Forecasting Earnings Before Franchising Your Business

When franchising an existing business, it is not enough to say that your own outlet has strong sales. You need to explain what a prospective franchisee might earn, where the figures come from and why results may vary. In franchising, honest forecasts are a foundation for trust—not a promise of a guaranteed return on investment.

1. Build a verifiable earnings record

Start with actual business records, not your best month. Choose a period that reflects typical performance, including quieter months, rising costs and disruptions. Record the date range and identify the outlets included.

Reconcile sales reports, purchase receipts, payroll, rent, electricity bills and other expenses. Resolve any discrepancies before preparing material for prospective franchisees.

Distinguish between the following:

• Sales: revenue from transactions, with a clear explanation of how discounts, returns and taxes are treated.
• Gross profit: sales less the direct cost of providing the product or service.
• Operating profit: the amount remaining after operating expenses have been deducted.
• Cash flow: money actually coming in and going out, including equipment purchases and debt repayments.

Do not treat the owner's time as free labour. If the owner manages the business, allow a reasonable cost for someone to perform that role at another outlet. Likewise, do not assume that a franchisee will benefit from the low rent associated with premises you own.

2. Tailor the forecast to the proposed outlet

Your own outlet may have loyal customers built up over many years, a good location or a special agreement with a supplier. These advantages will not automatically carry over to a new outlet.

Prepare a separate set of assumptions for the location being assessed. Include transaction volumes, average transaction value, trading days, staffing capacity, rent, stock spoilage and delivery costs. Also include the financial obligations under the proposed franchise agreement.

Prepare three scenarios: weak, typical and strong performance. There is no need to invent a growth percentage. Adjust factors for which there is a clear basis: for example, fewer customers during the rainy season or higher rent in the chosen area.

To calculate the sales needed to break even, divide fixed costs by the proportion of each Philippine peso of sales left after deducting costs that vary with sales volume. Have an accountant check how costs are classified to avoid double-counting or omissions.

Distinguish between the time needed to achieve positive monthly cash flow and the time needed to recover the full investment. These are different measures. An outlet making a monthly profit may still be a long way from recovering its fit-out and equipment costs.

3. Understand your legal responsibility for earnings claims

The Philippines does not have a single comprehensive franchise law. That does not mean, however, that franchise offers are unregulated. The Civil Code governs contracts and consent; intellectual property law, Republic Act No. 8293, is also relevant to the use of trade marks and related rights.

Executive Order No. 169, series of 2022, specifically addresses agreements involving micro, small and medium-sized enterprises. It sets minimum requirements for the contents of agreements and directs the Department of Trade and Industry (DTI) to establish a register of agreements. Ask the department and a lawyer to confirm the applicable submission process and current rules.

There is no general requirement to provide a standard pre-contract disclosure document for every franchise. This does not, however, permit misleading earnings claims. Under Article 1390 of the Civil Code, a contract may be annulled if consent was obtained through fraud or other defects in consent.

The phrase “earnings are not guaranteed” does not remedy inaccurate figures. The data must be accurate and its material limitations clearly disclosed.

4. Set a consistent approach to presenting forecasts

Before offering a franchise, prepare an approved information pack: a summary of actual results, a set of assumptions, forecasts for the three scenarios and an explanation of any exclusions. Give every document a date and version number.

Put the following rules in place:

• Only authorised people may explain the forecasts.
• No earnings promises may be made in messages, presentations or verbal discussions unless supported by the approved data.
• Answers to material questions about earnings must be provided in writing.
• Applicants must have sufficient opportunity to consult their own accountant and lawyer.

Keep the exact version supplied and promptly correct any errors you discover. An applicant's acknowledgement that they received a document is simply a record of receipt, not a waiver of your liability.

Practical reminder: Before using any figure to promote your franchise, make sure you can show its source, explain the assumptions and describe how actual results could be lower.