additional working capital.

Break-even analysis helps you identify the sales needed to cover fixed costs. However, the break-even point changes when the cost structure changes, for example if you hire additional staff or delivery accounts for a different share of sales. A favourable calculation does not make an investment safe if it rests on weak sales assumptions.

4. Resolve discrepancies before deciding whether to sign

If the figures given by a sales representative differ from those in promotional materials, sales forecasts or the franchise disclosure document, first compare how they were compiled. The difference may arise from different reporting periods or groups of outlets. Rather than immediately treating inconsistent figures as false, request a written explanation and check whether it is coherent and consistent.

Keep the materials in a way that records when you received them and who supplied them. Retaining original files, emails, text messages and the profit and loss forecasts used during discussions makes it easier to establish what information informed your decision. If the franchisor revises its figures, do not delete the earlier versions. Record the reasons for the revision and any changed assumptions alongside them.

Even if you are told that “these terms are only available if you sign now”, do not treat an unverified projection as an established result. If access to supporting evidence is refused, or answers to key questions repeatedly change, it is sensible not to rush into signing or making payments. When consulting a Korean franchise transaction specialist or a lawyer, provide the explanations and supporting materials as well as the sales figures.

If you suspect false or exaggerated claims, you can consider whether to report the matter to the Korea Fair Trade Commission or seek mediation through the Franchise Business Transaction Dispute Mediation Council. However, the availability of cancellation, a refund of franchise fees or damages depends on the facts and the applicable legal requirements. Poor sales alone do not guarantee any particular remedy.

Action summary: Bring together the sources of the sales forecast, the conditions at comparable outlets and your own outlet’s costs on a single page. If unexplained discrepancies or unverified assumptions remain, check them before you sign.