Assessing your pilot outlet’s financial viability as a franchise

Your existing business is profitable and you want to build a franchise network. But could a franchisee run a financially sound business using the same approach? To find out, you need to reassess your own outlet’s results. Low rent, unpaid owner hours or favourable purchasing terms negotiated years ago can distort the picture. Use your own business as a pilot outlet and examine which results can genuinely be replicated.

1. Turn your own figures into a verifiable baseline

Start with a completed accounting period for which all turnover, purchases, staff costs and other expenses have been recorded. Ideally, choose a period that includes both quieter months and seasonal peaks. One successful opening month or festive trading period is not a reliable basis for a new outlet.

Alongside the profit and loss account, record the operational data that explains the results. This might include opening hours, hours worked, transaction numbers, average spend, wastage and discounts. Without that context, you cannot tell whether a healthy margin comes from the business model or exceptional circumstances.

Then distinguish between:

• Recurring performance: normal sales and costs in the ordinary course of business.
• One-off effects: such as an unusually large order, a grant or a remedial expense.
• Outlet-specific advantages: such as exceptionally cheap premises or customers who come specifically because of you.

Keep the original figures alongside your adjusted version. Do not remove disappointing results simply because they are inconvenient. An adjustment should explain why an item might differ for a franchisee, not serve to make your franchise model look more attractive.

2. Calculate the costs an independent franchisee would actually bear

Your current business’s accounting profit does not automatically reflect the economic return for a franchisee. In a sole trader business in particular, the owner’s working hours may not be included in staff costs. Make clear how much work the owner does and what remuneration you allow for in your assessment. Label this as a calculation assumption, not an existing wage expense.

Also check for work whose cost is currently absorbed elsewhere without being noticed. Does your partner do the bookkeeping for free? Does an employee from another outlet regularly help out? Does your head office handle scheduling without charging the outlet? That work will still need to be done when an independent franchisee runs the outlet.

Use a simple table with four columns: actual costs, adjustment required, justification and expected costs for the franchise outlet. Include at least:

• Staffing, including cover for holidays and sickness.
• Premises at a realistic local cost.
• Software, maintenance, insurance and administration.
• Franchise fees and any marketing contribution.
• Local promotion and other responsibilities that remain with the franchisee.

Avoid double counting. If central software is fully covered by the franchise fee, the same licence should not appear again as a separate outlet expense. Also keep one-off start-up expenditure separate from recurring operating costs.

3. Test vulnerabilities, not just average performance

Prepare a downside scenario as well as a base case. Examine what happens if turnover builds more slowly, staff costs are higher or the gross margin falls. Change assumptions one at a time initially. This will show you which factor has the greatest impact on the result.

Next, calculate the turnover needed to cover recurring costs. Allow for costs that rise with turnover, such as purchases and turnover-based fees. State explicitly whether the calculation of this break-even point includes remuneration for the owner.

Check whether the required turnover is achievable in practice, too. A calculation may look viable on paper even though the outlet would need to serve more customers than its available staff, space or equipment could handle.

Finally, look at cash flow separately. Making a profit does not mean there will be enough cash available at every point. Building up stock, payment terms, tax payments and loan repayments affect liquidity differently from profit. Ask an accountant to check how your operating projections translate into cash flow before drawing conclusions.

4. Share pilot results with the right legal context

In the Netherlands, the Franchise Act has been in force since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Its pre-contractual disclosure requirements are relevant when you share pilot results with prospective franchisees. Among other things, the law requires financial information about the proposed location or, where that is unavailable, businesses considered comparable. You must explain why those businesses are comparable.

Your own pilot outlet is therefore not automatically a suitable benchmark. Describe differences in location, size, opening hours, customer base and cost structure. Always make clear what is historical information and what is an assumption or forecast. The Franchise Act does not impose a general obligation to provide a turnover forecast, but any forecast supplied voluntarily needs to be carefully substantiated.

Provide the legally required information in good time, observing the statutory standstill period of at least four weeks before entering into the franchise agreement. Ask a lawyer specialising in Dutch franchise law to assess whether your presentation and timing comply. A warning that results may vary is no substitute for a properly supported explanation.

Practical conclusion: only move forward once you can explain which pilot results can be replicated, which costs will change and when the outlet’s financial viability becomes vulnerable. That way, you build a franchise network on understanding rather than an attractive bottom line.