The Franchise Financial Model: Checks Before You Buy

A franchise’s promised payback period tells you little about the business’s prospects until you understand the underlying figures. In Russia’s franchise market, a financial model provides a basis for discussing the terms of a purchase, but does not guarantee results. As a buyer, your task is to check how profit is calculated and whether you will have enough cash until receipts start covering payments.

1. Establish where the figures come from

Ask for more than a presentation: request an editable spreadsheet with formulas, monthly forecasts and explanations of the underlying assumptions and data. It is important to distinguish actual results from operating outlets from the seller’s assumptions. Network averages can conceal substantial differences between franchisor-owned outlets and franchisees’ businesses.

For each key metric, establish:

• Which outlets were used in the calculation: franchisor-owned or franchised, newly opened or established?
• How comparable are they to your proposed town or city, premises and business format?
• What period does the data cover, and has seasonality been taken into account?
• Does the sample include low-revenue outlets and businesses that have closed?
• What evidence supports the figures for sales, cost of sales, rent and payroll?

Anonymised management accounts, till-system data, purchasing records and lease documents can help you check the figures. One source cannot replace another: a till report shows sales, but does not substantiate net profit. Offer to sign a confidentiality agreement if necessary.

Speak to existing franchisees, preferably not just those selected by the seller. Ask what it actually cost to launch, which costs emerged later and when they stopped needing additional funding. Cross-check their answers against documents rather than treating a single success story as typical.

2. Recalculate revenue for your outlet

Do not assume that a successful outlet’s turnover can be replicated in another town or city without checking demand. Break the revenue forecast down into clear components. For a shop, these are the number of purchases and average transaction value; for a service business, the number of paid appointments and average service price.

Next, check whether the forecast is operationally achievable. How many customers can each employee serve? Will there be enough workstations, equipment and opening hours? Does the spreadsheet assume full capacity immediately after opening? The forecast should allow time to build the team and attract the first customers.

Check discounts, refunds and intermediary fees separately. If the average transaction value is stated before discounts but receipts are calculated after them, the formulas need to use a consistent basis. For sales through aggregator platforms, establish which amounts are recognised as revenue and where the commission is recorded. Otherwise, it is easy to omit the fee or count it twice.

Prepare a base-case and a downside scenario. In the downside scenario, consider slower sales growth, higher purchase prices and a delayed opening occurring together. Set the scale of these changes using local supplier quotes and actual results from comparable outlets, rather than applying a standard percentage.

3. Build a complete budget and payment schedule

Divide the spreadsheet into three sections: pre-opening investment, ongoing costs and cash flow. The initial franchise fee is only part of the start-up budget. Other items may include fit-out work, a lease security deposit, equipment, initial stock, recruitment and training, including travel and accommodation expenses.

Check that ongoing costs include:

• staff salaries, statutory employer social insurance contributions and a manager’s pay, even if you initially intend to manage the business yourself;
• rent, utilities, equipment maintenance and waste collection;
• royalties, advertising contributions and mandatory purchases;
• card processing fees, delivery, stock write-offs and consumables;
• accounting, software, taxes and insurance where required.

Royalties are not necessarily calculated on profit. They may be a fixed amount, a percentage of revenue or a combination of payments. Copy the precise calculation basis, minimum payment, date from which royalties become payable and procedure for changing the terms from the draft agreement into your model.

Profit is not the same as available cash. Stock is paid for before it is sold, a security deposit ties up funds, and loan principal repayments reduce the cash balance even though they are not expenses when calculating profit. Show interest and principal repayments separately.

Prepare a monthly schedule of receipts and payments. The largest cumulative cash shortfall will show the funding required under your chosen scenario. Add a contingency reserve for specific risks, such as remedial fit-out work or equipment replacement. Check that the necessary funds will actually be available when payments fall due, rather than relying on a loan that has not yet been approved.

4. Record verified information in writing

In Russia, commercial concession arrangements—the legal framework commonly used for franchising—are governed by Chapter 54 of the Civil Code of the Russian Federation. However, there is no specific mandatory format for pre-contractual disclosure of a franchise’s financial performance comparable to the standardised disclosure documents used in some countries. Buyers must agree for themselves what information they will request.

This does not mean that misleading the other party during negotiations is permissible. Article 434.1 of the Russian Civil Code sets out requirements for good faith in negotiations, including in the provision of information. However, a forecast that proves inaccurate does not, by itself, establish a breach.

Work with an independent lawyer to distinguish forecasts from verifiable facts. For example, revenue figures for a particular outlet over a specified period may be covered by representations as to circumstances under Article 431.2 of the Russian Civil Code. Specify the source, period and substance of those representations, together with the consequences if they prove inaccurate. A promise of future profit requires a separate legal assessment and is no substitute for checking the calculations.

Keep the original model, correspondence and agreed appendices. If the seller does not provide supporting evidence, mark the relevant figure as unverified and assess whether you are willing to accept that risk.

Practical takeaway: only buy a franchise once you can explain every material figure in the model and fund the downside scenario without relying on the promised profit.