Buying a franchise: checking financial forecasts in Portugal

A sales forecast is not a guarantee of income. Before entering the Portuguese franchise market, prospective franchisees should understand how the franchisor calculated its projected results and whether those assumptions make sense for their proposed outlet. This analysis helps distinguish a potentially viable business from an overly optimistic sales pitch.

1. Find out where the figures come from

Ask for a financial forecast that sets out its assumptions, rather than simply an estimated investment payback period. The document should show sales, costs, operating profit and cash flows separately, and specify the period covered.

Start by asking whether the figures relate to actual outlets, network averages or a hypothetical model. Then seek clear answers to these questions:

• How many outlets underpin the estimate, and how long have they been trading?
• Are they owned by the franchisor or run by franchisees?
• Are their size, location, opening hours and staffing comparable to those planned for your outlet?
• Do the results include outlets that have closed, or only those still trading?
• Are sales figures shown inclusive or exclusive of VAT?
• Is appropriate remuneration for the owner’s work included?

An established outlet is not a sufficient benchmark for the first year of trading. Ask for data showing performance since opening and seasonal patterns. An annual average can conceal months when revenue is insufficient to pay staff and suppliers.

Request supporting evidence, aggregated or anonymised where necessary to protect confidential information. If the franchisor cannot substantiate a forecast, treat it as an unproven assumption.

2. Recalculate the margin with all costs included

Prepare your own budget with support from a certified accountant in Portugal. The aim is not to copy the franchisor’s spreadsheet, but to check that it includes all the costs needed to run the business.

Start with the margin after purchases, consumables and other costs directly linked to sales. Then add staffing, rent, insurance, energy, accountancy, maintenance and IT tools. Do not overlook stock losses, payment processing fees and local marketing expenses.

For payments to the franchisor, obtain written confirmation of:

• How royalties are calculated and whether a compulsory minimum applies.
• How discounts, returns and sales through platforms are treated.
• Advertising contributions and the services they actually cover.
• Charges for additional training, support, software and mandatory upgrades.

Also check whether compulsory purchases from suppliers specified by the franchisor affect the forecast margin. Compare the full terms: price, delivery charges, minimum order quantities, payment terms and returns policy.

Calculate the operating break-even point: fixed costs divided by the contribution margin ratio. This ratio should reflect costs that vary with sales, including variable royalties where applicable. The result shows the sales needed to cover the costs included in the calculation, but does not, on its own, demonstrate the ability to repay borrowing or recoup the investment.

3. Stress-test cash flow before seeking finance

A business can show an accounting profit and still run out of cash. Fit-out works, deposits, opening stock and loan repayments require payments that do not necessarily coincide with the costs recognised in the profit and loss account.

Prepare a monthly cash flow forecast covering the preparation, opening and stabilisation of the business. Review the timing of VAT and other tax payments with your accountant: even tax that may ultimately be recoverable can create a temporary funding need.

Build three scenarios — base case, cautious and adverse — by changing identifiable factors:

• A delayed opening while already-committed expenses continue.
• Slower sales growth than forecast.
• Higher staffing, purchasing or energy costs.
• Customer receipts arriving after supplier payments fall due.

Do not choose variations simply to produce a reassuring result. Base them on quotations, contractual terms and the experience of comparable outlets.

Identify the largest cumulative cash shortfall and add a contingency reserve supported by clear assumptions. Before taking on borrowing, check that the cautious scenario can cover principal repayments, interest and fees. Bank approval is no substitute for assessing the business’s viability.

4. Document the forecasts and understand the legal safeguards

Portugal has no franchise-specific law or standalone requirement to provide a standardised pre-contractual disclosure document. This does not mean there are no duties to provide information or grounds for liability.

Relevant provisions include freedom of contract under Article 405 of the Portuguese Civil Code and the duty to act in good faith during negotiations under Article 227. Inaccurate information or material omissions may give rise to pre-contractual liability, depending on the circumstances and the evidence.

Where standard contract terms are used, Decree-Law No. 446/85 imposes duties, including obligations to communicate those terms and provide information about them. The European Code of Ethics for Franchising is a self-regulatory benchmark, not a Portuguese law that applies universally.

Keep presentations, messages and different versions of the forecasts. Ask for assumptions and any commitments to be confirmed in writing and reviewed by a lawyer. A forecast that proves wrong does not automatically create a right to compensation; it is important to distinguish well-founded estimates from misleading information or unfulfilled commitments.

Practical conclusion: proceed only when you can explain where the forecast sales come from, what the true margin is and how much cash the cautious scenario requires. If evidence is missing, you are not yet ready to make the financial decision.