Reviewing a Franchise Sales Projection Statement: Checking Profitability Before You Sign

The sales forecast presented during a franchise consultation can strongly influence your decision to sign. But high sales and enough money left over for the owner to live on are two different things. In a healthy franchise community, the franchisor explains the basis of its projections, and prospective franchisees test them against their own cost structure. This article takes the projected sales calculation statement as a starting point and explains how to assess whether the figures provided are useful for deciding whether to open a business.

1. Understand the legal status of the sales projection statement

Franchise transactions in South Korea are governed by the Fair Transactions in Franchise Business Act, commonly referred to as the Franchise Act. It prohibits franchisors from providing prospective franchisees with false or exaggerated information, or concealing or downplaying facts material to the contract decision. When franchisors provide information about expected earnings, the Act also imposes requirements concerning written disclosure and the retention and inspection of supporting calculation records. This is why statements made during a consultation should not simply be dismissed as promotional language.

In particular, franchisors that do not qualify as small or medium-sized enterprises, or that had at least 100 franchisees at the end of the preceding financial year, are legally required to provide a projected sales calculation statement. Before the contract is signed, these franchisors must supply a statement setting out a range of projected sales and the basis of the calculation. First, check whether the franchisor you are dealing with is subject to this requirement. If it says it is not, ask for its reasons in writing. Exemption from this requirement does not permit false or exaggerated claims.

The franchise disclosure document and the projected sales calculation statement serve different purposes. Average sales figures for existing outlets in the registered disclosure document help you understand the brand’s past performance. The sales projection statement helps you assess the outlook for the outlet you intend to open. Neither amounts to government certification of profitability or an automatic sales guarantee from the franchisor.

When you receive the statement, check the brand name, the legal entity that will be your contracting party, the proposed outlet location and the date of preparation. If you have not yet chosen a site, ask what type of location has been assumed. A statement prepared for a different area or premises of a different size will not, without further assessment, validate the prospects of your own outlet. If the proposed site changes, check again whether the original projection remains applicable.

2. Read the calculation basis before the sales range

Before focusing on the headline amount, examine the data used to produce it. Ask the franchisor to explain its calculation method and check that its explanation matches the documents supplied. When requesting access to supporting records, specify the information you need. Rather than assuming you are entitled to receive all raw data containing personal information about other outlets, agree on access sufficient to verify the calculation process.

Putting the following questions on a single checklist makes gaps in the explanation easier to spot.

• Reference period: What period do the figures cover, and do they include seasonal peaks or temporary promotions?
• Comparison outlets: Which outlets were included, and what were the criteria for selecting or excluding them?
• Operating conditions: How do floor area, opening hours, seating capacity and the proportion of delivery sales differ from those of your proposed outlet?
• Basis of the figures: Do the amounts include VAT, and how are discounts, cancellations and refunds treated?
• Forecast assumptions: Does the projection allow for the time needed to reach normal trading levels and for different sales levels during the opening period?

Even a statement prepared using the statutory calculation method does not mean that your proposed outlet and the comparison outlets will operate under identical conditions. For example, if the projection draws on an outlet with long opening hours but you plan to trade for fewer hours, you need to assess the effect separately. A high proportion of delivery sales affects not only revenue but also additional fees and packaging costs.

Do not assume that a difference between the average sales in the disclosure document and the range in the projection statement is necessarily an error. Different reporting periods, geographical areas or sets of outlets can produce different results. What matters is whether there is evidence to explain the difference. Keep unexplained discrepancies on your list of outstanding questions, and avoid selecting only the favourable figures for your business plan until they have been resolved.

3. Translate projected sales into living costs and repayment capacity

The purpose of checking sales projections is not simply to predict revenue accurately, but to decide whether the business can keep operating. Transfer the statement’s figures into your own profit and loss forecast, using a consistent VAT basis for revenue and costs. As tax treatment also affects actual cash flow, it is sensible to ask a tax professional how to distinguish the relevant amounts.

Separate costs into those that vary with sales and those that arise even when there are no sales. Ingredients and stock purchases, payment processing fees, delivery platform charges and packaging costs vary according to the sales mix. Rent, service charges, core staffing costs, insurance premiums and equipment hire must still be paid when sales are low. Classify royalties and advertising charges according to whether they are fixed or linked to sales.

The franchisor’s quotation will not necessarily capture every operating cost. You also need to factor in lease terms, recruitment plans, prices for mandatory purchases, delivery charges and minimum order requirements. Waste, stock losses, cover staff for days off and equipment repairs are also easy to overlook. Do not treat unverified costs as zero: mark them as unresolved and establish them before signing.

Your own working time also needs to be rewarded. If you treat your labour as free, you may struggle to support yourself even when the accounts show a profit. Alongside your operating profit and loss forecast, prepare a cash flow forecast that includes living expenses, loan principal and interest repayments, and money set aside for tax. Repaying loan principal is not the same as an expense in the profit and loss account, but it still takes cash out of your bank account.

Do not look only at the top of the projected range. Test the lower end and scenarios in which sales fall below it. The lower end is not a guaranteed minimum either. Check how much additional funding you would need if sales take longer to recover, and whether you could still meet living costs and repayments. Do not treat further borrowing to cover a shortfall as secured funding until its availability and terms have been confirmed.

4. Record the answers and set your criteria for signing

When questioning the franchisor, asking ‘Is this cost included in the calculation?’ is more useful than asking ‘Are the profits good?’ Record each question alongside the franchisor’s answer, the supporting document and the date checked. If the representative has quoted an expected net profit, request a written breakdown of the costs included and excluded, and compare it with the sales projection statement.

Keep presentation materials, emails, text messages, quotations and calculation statements in their original form. If documents are revised, retain earlier versions so you can identify which assumptions have changed. If profitability depends on a subsidy or fee waiver promised only verbally, check whether its conditions and duration can be incorporated into the contract documents. If anyone uses the phrase ‘profit guarantee’, ask a legal professional to review its scope and the conditions for honouring it.

It is also worth setting your criteria for proceeding in advance. These should include a clear explanation of the calculation basis, confirmation of major costs and a manageable cash flow position even under conservative sales assumptions. Conversely, reluctance to explain the evidence, treating sales and net profit as interchangeable, or pressure to sign before costs have been checked are signs that further review is needed. They do not, by themselves, prove unlawful conduct, but nor do they give you a reason to rush.

A later difference between the forecast and actual performance does not automatically establish a breach of law or liability for damages. Relevant issues include the accuracy of the information when it was provided, the basis of the calculations and whether material facts were omitted. If you suspect you have suffered loss because of false or exaggerated claims, use your retained records to seek advice from a qualified franchise transaction adviser in South Korea or a lawyer. You can also consider the franchise dispute mediation procedure offered by the Korea Fair Trade Mediation Agency.

Action summary: Once you receive the projected sales calculation statement, prepare both an evidence checklist and a monthly cash flow forecast. Being able to explain where the figures come from and how the business will leave you with money to spare is a sound basis for deciding whether to sign—and a prudent first step towards joining a franchise community.