Buying a franchise: checking financial projections

A presentation showing projected sales and positive profits can make a franchise proposal compelling. But a forecast alone does not demonstrate that your outlet will achieve those figures. Before joining the network, check where the numbers come from, which assumptions underpin them and what happens if performance falls short of expectations.

1. Distinguish actual results from sales forecasts

Start by classifying each document you receive. A statement of historical results from existing outlets is different from a financial model for a hypothetical outlet. Both are different from a projection prepared specifically for your intended location.

Ask the brand to confirm in writing:

• Whether the figures presented are historical, estimated or a combination of the two;
• The period they cover and the date they were prepared;
• Whether they include company-owned outlets, franchised outlets or both;
• How many outlets were included and how they were selected;
• Whether they represent a mean, a median, a range or simply one example.

A reference outlet is not necessarily a comparable outlet. An established operation in a proven location, managed directly by the brand, may operate under different conditions from those facing a new franchisee.

Also ask whether the sample excludes outlets that have closed or underperformed. A selection limited to the strongest results can create an unrepresentative picture, even when the figures themselves are accurate.

Where there are legitimate confidentiality concerns, suggest anonymised data or controlled access to supporting documents. You do not need to know customers’ identities to understand the financial basis of the proposal.

2. Examine the assumptions behind the projected profit

Do not assess only the bottom line of the spreadsheet. Ask for an explanation that allows you to trace the calculations from sales to projected profit.

For revenue, seek to understand the relationship between transaction numbers, average transaction value, trading days and changes over time. Check whether the first few months have been treated as a start-up period or whether the forecast assumes the performance of an established outlet from day one.

For costs, confirm that all necessary operating expenses have been included: stock, staffing, premises costs, insurance, external services, payments to the brand and mandatory IT tools. If the owner will work in the business, their remuneration should be explicitly identified rather than hidden within a profit figure that appears available to take out of the business.

Ask your accountant to clarify three distinctions:

• Sales and cash receipts: making a sale does not mean receiving payment at the same time;
• Operating profit and net profit: interest, tax and other items can change the final figure;
• Profit and available cash: capital expenditure and loan repayments also affect cash flow.

Also confirm whether the figures include or exclude VAT and whether the treatment is consistent. Comparing documents prepared on different bases can distort your assessment.

3. Understand the legal framework in Portugal

Portugal has no legislation specifically governing franchise agreements, nor does it require a pre-contractual disclosure document with prescribed content and deadlines for this business model. There is also no specific register of franchisors that certifies the reliability of their projections.

The general rules of the Portuguese Civil Code apply. Article 405 establishes freedom of contract within legal limits. Article 227 requires good faith during negotiations and the formation of a contract; Article 762(2) requires it in the performance of obligations.

Presenting misleading data or omitting relevant facts may therefore give rise to liability, depending on the circumstances, fault and proven losses. However, a missed forecast does not automatically amount to a breached guarantee, nor does it, on its own, create a right to compensation or cancellation.

Where pre-drafted terms are used without the possibility of individual negotiation, Decree-Law No. 446/85 of 25 October, as amended, should also be considered. Articles 5 and 6 establish duties to communicate terms and provide information.

Ask a lawyer to examine how the agreement describes the projections and any disclaimers. Do not sign a statement saying that you have checked data you have never been given access to.

4. Test your decision before committing

With your accountant’s support, build an alternative scenario: slower sales, a lower margin or higher costs than forecast. Identify the assumptions that have the greatest impact on profit and assess whether you could withstand that combination.

Use a simple table to record each key assumption, the document supporting it, the brand’s explanation and any unresolved questions. Clearly distinguish figures supplied by the franchisor from your own estimates.

If a performance guarantee is central to your decision, ask for its scope, conditions and consequences to be expressly defined in the agreement and reviewed by a lawyer. A sales claim is no substitute for this work.

Practical conclusion: only use a projection to make your decision once you can explain where the figures come from, which costs are included and what weaker performance would mean. If essential questions remain unanswered, postpone your commitment.