Sales forecasts when franchising: how to substantiate them

When you decide to franchise an established business, its historical sales figures can become your most persuasive selling point. They can also mislead if presented as results that any new outlet will achieve. To build a franchise network based on trust, you need a process that explains where each forecast comes from, the conditions it assumes and its limitations.

1. Distinguish between actual results, assumptions and commitments

A profit and loss account for your outlet is not a forecast for a prospective franchisee. It may reflect advantages that are difficult to replicate: a long-standing rental agreement, a customer base built up over years, particularly favourable purchasing terms or your own day-to-day work without any remuneration recorded as a cost.

Before preparing a sales presentation, separate three categories:

• Historical data: results actually achieved, with the outlet, period and source identified.
• Forecast assumptions: assumptions about footfall, conversion rates, average spend, staffing, prices or the pace of new openings.
• Contractual commitments: services you will actually undertake to provide, such as specified training or initial support.

Do not combine these categories in a single claim. ‘Our outlet achieved these sales’ does not mean ‘your outlet will achieve these sales’. Nor does a commitment to support the opening guarantee a minimum turnover.

Appoint someone to validate the figures before they are used in meetings, advertisements or documents. The franchise recruitment team should use the same version and understand its limitations.

2. Build a comparable baseline from the pilot operation

Start with your business records: sales, purchases, payroll, rent, utilities and capital expenditure. Cross-check information from your management system against the accounts, and retain supporting evidence so that the calculations can be reconstructed.

Then prepare an operating profit and loss account adjusted to reflect a franchisee’s circumstances. Include reasonable remuneration for the work performed by the owner, even if that cost does not currently appear in the accounts. Also include any planned ongoing franchise fees, advertising contributions and mandatory services.

Separate profitability from cash flow. The initial franchise fee, fit-out works, deposits and initial purchases all affect funding requirements, even though their accounting treatment differs. An outlet can show a profit while still needing cash to pay for stock or service debt.

Also document the significant differences between the pilot unit and the proposed outlet:

• Location, floor area, capacity and opening hours.
• How long the business has been established and the level of brand awareness.
• The founder’s direct involvement in sales.
• Seasonality and the time needed for trading to stabilise.

If you have only one company-owned outlet, state this explicitly. Do not present its results as a network average or conceal the fact that the available experience is still limited.

3. Incorporate forecasts into pre-contractual disclosure

Spain has specific rules governing the information that must be provided before someone joins a franchise network. Article 62 of Law 7/1996 on the Regulation of Retail Trade (Ley de Ordenación del Comercio Minorista) requires written information to be supplied before an agreement is signed or payment is taken. Royal Decree 201/2010, particularly Article 3, sets out the required content and stipulates that it must be provided at least twenty working days before the franchise agreement or preliminary agreement is signed, or before the prospective franchisee makes any payment to the franchisor.

These rules expressly address individual sales or earnings forecasts: where a franchisor provides them, they must be based on sufficiently substantiated experience or studies. The rules do not require a promise of profitability or turn an estimate into a guarantee.

As a documentation practice, accompany each forecast with an appendix setting out its sources, reference period, calculation method, adjustments and assumptions. Include the required investment and start-up expenditure, and explain which items are excluded from each financial measure.

A disclaimer such as ‘results are not guaranteed’ is no substitute for a verifiable basis. Nor does it remedy figures selected to create a misleading impression. Have the complete set of documents reviewed by legal and financial advisers before providing it to a prospective franchisee.

4. Manage scenarios, versions and sales explanations

Rather than presenting a single profit figure, use consistent scenarios that help explain the uncertainty. Vary identifiable factors — sales, staffing costs, rent or the time needed to get established — and explain why each assumption is plausible. The favourable scenario should not become the default expectation.

Also calculate the break-even point, stating which costs it covers. If it excludes financing costs, taxes or the owner’s remuneration, make that limitation clear.

Provide a dated version and retain evidence of receipt, along with a record of the appendices sent. Record the prospective franchisee’s questions and respond in writing when they concern significant figures. If the conditions or forecasts change substantially, update the documentation and consult your advisers about the implications for the process and deadlines before proceeding.

Practical conclusion: before recruiting your first franchisee, check that you can reconstruct every figure presented. If you cannot explain its source, adjustments and limitations, it is not yet ready to be used in sales materials.