Setting turnover targets in your first franchise agreement

When you turn an existing business into a franchise network, you want new outlets to generate sufficient sales. A turnover target can provide direction, but a firm contractual minimum has different implications from a shared ambition. In a healthy franchise network, both parties know in advance what a target means, how it will be measured and what happens if results fall short.

1. Distinguish between an ambition, a forecast and an obligation

Do not use the same term for different expectations. An ambition is a result you work towards together. A forecast is a reasoned estimate based on data and assumptions. A contractual turnover obligation is a commitment that may carry legal consequences.

As a new franchisor, it is easy to blur these concepts. You might present an expected annual turnover during an introductory meeting, later call it a target and eventually include the same figure in the agreement as a minimum. For the prospective franchisee, the meaning of that figure has changed along the way.

Start by deciding why you need a turnover target. Do you want to structure commercial support, monitor viability or agree a specific performance obligation? A firm minimum turnover is not necessarily needed to provide support.

For each target, record:

• whether it is a guideline or legally binding;
• which period and outlet it applies to;
• what the figure is based on;
• what the consequences are if turnover falls below it.

Then check that your presentation, financial explanation, agreement and operations manual use the terms consistently. A sales promise that sounds non-binding should not come with serious contractual consequences.

2. Base the target on the new outlet’s circumstances

Your existing business’s turnover is not automatically an appropriate benchmark for a franchisee. Your own outlet may benefit from long-standing customer relationships, favourable rent or your personal reputation. A new operator may start without those advantages.

Make clear which circumstances influence the proposed target. Consider the catchment area, opening hours, available capacity, seasonal patterns and the time needed to build a customer base. Separate proven results from expectations, and explicitly identify any assumptions that have not yet been tested in a franchised outlet.

Where possible, allow for a start-up period and use several scenarios. For example, show what happens to financial results if customer numbers grow more slowly or average spending is lower than expected. Present scenarios as planning tools, not guarantees.

Look beyond turnover alone. Extra sales generated through prolonged discounting can erode gross margins. More orders may mean higher staffing costs. Meeting a turnover target while cash flow deteriorates gives an incomplete picture.

Encourage the prospective franchisee to assess the target alongside their own operating budget and cash flow forecast, preferably with an independent financial adviser. This helps establish whether the projected sales could support a sustainable business.

3. Agree measurement rules and consequences in advance

A figure is only useful if everyone understands how it is calculated. Specify, for example, whether turnover is measured excluding VAT, how returns and discounts are treated, and which outlet an order is allocated to. Also agree how to handle a partial first year of trading or a temporary closure.

Choose a measurement period that suits the business. Monthly figures help identify problems early, but in a seasonal franchise business they may not be suitable for a final assessment. Distinguish between an interim warning and an assessment of whether a contractual obligation has been met.

Then establish a procedure for dealing with results that fall short:

1. Check the figures and definitions together.
2. Investigate the causes, including problems with the franchise model or support provided.
3. Record improvement actions for both parties.
4. Agree a suitable review date.
5. Then assess whether further measures are needed.

Avoid automatically linking one disappointing period to termination. Whether a breach justifies termination depends in part on the circumstances and general principles of contract law. Have any sanctions, periods allowed to remedy a breach and termination provisions reviewed by a legal adviser. Including a clause in the agreement does not automatically make every sanction enforceable.

4. Align the arrangements with the Dutch Franchise Act

The Netherlands has specific franchise rules: the Dutch Franchise Act (Wet franchise), incorporated into Book 7 of the Dutch Civil Code since 1 January 2021. The Act does not require you to agree turnover targets. However, its disclosure obligations and standards of conduct are relevant when you use them.

Provide the draft agreement containing the turnover obligations, together with the relevant supporting information, well before signing. A standstill period of at least four weeks applies to the information that must be disclosed by law. The prospective franchisee must have the opportunity to examine the arrangements and risks. There is no general statutory obligation to provide a turnover forecast as such, but if you do provide one, make sure it has a sound basis.

During the relationship, you must provide the commercial and technical assistance that can reasonably be expected for the franchise model. An improvement plan should therefore not simply be a task list for the franchisee. Record the analysis, guidance or other appropriate help you will provide too.

If you want to change targets later, do not assume that amending the operations manual gives you the right to impose new obligations. Seek legal advice on what the agreement permits and which statutory disclosure or consent requirements may apply.

Practical conclusion: before entering into your first franchise agreement, prepare a single target sheet setting out the meaning, supporting rationale, measurement method and consequences of each turnover target. Discuss it with the prospective franchisee and have any binding obligations legally reviewed.