Franchise profit forecasts: how to check a brand’s promises

A brand’s presentation may show an attractive monthly result without answering the most important question: how much will you have left after covering all costs? Other franchisees’ experiences are a valuable benchmark, not a guarantee of success. Before buying a franchise, check not only the projected profit, but also how it has been calculated and whether a similar result is achievable in your location.

1. Establish what the figures really mean

Start with the definitions. ‘Revenue’, ‘margin’, ‘owner’s income’ and ‘operating profit’ are not interchangeable. Ask for a calculation that takes you from sales to the bottom line, with an explanation of each item. Also establish whether the figures are net or gross and how VAT has been treated. Mixing figures calculated on different bases can make a business appear profitable when it is not.

Check whether the breakdown includes:

• the cost of goods sold or materials needed to provide services;
• wages, including employer contributions, cover for absent staff and overtime;
• rent, service charges, energy and routine maintenance;
• franchise, marketing and technology fees, as well as payment processing charges;
• stock losses, customer claims, insurance and accountancy services;
• depreciation of equipment and financing costs.

Separate payment for your own work from the return on your investment. If the model assumes that you personally run the outlet for most of the week, part of the stated ‘profit’ is effectively payment for that work. Prepare an additional scenario that includes the cost of employing someone to take over your duties. Only then will you see whether the outlet also generates a return as an investment.

Ask an accountant to distinguish between accounting profit, taxable profit and cash flow. For example, repaying the principal on a loan uses cash but is not a tax-deductible expense.

2. Check whether the outlets being compared are similar

The average result across the network tells you little without information about the sample. It may combine established outlets in prime locations with new sites that are still building a customer base. Ask which period the data covers and whether it includes a full year rather than just the best months.

Request an anonymised breakdown of outlets that are comparable in terms of town or city size, floor area, opening hours, competition and length of time in business. Differences in rent and the owner’s involvement also matter. A family-run outlet may have a different cost structure from one run by an employed manager.

Look beyond the average. Ask for the median, the range of results and the number of outlets included in the figures. Establish whether closed or unprofitable outlets have been excluded. Selecting only the best examples does not allow you to assess the typical risks.

Speak to existing franchisees who are willing to share their experiences. Ask about the differences between the plan and reality: which costs were underestimated, how long it took to build sales and how much work the outlet required. Do not expect anyone to disclose confidential business information; the aim is to test the assumptions, not obtain a competitor’s full records.

3. Recalculate the forecast for your specific location

Build a simple sales model based on the number of transactions and average basket value, or the number of services provided and their average price. Every assumption should have a basis: observed footfall, data from an operating outlet or documented experience from comparable sites. An assurance that a location has potential is not enough.

Observe the area on different days and at different times. High footfall does not necessarily mean plenty of customers if the offer does not meet their needs. Account for seasonality, parking availability, planned building or road works, and competition. Also check whether the premises and team can handle the projected number of orders.

Prepare three scenarios: base case, cautious and optimistic. In the cautious scenario, reduce sales, allow more time to reach target turnover and increase the main costs in line with the risks you have identified. Do not change every variable arbitrarily — record the reason for each adjustment.

Calculate the break-even point. In simple terms, divide monthly fixed costs by the contribution margin ratio: the proportion of revenue left after variable costs. Then work out how many transactions a day are needed to achieve that turnover. This test often tells you more than an attractive profit margin in a presentation.

4. Record the assumptions and distinguish a forecast from a guarantee

In Poland, a franchise agreement is an ‘unnamed contract’, meaning it is not a separately defined contract type under the Civil Code. There is no dedicated statutory system of pre-contractual disclosure for franchising, nor a requirement to register franchise agreements. The legal basis is the Civil Code, including the principle of freedom of contract under Article 353¹ and its limits. Depending on the business, tax law, competition law and other general regulations also apply.

Do not therefore assume that you will receive a legally prescribed document confirming profitability. Ask for a written forecast, its date, the data sources and a list of assumptions. Keep presentations and correspondence. If a result has been presented as guaranteed, insist that the agreement specifies the conditions of that guarantee and the consequences if it is not met.

An inaccurate forecast does not automatically make the franchisor liable. Relevant factors include the assurances given, the reliability of the information, the circumstances of the negotiations and the connection to any loss suffered. Suspected deliberate misrepresentation requires an individual legal assessment.

Practical takeaway: before signing the agreement, prepare your own profitability calculation, review it with an accountant and establish your minimum acceptable return. Choose a brand on the strength of verifiable assumptions, not its most optimistic slide.