How to assess a franchise’s profitability in Spain

A profit forecast does not prove that your future outlet will be profitable. Before joining a franchise network, you need to know where the figures come from, which costs they include and how closely they reflect your proposed location. This guide helps you assess a financial proposal without mistaking a sales presentation for verifiable results.

1. Distinguish actual results from forecasts

Ask the franchisor to classify every figure they provide: historical results for an outlet, an average across several outlets, an estimate for a new opening or a sales target. These are not interchangeable. A target expresses what the business aims to achieve; a historical result describes what happened under specific conditions.

Spain has specific franchise legislation: Article 62 of Law 7/1996 on Retail Trade, and the provisions currently in force under Royal Decree 201/2010 of 26 February. The latter states that, where a franchisor provides forecasts of sales or operating results, these must be based on sufficiently substantiated experience or studies. This does not amount to a guarantee of profitability.

Pre-contractual information must be provided in writing at least twenty days before the contract or preliminary agreement is signed, or before the prospective franchisee makes any payment to the franchisor. Use that period to review the financial assumptions, not just to read the contractual terms.

Request a written explanation of the methodology: the period analysed, the outlets included, how long they have been operating and any adjustments made. If all you receive is an ‘estimated profitability’ figure, you still lack the information needed to decide.

2. Check whether the outlets are comparable

An established outlet on a shopping street cannot, on its own, predict sales for a new opening in a residential neighbourhood. Nor is knowing the network average enough: it may conceal significant differences between outlets.

Ask for anonymised data where necessary to protect confidential information, and check these variables:

• Location and demand: local population, footfall, competition and shopping habits.
• Format: usable floor area, customer service capacity and sales channels.
• Maturity: months since opening and the time needed for sales to stabilise.
• Management: the owner’s involvement, staffing levels and actual opening hours.
• Period: a full financial year, seasonality and exceptional events.

Also distinguish between company-owned and franchised outlets. Company-owned outlets may have a different cost structure; for example, they may not be charged the same franchise fees internally that you would have to pay.

Ask how many outlets are included in the sample and which were left out. Excluding recent openings, loss-making outlets or closed businesses can present an overly favourable picture. Do not assume you have an unlimited right to access third parties’ full accounts: request sufficient, proportionate evidence to check the sales claims.

3. Work out the profit you would actually receive

Start with sales and ask for a clear breakdown through to the bottom line. Establish whether sales figures include or exclude VAT, and use a consistent basis throughout your comparison. Then identify the cost of the products or services sold and the expenses required to run the business.

Check that the figures include staff costs, employer social security contributions, rent, utilities, insurance, maintenance, advertising, franchise fees and platform or payment processing charges, where applicable. Avoid deducting the same cost twice if it is already included under another heading.

Include reasonable pay for your own work. If the business only makes a profit because you work in it full-time without allowing yourself a salary, the figure combines payment for your labour with the return on your investment.

Clarify exactly what ‘profit’ means in the proposal. Earnings before interest, tax, depreciation and amortisation are not the same as net profit or cash available to withdraw. Repaying the principal of a loan, for example, uses cash even though it is not an expense in the profit and loss account.

Ask an independent adviser to turn the presentation into a clear profit and loss account, separating operating profitability, the impact of financing and available cash.

4. Test the assumptions before deciding

Where possible, speak to franchisees running comparable outlets, not just the success stories highlighted by head office. Respect their confidentiality obligations and ask specific questions: how long sales took to stabilise, which costs differed from forecasts and how much time managing the business really requires.

Then prepare a base case and a downside scenario. Vary the assumptions on a reasoned basis: fewer daily transactions, lower average spend, higher staffing requirements or a slower start after opening. Calculate the sales needed to cover costs and check whether the outlet has the capacity to achieve them.

Keep presentations, emails and different versions of the forecasts. If you spot contradictions, request written clarification and a legal review before committing; results below forecast do not automatically establish a breach of contract.

Practical takeaway: do not buy a promise of profit. Only decide once you can explain where sales will come from, account for every cost and understand what would happen if the main assumptions do not hold.