Profitability of Your First Franchise: Calculating Without Hidden Advantages

A successful existing business is a good starting point for building a franchise network, but its accounting profit does not yet show what an independent franchisee can expect. Unpaid owner time, favourable rent or support from another outlet can conceal the true costs. Before making your first franchise offer, prepare an adjusted profit and loss statement for a single franchise unit: a calculation that translates existing results into the circumstances of a new partner, without presenting them as guaranteed future earnings.

1. Separate the outlet’s performance from the owner’s advantages

Start with business data for a clearly defined unit and a period that captures normal seasonal fluctuations. Do not combine revenue from several locations if you cannot reliably allocate costs between them. Treat revenue and costs consistently for accounting purposes; VAT collected, for example, is not business revenue.

Next, work with your accountant to identify advantages that a new partner will not automatically enjoy. The most common are:

• the owner handles management, sales or administration without being paid an equivalent market rate;
• the outlet operates from owned premises, so the statement includes no rent;
• staff from another unit help at busy times without their time being recorded;
• supplier discounts are based on the existing business’s total purchasing volume;
• accounting, software or delivery costs are paid elsewhere.

Record each adjustment separately. Alongside the amount, state the supporting evidence, such as timesheets, a service provider’s quote or comparable rental terms. If you do not yet have the data, label the figure as an assumption rather than a confirmed fact.

Take particular care when removing exceptional costs. A repair may be a one-off, but maintenance is not. A calculation that strips out every unwelcome item does not show a repeatable business performance.

2. Build the statement from the franchisee’s perspective

The adjusted statement should answer a specific question: can an independent unit generate a positive operating result after paying all normal costs and meeting its obligations to the franchise network?

Use a clear sequence:

1. Net sales revenue: excluding VAT and allowing for discounts and returns.
2. Direct costs: goods, materials, packaging and other items that vary with sales.
3. Labour costs: employees and a realistic allowance for the owner’s operational work.
4. Premises and operating costs: rent, energy, insurance, maintenance and administration.
5. Ongoing franchise obligations: fees, marketing contributions and mandatory services.
6. Other relevant items: including depreciation, which must not be overlooked in an equipped outlet.

Check each item for double-counting. If the ongoing franchise fee includes software, do not add it again as a separate cost. Conversely, do not assume that the fee covers a service that will be charged separately.

Distinguish payment for the owner’s work from the return on their investment. If the remaining profit only covers an equivalent salary for their full-time work, that is not the same as an attractive investment return.

Do not equate profit with cash in the bank, either. Repaying loan principal is not an expense in the profit and loss statement, but it is a cash outflow. This guide assesses unit economics; an investment decision also requires a separate cash flow plan.

3. Test sensitivity, not just the best-case scenario

Use the existing location’s results as evidence of past performance, not as an automatic forecast for a new location. Differences in footfall, sales mix, rent and staffing requirements can materially change the outcome, even with the same business concept.

Prepare a base case and a more cautious scenario. Vary individual key assumptions to understand their impact: fewer transactions, a lower average transaction value, higher purchasing costs or an additional shift. Then test a plausible combination of adverse changes as well.

Calculate the break-even point. In a simplified calculation, divide fixed costs by the proportion of revenue remaining after variable costs. Include turnover-based fees among the variable costs. Bear in mind that some costs rise in steps: an additional employee is not necessarily needed in direct proportion to every extra euro of sales.

Turn the break-even point into a practical question: how many purchases or completed services must the unit achieve in the time available? If the required volume exceeds the capacity of the premises or team, a more optimistic spreadsheet will not solve the problem.

4. Set rules for using the calculation

Slovenia has no dedicated franchising act, compulsory franchise register or specific statutory franchise disclosure document. This does not mean you have free rein when making financial claims. The Slovenian Obligations Code (Obligacijski zakonik, OZ) is relevant to negotiations and the contractual relationship, particularly its principles of good faith and fair dealing and its rules on liability during negotiations. Accounting records and annual reports are governed by the Companies Act (Zakon o gospodarskih družbah, ZGD-1).

Your internal calculation should therefore include a date, the person responsible, the period covered by the actual results and a list of adjustments. Clearly distinguish measured data from estimates. Anyone presenting it to prospective franchisees must also understand its limitations; labelling it ‘for information only’ does not, by itself, remedy a misleading presentation.

Practical takeaway: before expanding, check whether the unit remains sufficiently profitable after allowing for the owner’s work, costs at market rates and franchise obligations. If the result depends on advantages a partner cannot replicate, adjust the model first.