Buying a NZ Franchise: How to Check Earnings Claims

A convincing sales forecast is not proof that a franchise will support you. Before buying into New Zealand’s franchising community, establish where the numbers came from, which costs they include and whether they fit your proposed business. This guide explains how to turn an earnings claim into an evidence-based decision, with help from an independent accountant and franchise lawyer.

1. Establish exactly what is being claimed

Ask the franchisor or seller to identify every financial statement as historical results, a forecast or an illustration. These are different things: actual trading records describe past performance, while forecasts depend on assumptions and illustrations may not predict your likely results at all.

For each claim, request written answers to these questions:

• Does the figure mean sales, gross profit, operating profit or cash available to the owner?
• Is it inclusive or exclusive of GST?
• Which trading period and locations does it cover?
• Does it include a commercial wage for the owner’s work?
• Are royalties, marketing contributions and other compulsory charges deducted?
• Does it describe an established outlet or a new opening?

Treat phrases such as “owner earnings” cautiously until they are defined. A figure combining wages and profit is not the same as a return on your investment. Keep copies of advertisements, presentations, emails and spreadsheet versions so your advisers can trace each claim.

2. Ask for evidence that matches your purchase

For an existing franchise, request financial statements, management accounts and supporting sales records covering several trading periods where available. Have your accountant reconcile reported revenue with appropriate source records, such as point-of-sale reports, bank receipts and GST returns. Differences may be explainable, but they need explaining.

Check whether reported profit includes unusual income or excludes expenses you will face. A seller might add back personal expenses or a one-off repair. Your accountant should assess each adjustment rather than accepting an adjusted profit figure at face value.

For a new location, there is no local trading history to verify. Instead, ask how comparable outlets were selected. Consider their customer base, opening hours, maturity, competition and owner involvement.

An average can hide wide variation. Request the range of results, the number of outlets represented and whether closed or transferred outlets were excluded. Anonymised information may help protect confidentiality, but it still needs enough context to be useful. If evidence is unavailable, record that uncertainty rather than treating the forecast as verified.

3. Know the New Zealand rules behind the paperwork

New Zealand has no franchise-specific legislation, mandatory statutory franchise disclosure regime or franchise registration requirement. General commercial laws apply instead.

The Fair Trading Act 1986 prohibits misleading or deceptive conduct and unsubstantiated representations in trade. Earnings statements therefore need proper support; presenting a number as a forecast does not make its basis irrelevant. The Contract and Commercial Law Act 2017 may provide remedies for misrepresentation, depending on the circumstances. The Commerce Act 1986 also applies to competition issues in franchise arrangements.

Separate from legislation, franchisors belonging to the Franchise Association of New Zealand (FANZ) must comply with its Code of Practice and Ethics. Membership is voluntary; the Code is not a nationwide franchise law.

The Code requires a disclosure document, updated at least annually, to be supplied at least 14 days before signing a franchise agreement or becoming bound by a preliminary agreement to proceed. Verify membership and ask your lawyer to check the applicable requirements before committing.

Disclosure is a starting point, not an audit or a guarantee of earnings. Ask your lawyer to review disclaimers, acknowledgements and any proposed contracting out of Fair Trading Act provisions. Limited contracting out can be permitted between parties in trade where statutory conditions are met.

4. Rebuild the forecast around your own cash needs

Have your accountant prepare an independent monthly cash-flow forecast rather than simply adjusting the seller’s profit total.

Include compulsory franchise charges, staffing, stock, insurance, premises costs, software, repairs and local marketing. Allow for opening delays, seasonal trading, customer payment timing and working capital. Include loan repayments and tax payments: accounting profit does not necessarily mean cash is available to pay them.

Model a downside case with slower sales growth and higher costs. Work out the sales needed to cover operating costs, finance commitments and your household drawings without double-counting an owner’s wage.

Speak to several current franchisees about whether the assumptions resemble their experience, while recognising that their results are not promises about yours.

5. Resolve discrepancies before committing

Create a short schedule of unresolved questions, the evidence needed and who must provide it. Ask for material explanations in writing and have your lawyer consider how important representations should be reflected in the transaction documents.

If signing before checks are complete, obtain legal advice on appropriate due-diligence conditions. Do not assume a deposit is refundable or that you can cancel later simply because the figures disappoint.

Practical takeaway: Buy on verified evidence and affordable downside assumptions—not the most attractive profit figure in the presentation.