Buying a franchise: check the profit claims

A franchise presentation often includes estimates of revenue, profit or the time needed to recoup your investment. These figures can be useful, but only if you understand their source and assumptions. Joining a franchise network does not buy you a guaranteed return. Before signing, check above all whether the earnings shown are based on actual results from comparable outlets or simply on a sales scenario.

1. Distinguish actual results from forecasts

Ask the franchisor to label every figure clearly: is it a past result from a specific outlet, an average across several units or a forecast for your future location? These figures are not interchangeable. The results of a successful company-owned outlet, for example, do not necessarily reflect the earnings of a franchisee who pays franchise fees and finances their own equipment.

For each set of figures, ask for basic explanations:

• Which period and which outlets do they cover?
• Do they include all units or only selected success stories?
• Are the outlets company-owned or franchised?
• Are the figures actual, estimated or annualised?
• Do they also include closed outlets and units in their start-up phase?

An average without an explanation of the sample is a weak basis for a decision. Ask for the range of results too and, if possible, the median — the middle value. A few exceptionally successful outlets can push up the average considerably. Where there are only a small number of units, the limits of any conclusions should be made particularly clear.

2. Establish what ‘profit’ actually means

A presentation may describe the difference between sales and the cost of goods sold as earnings, even though staff costs, rent and franchise fees have yet to be paid. Similarly, earnings before interest, tax, depreciation and amortisation are not the same as money the owner can safely withdraw from the business.

Work with an accountant to prepare a breakdown from revenue through to the bottom line. Check whether revenue is shown excluding VAT and whether costs are treated consistently. Then check that the figures include wages and employer contributions, rent, energy, insurance, accountancy fees, franchise fees and marketing contributions.

Pay particular attention to putting a value on your own work. If the model assumes that you will manage the outlet yourself, payment for that work must not be left out of the financial comparison. Otherwise, the return shown may largely represent payment for long working hours rather than a return on the capital invested.

Check depreciation and amortisation, interest and loan principal repayments separately. Repayment of the principal is generally not an expense in the profit and loss account, but it does reduce the cash available. A profitable outlet therefore does not necessarily have enough cash to meet its obligations.

3. Check the evidence and test the sensitivity of the figures

Ask for evidence supporting the key claims, not simply another presentation containing the same figures. Anonymised outlet accounts, sales reports and cost breakdowns can be useful, provided their scope is clear. Protecting commercially confidential information is legitimate; data can be shared on a limited basis or under a confidentiality agreement.

Ask an accountant to check whether the figures are consistent with one another. If monthly sales do not account for annual revenue, or staffing costs do not match the proposed opening hours, ask for an explanation of the discrepancy. A refusal to provide any verifiable supporting evidence is not proof of fraud, but it does mean that you cannot reliably assess the forecast.

Next, test the base calculation using less favourable assumptions. What happens if sales grow more slowly, staffing costs rise or margins fall? Change individual assumptions first, then several at once. This will help you identify which have the greatest effect on the outcome.

Where a payback period is promised, also ask how the initial investment has been defined. If the calculation leaves out start-up losses, deposits or the working capital required, it captures only part of your actual financial exposure.

4. Keep important claims in writing

Slovenia has no specific franchise law, compulsory franchise register or dedicated statutory disclosure document. Do not therefore assume that the profitability presentation has already been checked through a special government procedure.

The Slovenian Obligations Code (OZ) is relevant to negotiations and the contractual relationship, including its principle of good faith and fair dealing and its rules on liability during negotiations. The Companies Act (ZGD-1) governs obligations relating to accounting records and annual reports. However, a company's published annual report does not in itself confirm the profitability of an individual franchise outlet.

Keep presentations, emails and dated versions of financial calculations. Summarise verbal claims in an email and ask for confirmation. Have a lawyer check how the contract deals with earlier presentations, forecasts and any exclusions of liability. Poorer results do not in themselves create a right to compensation for losses; the legal consequences depend on the specific statements made and the circumstances.

Practical takeaway: before signing, link every significant earnings claim to supporting evidence, a clear definition and your own test of the assumptions. If the figures remain unverifiable, do not use them as the basis for an investment.