Check Profit Claims Before Offering a Franchise

When franchising an existing business, profit figures from company-owned outlets are often a key selling point. However, one outlet’s results do not prove that franchisees will achieve the same outcomes. Before preparing your franchise pitch, establish a process for checking every financial claim. This helps prospective franchisees make informed decisions and protects trust within Malaysia’s franchise community.

1. Distinguish between actual results, projections and promises

Start by listing every financial statement you intend to use in brochures, presentations, sales messages and conversations with prospective franchisees. Do not check the figures alone: phrases such as “a quick return on your investment” or “steady profits” also convey expectations about performance.

Divide each statement into one of three categories:

• Actual results: results achieved by specified outlets over a stated period.
• Projections: estimates based on assumptions about sales, costs and operating conditions.
• Promises: statements suggesting that a particular outcome is guaranteed.

For example, “the company-owned outlet recorded an operating profit over the stated period” is a historical claim that can be checked. “Franchisees will earn the same profit”, by contrast, turns that record into an expectation that has not been substantiated.

Define each measure as well. Sales are not profit, gross margin is not net profit, and accounting profit is not cash available for the owner to withdraw. If you use the term “break-even”, clarify whether you mean the point at which operations stop making a loss or the recovery of the entire initial investment.

2. Prepare an evidence file for every claim

Do not rely on the founder’s memory or a single screenshot from the sales system. Create a claims register recording the wording you intend to use, the source of the figures, the calculation method, the period covered by the data and the person responsible for checking it.

Supporting files may include sales reports, expense records, outlet profit and loss statements, and explanations of any adjustments. The aim is to enable someone else to repeat the calculation and obtain the same result.

When assessing how relevant data from company-owned outlets is to franchisees, check the following:

• Does the owner work full-time without a salary being recorded?
• Is the rent lower than the amount a franchisee is likely to pay?
• Does head office cover marketing, administration or support costs?
• Were sales temporarily boosted by an opening promotion or a special event?
• Will franchisees incur royalties and other fees that do not appear in the company-owned outlet’s accounts?

If you present an adjusted view of performance, show the adjustments separately. Do not label adjusted figures as the outlet’s actual results.

Also avoid selecting only the best-performing outlets without explaining the basis for that selection. State how many outlets are represented, how long they have been operating and why any outlets have been excluded. If the data is still limited, narrow the scope of your claims rather than making your marketing language more confident.

3. Place claims within Malaysia’s legal framework

Malaysia regulates franchising through the Franchise Act 1998 [Act 590], as amended. Section 6 requires franchisors to register a franchise before offering it for sale. Preparing financial materials internally therefore does not mean that a business can start offering franchises.

The Act also makes it an offence to make a false statement of material fact, or to omit a material fact that makes a statement in a disclosure document misleading. Even accurate sales figures can create a false impression if important context is withheld, such as major costs excluded from a profit calculation.

Under Section 15, prospective franchisees must receive copies of the franchise agreement and disclosure document at least ten days before signing the agreement. Use this process to give candidates time to examine the financial basis of the offer, rather than replacing explanations with pressure to make a decision.

Section 21 stipulates that the franchise fee or royalty rate charged must be as stated in the disclosure document. If your profit illustration includes royalties, use the correct rate and explain how they are calculated.

Have a lawyer review claims that will appear in your offer documents. A general disclaimer that “results may vary” does not justify using unsupported figures or omitting important information.

4. Control how your team explains the figures

Appoint one person to take responsibility for approving financial claims before they are used. The franchise development team, marketing staff and external representatives should use the same materials and understand the limits of what they may say.

Prepare a short guide setting out:

• Approved wording and the context that must accompany it.
• Statements that must not be made, including unsupported profit guarantees.
• How to answer performance questions where evidence is not yet available.
• Circumstances that require figures to be reviewed or materials to be withdrawn.

If a candidate requests an estimate for a particular location, keep it separate from existing outlets’ results. List the assumptions and encourage the candidate to seek an independent financial review. Retain the versions of materials provided, along with a record of important explanations, so that subsequent queries can be answered accurately.

Practical action: before offering a franchise, identify every sentence that mentions sales, profit, breaking even or recovering the initial investment. Make sure each has supporting evidence, clear definitions and context. If any of these is missing, revise or remove the claim.