Buying a NZ Franchise: Test the Earnings Forecast

An earnings forecast can make a franchise opportunity look convincing, but a spreadsheet is not proof of future income. Before joining New Zealand’s franchising community, establish where the numbers came from, whether they fit your proposed business and what happens if the assumptions prove optimistic. Your aim is not to demand guaranteed profits: it is to understand the evidence behind the sales pitch.

1. Identify exactly what you have been given

Start by separating historical results from predictions. Accounts for an existing franchise show past performance. A forecast estimates future results. An illustration based on another outlet may demonstrate how the model works without showing what your business is likely to earn.

Ask the franchisor or seller to identify:

• Who prepared the figures and when they were last updated.
• Whether they describe your proposed business, another outlet or a network average.
• Which figures come from actual trading records and which are assumptions.
• Whether revenue and expenses include or exclude GST.
• What the stated ‘profit’ includes and excludes.

The last question matters particularly for owner-operated businesses. A surplus before paying the working owner is not the same as a return after allowing a realistic wage for their work. Likewise, earnings before interest, tax, depreciation and amortisation are not the cash available for personal spending or loan repayments.

Request an editable forecast with its assumptions visible, rather than relying solely on a summary chart or headline return.

2. Check the evidence and the comparison group

For an existing franchise, ask your accountant to reconcile reported sales and expenses against supporting records, such as financial statements, GST returns and point-of-sale reports. Differences may be explainable, but they should be explained before you rely on the results.

Check whether recent trading is representative. Temporary discounts, unusually large orders, reduced opening hours or the seller’s unpaid family labour can distort the picture. Identify adjustments made to reported profit and ask for evidence supporting each one.

For a new franchise, comparable outlets may be the main evidence available. Their relevance matters more than the attractiveness of their results. Ask whether they have similar:

• Catchment populations, customer profiles and competition.
• Opening hours, premises size and operating capacity.
• Labour requirements and local occupancy costs.
• Time in operation and levels of repeat business.

A mature outlet in a busy location is not a reliable substitute for a newly opened business building its customer base.

If a network average is used, ask how it was calculated, how many outlets it covers and whether closed or poorly performing outlets were excluded. An average alone does not reveal the spread of outcomes. Where confidentiality limits access to individual accounts, ask for anonymised data and an explanation of its limitations.

3. Rebuild the forecast around your operation

Have your accountant test sales from the bottom up. For a retail or food business, that might mean customer transactions multiplied by average spending. For a service franchise, it might mean completed jobs multiplied by the average fee.

Then check whether the operational assumptions are achievable. Can the premises, equipment and staffing actually handle the proposed volume? Does the forecast allow for travel time, cancellations, quieter periods and the time you must spend on administration?

Review costs alongside sales. Include the labour required to deliver the forecast, franchise charges, payment-processing costs, insurance and other recurring expenses. Check whether quoted costs are current and whether temporary opening concessions have been treated as permanent savings.

Build a base case and a downside case. Test slower customer growth, lower average spending and higher staffing costs, including a scenario where several pressures occur together. Avoid reducing revenue while leaving every related assumption untouched.

Finally, distinguish accounting profit from cash flow. Loan principal repayments and equipment purchases can consume cash without appearing as ordinary operating expenses. Ask your accountant to identify the sales level needed to cover operating costs, reasonable owner remuneration and debt payments.

4. Understand the legal position on earnings claims

New Zealand has no franchise-specific legislation, 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 claims therefore need careful scrutiny: describing figures as a forecast does not automatically remove legal responsibility for how they are presented or supported. Equally, missing a forecast does not by itself establish a legal breach.

The Contract and Commercial Law Act 2017 may also provide remedies for misrepresentation, depending on the circumstances. Ask your lawyer how these laws apply to the particular claims and agreement.

Membership of the Franchise Association of New Zealand is voluntary, but member franchisors must follow its code, including disclosure obligations. This is not government approval of projected earnings.

Keep dated copies of forecasts, presentations and explanations of assumptions. If the numbers change, request a clear reconciliation rather than accepting a replacement spreadsheet without explanation.

Practical takeaway: Proceed only when you can explain the forecast’s evidence, its key assumptions and its downside. If essential figures cannot be verified, treat that uncertainty as a buying risk—not as a reason to accept the headline profit.