Buying a franchise: assessing minimum sales targets

Before joining a franchise network, establish whether the sales targets presented are simply management benchmarks or binding commitments. A sales forecast helps you plan; a contractual minimum target can affect your costs and whether your business can continue operating. Clarify the distinction before signing, rather than when sales first fall short of expectations.

1. Separate forecasts, targets and obligations

Ask the franchisor to identify every provision on minimum performance in the draft agreement and its schedules. Look for terms such as ‘minimum turnover’, ‘mandatory targets’, ‘performance quota’ or ‘annual minimum’. Also check whether the agreement refers to other documents in which these figures may be set out.

Distinguish between three situations:

• Sales forecast: an estimate used to present or plan the business, which should not be treated as a guaranteed outcome.
• Performance benchmark: a reference point for assessing operations and deciding on improvements.
• Contractual obligation: a result that must be achieved under the agreed terms, with specified consequences for falling short.

The label alone is not decisive. A document may call a figure a ‘target’ while another clause attaches contractual consequences to it. Read the provisions together.

Ask explicitly: ‘If the outlet follows the operating procedures but does not reach this figure, what happens?’ Request a written answer and check that the agreement reflects it.

2. Make sure the calculation can be checked

A sales obligation needs a definition that allows both parties to arrive at the same result. Simply stating an amount or a growth percentage is not enough.

Check at least the following:

• Calculation basis: sales including or excluding VAT, before or after discounts, returns and cancellations.
• Period: month, quarter, calendar year or a period running from the opening date.
• Allocation: how online orders, sales shared between outlets and centrally invoiced transactions are treated.
• Verification: the information system used and the procedure for correcting errors.
• Adjustments: whether the figure is fixed, follows a previously agreed formula or can only be revised by further agreement.

For example, an order received in December and returned in January may affect different reporting periods. The agreement should make clear how it will be accounted for, without relying on one party’s interpretation later on.

Also check whether the first period’s target is pro-rated to reflect the actual months of trading. An outlet that opens halfway through the year should not be assessed as though it had traded for twelve months, unless that commitment has been clearly accepted and factored into the investment decision.

3. Test what it will take to meet the target

Do not assess the target solely on whether it is achievable. Consider the cost of reaching it too. Increasing sales through discounts, extra advertising or additional staff may raise turnover while reducing your margin.

Work with your accountant to model the proposed obligation specifically. Start with the number of transactions required and the average spend per purchase. Compare the result with the premises’ capacity, opening hours, staffing and the local demand you can substantiate.

Test three scenarios: meeting the target at your usual margin, meeting it through increased promotional activity, and missing it despite running the business diligently. In each case, identify the additional costs and the cash remaining.

Also examine how minimum sales requirements interact with other obligations. Minimum purchasing requirements may create pressure to build up stock without sufficient demand. Minimum payments to the network may remain payable even when sales fall below target. These are separate commitments: ask for them to be presented separately.

4. Negotiate balanced terms within Portuguese law

Portugal has no specific statute governing franchise agreements, nor a pre-contractual disclosure document with legally prescribed content for this type of relationship. The general contract rules in the Portuguese Civil Code apply, including freedom of contract and the duties of good faith in negotiations and performance under Articles 227 and 762.

Competition rules also apply, as does the regime governing standard contract terms under Decree-Law No. 446/85 where such terms are involved. The absence of franchise-specific legislation does not mean that every written requirement is valid or that duties to provide information and clarification cease to apply.

Before accepting a binding target, seek to negotiate:

• An initial settling-in period with its own criteria.
• An objective review method, rather than wholly discretionary increases.
• Express provisions covering interruptions and failures in supply or support attributable to the franchisor.
• Access to the data used in the assessment and an opportunity to challenge errors.
• An assessment that takes the circumstances into account before the specified consequences are applied.

These are points for negotiation, not automatic franchisee rights. A lawyer should review the precise wording, how the documents work together and the applicable legal limits.

Practical conclusion: do not sign up to a minimum target unless you can explain how it is calculated, what meeting it will cost and what happens if you fall short. Get those three answers in writing and include them in the contract review.