Keeping Profitability Claims in Check Before Marketing a Franchise in Saudi Arabia

Your existing business may generate healthy profits, but that does not make ‘a guaranteed payback’ an appropriate claim when presenting a franchise opportunity. The results of an outlet managed by its founder, or benefiting from a favourable older lease, do not automatically translate to a new franchisee. Before you begin marketing, you need to establish clear controls over the financial information you provide, its sources and the limits of its use. This protects trust within the franchise community and helps investment decisions rest on evidence rather than impressions.

1. Set clear boundaries for profitability claims

Start by listing every financial claim you use in presentations, meetings and messages: projected sales, profit margins, break-even points and investment payback periods. Do not limit the review to written figures. A salesperson’s statement that ‘all our outlets are profitable’ is a claim that needs evidence, even if it includes no specific percentage.

In Saudi Arabia, the relationship is governed by the Commercial Franchise Law, issued under Royal Decree No. M/22, and its Implementing Regulations. The law provides that, if a franchisor supplies information about the past or projected financial performance of franchise businesses owned by it or a member of its group, that information must be included in the disclosure document in accordance with the regulations. This does not mean that a franchisor must invent forecasts or promise a profit.

The disclosure document must also be delivered at least 14 days before the agreement is signed or the franchisee pays any consideration relating to the franchise, whichever occurs first. Do not, therefore, treat a financial presentation as promotional material separate from the statutory disclosure process.

Adopt a simple internal rule: No financial claim may be used with a prospective franchisee until its source has been verified, its wording approved and its consistency with the disclosure document checked. Seek legal advice on which financial information must be included, rather than relying on a general disclaimer that results are not guaranteed.

2. Build an evidence file for every figure you publish

Create a reference file linking each figure to its source data and calculation method. Someone other than the person who prepared the presentation should be able to repeat the calculation and arrive at the same result. Use sales reports, accounting statements and actual expense records, and reconcile any differences before approving a marketing summary.

A practical evidence file should include:

• Data scope: The outlets included, how long they have been operating and the period covered by the results.
• Metric definition: Does the figure represent sales, gross profit, operating profit or cash flow?
• Calculation basis: How discounts, returns, tax and shared expenses have been treated.
• Exceptions: Temporary closures, one-off sales and exceptional campaigns.
• Responsibility: The names of the person who prepared the calculation and its reviewer, and the date the version was approved.

Do not present your best-performing outlet as typical. If you use an average, explain which outlets were included and why others were excluded. A range of results, with an explanation of differences in location and how long outlets have been trading, may be clearer than an average that conceals substantial variation.

Also retain copies of the documents relied on at the time of the presentation. Later updates to the accounting system should not prevent you from explaining a figure previously given to a prospective franchisee.

3. Separate the founder’s results from the franchisee’s economics

Your business may appear more profitable because you manage it without a recorded salary, or because a warehouse you own serves it at no visible cost. These are advantages of your current circumstances, not necessarily features a franchisee can replicate.

Prepare a schedule of adjustments that starts with actual results and then identifies the items that would differ under independent operation. Include an appropriate management salary, occupancy costs, accounting and technology services, and expenses currently borne by head office. Add the relevant contractual fees when analysing franchisee profitability, rather than hiding them behind an attractive gross margin.

Clearly distinguish between three layers:

• Historical results: What was actually achieved during a specified period.
• Adjusted results: An analytical calculation that adds or excludes items, with an explanation of why.
• Future forecasts: Estimates based on assumptions that may or may not materialise.

Test the forecast against lower sales, higher rent or a longer wait before operations stabilise. Do not confuse operating break-even with investment payback: covering recurring expenses does not mean that fit-out costs, opening costs and working capital have been recovered.

For example, if your outlet benefits from low rent under an older lease, do not apply its profitability to a new location without adjusting occupancy costs. Present the historical results as they stand, then explain the effect of the expected rent in a separate, clearly labelled analysis.

4. Control how presentations are shared and reviewed

Appoint someone to approve financial information, and make approved versions the sole source for the marketing team and anyone communicating with prospective franchisees. Prohibit changes to tables simply to please a prospect, or the sending of improvised estimates in messages without the same review process.

Prepare written answers to frequently asked questions, including: ‘When will I recover my investment?’ and ‘Is this profit guaranteed?’ Answers should explain the limits of the data and the effects of location, management and financing, while encouraging the prospect to conduct an independent assessment. A risk warning does not put an unsupported figure right.

Record which version was given to each prospect and when, and review materials whenever costs or performance change materially. If you discover an error, stop circulating the presentation, identify who received it and correct the information in writing in consultation with your legal adviser. Assess the effect of the correction on disclosure and the contracting process.

The practical takeaway: Before using profitability to market a franchise, prepare an evidence file, distinguish historical results from forecasts and approve a standard version of your presentations. A figure whose source and assumptions you cannot explain should not form the basis for attracting a partner into the franchise community.