Franchise profitability in Mexico: check the figures

A presentation may show attractive sales figures and a quick payback period, but that does not prove how much you will earn. Before buying a franchise in Mexico, examine how its projections were prepared and what evidence supports them. Comparing figures using clear criteria helps prospective franchisees make decisions without confusing a brand’s reputation with the profitability of an individual outlet.

1. Establish what the advertised profit means

When a brand refers to ‘profit’, ask for a written definition. It could mean the margin after purchasing stock, operating profit or cash available to the owner. These are not equivalent.

Request a reconciliation starting with sales and deducting the relevant costs and expenses separately. In particular, check whether it includes:

• Royalties and advertising contributions.
• Full payroll costs, employee benefits and a salary for the role you will perform.
• Rent, maintenance, insurance and utilities.
• Payment processing and delivery platform fees, where applicable.
• Stock losses, returns and discounts.
• Taxes, interest and equipment replacement, depending on the measure presented.

Accounting profit is not the same as available cash. For example, repaying the principal on a loan uses cash, even though it is not an expense in the profit and loss account. Ask your accountant to separate the two calculations and check that Mexican value added tax (IVA) is treated consistently.

2. Check where the projections come from

Ask whether the model is based on actual outlets, a pilot operation or a sales estimate. Request details of the period analysed, the number of outlets included and the reasons for selecting them. An average without this information tells you little.

Look for comparable outlets in terms of format, location, opening hours, floor area and length of time in operation. An established outlet will not necessarily reflect the first few months of a new opening. Nor will an outlet operated directly by the brand always have the same cost structure as a franchised one.

Where confidentiality restrictions apply, request aggregated or anonymised information. Reviewing monthly profit and loss accounts and reconciliations against sales reports can be useful, without accessing other operators’ personal data or trade secrets.

These questions can help identify bias:

• Are all comparable outlets shown, or only the best performers?
• Are outlets that closed or made losses included?
• Do sales figures account for discounts, cancellations and returns?
• Are ordinary trading months distinguished from peak seasons and exceptional promotional campaigns?

If you cannot verify a figure, treat it as an assumption awaiting verification, not as a fact. A lack of supporting evidence does not in itself prove deception, but it does limit how much confidence you can place in the projection.

3. Recalculate the figures for your future outlet

Do not settle for a spreadsheet containing only totals. Ask for the formulae and recreate the model using realistic costs for your operation. A simple starting point is to calculate sales from daily transaction numbers, average spend per purchase and the number of trading days. Then check whether the outlet has the capacity to handle that level of activity.

Build three scenarios: base, favourable and adverse. In the adverse scenario, combine lower sales with plausible cost pressures. Reducing revenue alone is not enough if payroll or input costs could also rise.

Also calculate the break-even point: fixed costs divided by the contribution margin expressed as a percentage, provided the items have been classified correctly. This margin is the share of sales remaining after variable costs. The result indicates the sales needed to cover the costs included; it does not guarantee demand.

To assess the payback period, compare cumulative available cash flow with the investment actually paid out. Avoid dividing the investment by the profit from the best month: this ignores the start-up period, seasonality and possible further outlays.

4. Distinguish estimates from legal commitments

In Mexico, franchises are specifically regulated by the Federal Law on the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial, or LFPPI). Article 246 requires a written contract and specifies minimum content, including the criteria and methods used to determine the franchisee’s profit margins or commissions.

This requirement does not automatically turn a sales projection into a profit guarantee. Ask your lawyer to compare the financial presentation with the contract and identify any contradictions, exclusions or conditions that could change the expected outcome.

If a promise of profitability is decisive in your purchase decision, ask for written clarification of who is making that commitment, how it will be measured, over what period and what the consequences would be if it is not met. Do not assume that an advertising claim provides sufficient protection.

Practical takeaway: before committing your money, insist on clear definitions, comparable evidence and a model you can recalculate. If the purchase only makes financial sense with optimistic sales figures or omitted expenses, you do not yet have a sound basis for a decision.