Franchise profitability: how to adjust the figures for your own outlet

A successful business cannot always be replicated with similar financial results. The owner may work without pay, own the premises or receive discounts unavailable to a new partner. Before inviting entrepreneurs to join your franchise network, prepare a profitability assessment for an outlet run by an independent franchisee. The aim is not to produce an attractive forecast, but to check whether the model remains viable once all costs are included.

1. Separate the business’s results from those of an individual outlet

Start with data for a specific outlet, rather than the business as a whole. The overall results may include online sales, wholesale trade or additional services that the franchisee will not offer. Similarly, head office costs may obscure the outlet’s true financial performance or, conversely, cover expenses that do not appear in its accounts.

Prepare a month-by-month statement covering a full seasonal cycle. Break out revenue and the costs of goods or materials, staffing, premises, utilities, external services and marketing. Flag unusual months, for example those affected by refurbishment, a one-off order or an exceptional promotion. Do not exclude them without explanation: show how they affect the picture of the business.

Record the source for each item: sales records, invoices, payroll records or the lease. Agree with your accountant on a consistent approach to VAT, discounts, returns and allocating costs between months. Money passing through a bank account is not the same as revenue, and the account balance does not show profitability.

It is also worth breaking down sales by channel. An order handled through a third-party platform may generate a different margin from an on-site purchase, even if the customer pays the same price.

2. Add the costs currently hidden by the owner’s work

The most important step is to normalise the results: recalculate them as if the outlet were operating on terms available to a new partner. This does not mean changing the historical accounts, but creating a separate comparison model with clearly disclosed adjustments.

In particular, check:

• Work done by the owner and family members. Include the cost of replacing their work, allowing for time spent on management, sales, purchasing and administration.
• Premises. If the business owner owns the premises, allow a reasonable cost for using comparable space. Do not assume that preferential rent will be available everywhere.
• Purchasing terms. Do not include discounts in the forecast unless their availability to the franchisee has been confirmed.
• Shared services. Allocate an appropriate cost to the outlet for accounting, software, maintenance and administrative support.
• Equipment upkeep. Allow for repairs, wear and tear, and the economic cost of replacing equipment, without counting the same items twice.

Next, add franchise fees and any mandatory expenditure arising from the proposed arrangement. You are not setting their amounts at this stage; you are checking their effect on the franchisee’s results. Separate start-up expenditure from ongoing costs, and agree with your accountant on how to present them.

Show remuneration for the franchisee’s own work separately from the profit remaining after that remuneration has been accounted for. Otherwise, a prospective franchisee may mistake payment for a full-time job for a return on invested capital.

3. Calculate the break-even point and test less favourable conditions

Divide costs into fixed costs and those that vary with sales. The latter may include goods, packaging, payment processing charges and percentage-based franchise fees. Some costs rise in steps: higher sales may require an extra staff shift, not just more materials.

You can calculate a simplified break-even point by dividing monthly fixed costs by the contribution margin ratio. This ratio is the proportion of revenue remaining after variable costs have been deducted. All items must be calculated on a consistent basis. If there are several product categories, use the actual sales mix, as changes in that mix affect the result.

Prepare three scenarios: base case, cautious and favourable. Do not assign arbitrary percentages to them. Base your assumptions on observed fluctuations, quoted rents, staffing costs and potential supply terms. Also test a simultaneous fall in sales and rise in a significant cost.

For each scenario, answer these questions: does the outlet cover the full cost of labour, when does it break even, and what level of sales does it need? If that level exceeds the capacity of the premises or team, a spreadsheet alone will not fix the model. The operating assumptions need to change before you offer the franchise.

4. Document your assumptions and present the results responsibly

In Poland, there is no dedicated statute governing franchising. A franchise agreement is an ‘unnamed contract’ — a contract type not specifically defined in legislation — based, among other things, on the principle of freedom of contract under Article 353¹ of the Polish Civil Code. General rules on contractual obligations, competition law, intellectual property and taxation also apply. Proposals for specific regulation are not law in force.

The absence of a dedicated statute does not mean you have free rein when presenting results. Inaccurate or misleading information may give rise to liability under general legal rules, depending on the circumstances. Clearly distinguish between your own outlet’s historical results, its adjusted results and the forecast for a new outlet. A disclaimer stating that a forecast does not guarantee a profit is no substitute for reliable data.

Keep a record of the model version, the calculation date and the reasoning behind each adjustment. Ask an accountant to check the calculations, and someone familiar with the outlet’s day-to-day operations to assess whether the assumptions are realistic.

Practical takeaway: expand your franchise network on the basis of results that account for the franchisee’s full costs, not simply the profit made by your own business. If profitability depends on unpaid work or exceptional advantages enjoyed by the owner, improve the model first.