Buying a franchise: scrutinise the sales forecast before signing

A promising sales forecast can make buying a franchise an attractive prospect. But a well-known brand does not make every new outlet profitable. When joining a franchise network, you need to understand the assumptions behind the figures and whether they fit your local area. Here is a step-by-step approach to assessing the forecast before you commit.

1. Find out what the figures actually show

Start by distinguishing between historical results, budgets and sales targets. Historical results describe what has happened. A budget is based on assumptions about the future. A sales target may express the network’s ambitions without showing what a new outlet can reasonably achieve.

Ask the franchisor to label each set of figures clearly and specify its source, the period covered and which outlets are included. In particular, ask:

• Is turnover shown inclusive or exclusive of VAT?
• Do the figures relate to new or established outlets?
• Are both franchisee-owned and company-owned businesses included?
• Is the figure a mean, a median or a selected example?
• Have outlets that have closed or changed hands been included?

An average can be pushed up by a few highly successful outlets. Ask for the range of results across comparable businesses, rather than a single figure for the network. Anonymised data can provide useful evidence without disclosing individual businesses’ sensitive information.

Check the period covered, too. A strong quarter is not the same as a typical full year. Seasonality, short-term promotions and an unusually large customer can make a seemingly representative example misleading.

2. Make proper use of disclosure requirements

Sweden has an Act on Franchisors’ Duty to Disclose Information (2006:484). It requires the franchisor, well before the agreement is concluded, to provide clear and understandable written information about what the agreement entails and any other matters necessary in the circumstances.

This information must cover, among other things, the business, other franchisees in the same franchise system and the scale of their operations, payments to the franchisor and other financial terms. The Act also covers matters such as intellectual property rights, mandatory purchases, non-compete restrictions, the term of the agreement and dispute resolution.

The duty to disclose information is not a guarantee of turnover or profitability. The Act does not impose a general requirement for the franchisor to provide a particular sales forecast or complete profit and loss statements for every outlet. However, if a forecast is used in the sales presentation, you should ask for its assumptions and limitations to be explained in writing.

Sweden does not have a comprehensive franchise law governing every aspect of the relationship. Other legislation, including the Swedish Contracts Act and Competition Act, may also be relevant. Verksamt, Sweden’s official business information portal, stresses that franchise agreements can vary and should be reviewed carefully.

Keep presentations, emails and each version of the forecast. Ask a lawyer specialising in franchising to check how any financial assurances relate to the agreement, particularly if it states that information provided previously does not form part of the agreement. Do not let a verbal assurance take the place of a clear contractual term.

3. Test the forecast against local conditions and other franchisees’ experience

Break the projected turnover down into factors you can investigate. For a shop, this might be the number of purchases per trading day multiplied by the average transaction value. For a service business, it could be the number of billable hours multiplied by the average revenue per hour.

Then ask what it would take to achieve that volume. Is the customer base large enough? Can the premises, staffing and opening hours support the planned level of business? Does the forecast allow for administration time and gaps between bookings?

Compare your proposed business with outlets in similar towns or areas, with comparable locations, sizes and levels of competition. An established business in a prime retail location is rarely an adequate benchmark for a new outlet with little local recognition.

Conversations within the franchise network can provide a valuable reality check. Ask to speak to several franchisees, ideally a mix of relatively new and established operators. Ask:

• How did sales during the start-up period compare with the budget?
• Which assumptions proved too optimistic?
• When did customer numbers become more predictable?
• How much work did the owner personally put in?

Respect confidentiality and distinguish personal experience from verified information. One business owner’s account is a point of reference, not proof of how your business will perform.

4. Turn uncertainty into a funding decision

Prepare your own monthly budget with a base case and a more cautious scenario. In the latter, you could test slower customer growth, a lower average transaction value or a delayed opening. Choose assumptions based on your research, rather than generic figures with no connection to the business.

Link your profit and loss budget to a cash flow forecast. Sales and cash receipts do not always coincide, while rent, wages, taxes and loan repayments have fixed due dates. Include reasonable pay for your own work so that the calculations do not depend on you working unpaid for a prolonged period.

Identify the month when cash reserves will be at their lowest and how much funding you will need at that point. Discuss the figures with an accountant and prospective lenders. Distinguish between funding that has been approved and money you hope to borrow later.

Before signing, decide which issues must be resolved: verifiable evidence behind the forecast, credible local demand and funding that can withstand the more cautious scenario. If key assumptions remain unclear, that is a reason to wait.

Practical tip: Do not buy on the strength of the network’s best-performing example. Make your decision only when you can explain the sales forecast in your own words and show how your cash flow would cope with a slower start.