Financial projections when franchising in Mexico

A profitable business does not mean someone else will achieve the same results by replicating it. Before offering a franchise in Mexico, you need to explain which figures come from actual operations, which are estimates and what conditions could change them. A transparent financial presentation helps build a franchise network with realistic expectations and better-informed decisions.

1. Separate historical results from estimates

Start with documentary evidence: profit and loss statements, sales records, expense receipts and inventory movements. Use comparable periods and identify seasonal effects, exceptional closures or promotions that changed normal trading patterns.

Do not present turnover as profit. Nor should you confuse accounting profit with the cash available to meet financial obligations. Your records should distinguish at least the following:

• Net sales: after discounts and returns, with consistent tax treatment.
• Cost of sales: materials, goods and other costs directly related to what was sold.
• Operating expenses: payroll, rent, utilities, maintenance and administration.
• Cash flow: money coming in and going out, reflecting the actual timing of each transaction.

Next, adjust for advantages the current owner enjoys that a franchisee may not have. If you work without paying yourself a salary, operate from premises you own or share staff with another business, these arrangements may inflate apparent profitability.

Prepare two columns: recorded results and results adjusted for a standalone operation. Explain each adjustment and retain the supporting evidence. Do not exclude exceptional expenses without also showing the original results.

2. Build a model for a standalone unit

The projection should reflect the costs the franchise operator will bear, not just those of your existing outlet. Include the payments set out in the franchise offer, the systems required and the staffing needed to run the business. The aim here is not to set fees, but to show their financial impact.

Separate three categories that are often mixed together:

1. Initial investment: fit-out, equipment, deposits and expenditure before opening.
2. Recurring operations: purchases, wages, utilities and other regular payments.
3. Working capital: cash needed to maintain stock and meet obligations while cash receipts settle into a regular pattern.

Include expenses that do not arise every month, such as renewals, insurance or equipment replacement. Spreading these across the analysis helps assess their impact, but the cash flow forecast must show when they are actually paid.

Calculate the break-even point using a consistent classification of fixed and variable costs. If you use contribution margin, explain that it represents what remains of sales revenue after variable costs have been covered. Do not present it as net profit.

Finally, document what any stated payback period means: which investment it covers, which cash flows it uses and whether it takes account of taxes, debt and replacements. Without that definition, two seemingly identical calculations may tell different stories.

3. Test scenarios and show their limitations

Avoid providing a single expected sales figure. Present a base case, a downside scenario and an upside scenario, all built on explicit assumptions. The upside scenario should not become the main sales promise.

Link sales to observable variables: daily transactions, average transaction value, trading days and available capacity. Ask whether the projected volume can be handled with the staff and equipment budgeted for.

Also test what happens if opening is delayed, rent increases or sales take longer to grow. Identify how much additional cash each situation would require and when the shortfall would arise.

Each scenario should state:

• The source and period of the data used.
• Assumptions about sales, costs and the opening schedule.
• Significant differences from the reference outlet.
• Variables outside the franchisor’s control.

Do not combine the strongest sales from one location with the lowest rent from another without justification. That combination may produce a financially attractive unit that cannot be replicated in practice.

4. Align the figures with the legal documentation

Mexico has specific franchise regulations. Article 245 of the Federal Law for the Protection of Industrial Property (Ley Federal de Protección a la Propiedad Industrial) requires prospective franchisees to receive information about the state of the business at least thirty days before entering into the agreement, in accordance with the applicable regulations. This pre-contractual information should not be confused with a guarantee of future earnings.

Article 246 requires a written agreement and specifies minimum contents, including the criteria and methods used to determine franchisees’ profit margins or commissions. This does not amount to a requirement to guarantee profitability.

Have accounting and legal advisers review the financial presentation, pre-contractual information and agreement together. If their figures differ, clarify why before proceeding. A warning that results may vary does not remedy false or misleading information.

Maintain version control and ensure sales discussions do not add promises that are absent from the documentation. Retain the assumptions and supporting evidence for every projection provided.

Practical conclusion: before offering your franchise, prepare an adjusted model, three scenarios and a file of supporting evidence. If you cannot explain where a figure comes from, it is not yet ready to present.