Franchise profitability: how to check forecasts before you buy

A brand's presentation may show an attractive profit without explaining how much of the owner's time, capital and effort it takes to achieve it. Before joining a franchise network, assess the economics of an individual outlet. The aim is not to secure a guarantee of success, but to establish whether the forecast uses data comparable to your circumstances and whether you could withstand a slower start.

1. Establish what the quoted profit actually means

Start by asking the franchisor for the spreadsheet containing the calculations, rather than just a slide showing the bottom line. Every significant item should include a description, a source and an indication of whether it represents historical data or an assumption. Separate revenue, operating costs, initial investment and cash flow.

Look particularly closely at any figure labelled “owner's profit”. It may mean profit before tax, finance repayments, depreciation or payment for the owner's own work. These are different measures and cannot be compared without adjustments.

Ask directly:

• Are sales and costs shown inclusive or exclusive of VAT?
• Are all franchise, marketing and IT fees included?
• Do staffing costs include employer contributions, cover and holiday pay?
• How many hours a week does the owner work, and where is the cost of that work included?
• Does the figure account for stock losses, customer claims, discounts and payment processing fees?

Also calculate a scenario with an employed manager. Even if you initially run the outlet yourself, this will show whether you are buying a business model that can afford paid management or primarily creating a job for yourself. Neither choice is necessarily wrong, but it should be an informed one.

2. Check whether the comparison outlets are genuinely similar

An average for the whole network tells you little about a new outlet. Established outlets may benefit from brand recognition built up over years, better purchasing terms or unusually high customer traffic. Ask for data from outlets with similar locations, floor areas, product or service ranges, opening hours and lengths of time in operation.

Try to obtain monthly figures covering a full seasonal cycle, along with separate data for the start-up period. Ask how many outlets are in the sample and how they were selected. If only the best-performing outlets are shown, do not treat their results as typical.

Ask for the median results and the spread across outlets, rather than basing your decision solely on the average. Clarify whether the figures include outlets that have closed or been transferred to other operators. Excluding unsuccessful businesses can make the model look substantially stronger.

Then speak to several franchisees, not just the person presented as a success story. Ask how long it took to reach stable sales, what unexpected expenses arose and how much involvement the owner actually needed to have. Respect confidentiality: you do not need someone else's tax returns to assess whether the assumptions are credible. Anonymised figures, supported by an explanation of the methodology, may be a sufficient starting point.

3. Build your own financial stress test

Transfer the data into your own spreadsheet and prepare three scenarios: a base case, a downside case and a severe downside case. Do not simply reduce every item by the same percentage. Lower sales do not mean a proportionate fall in staffing costs, subscriptions or mandatory minimum fees.

In each scenario, test the effects of fewer transactions, a lower average transaction value, reduced margins and a delayed opening separately. Also allow for additional stock purchases and equipment replacement. Tailor your assumptions to the specific business and local conditions rather than using arbitrary figures.

A simple calculation can help:

Break-even sales revenue = monthly fixed costs ÷ contribution margin ratio.

The contribution margin is the share of revenue left after deducting variable costs, including fees charged as a percentage of sales. Agree the classification of costs with an accountant, as misclassifying a fee could understate the break-even point.

Alongside your profit forecast, prepare a monthly cash-flow forecast. Stock purchases, payment terms, VAT settlements and loan principal repayments mean that a profit does not necessarily translate into available cash. Base your cash reserve on the largest cumulative cash shortfall in a cautious scenario, then add a buffer for unexpected expenses. Calculate the funds needed for your household living costs separately.

4. Get the information on record before signing

In Poland, a franchise agreement is an “unnamed contract”: it is not a separately defined contract type, and there is no dedicated statute comprehensively regulating franchising. The legal framework rests on the general provisions of the Polish Civil Code, including the principle of freedom of contract in Article 353¹ and its limitations. Rules on competition protection, unfair competition and industrial property may also apply.

There is no general statutory obligation to give a prospective franchisee a franchise disclosure document, nor a specific statutory period for reviewing it. Voluntary codes of good practice are not legislation. Check whether the franchisor has adopted a particular code and what commitments it entails; do not treat proposed legal changes as rules already in force.

Before making a non-refundable payment, therefore, agree what data will be provided and how much time you will have to verify it. Keep presentations, correspondence and the version of the spreadsheet on which you base your decision. Ask for written confirmation of data sources, comparison periods and excluded costs. After consulting a lawyer, consider recording important assurances in a schedule to the agreement.

A difference between forecast and actual results does not, in itself, establish the franchisor's liability. The wording of any assurances, the circumstances in which they were given and the causes of the loss all matter. Refusal to disclose the basis of a forecast does not prove a lack of integrity, but it does increase investment uncertainty.

Practical takeaway: make your decision only once you understand the basis of the forecast, can reproduce the calculations and have enough funds for a weaker scenario. Trust within a franchise network should go hand in hand with verifiable data.