Buying a franchise: scrutinise the profit forecast before signing

A promising profit forecast can make choosing a franchise brand seem easy. But a spreadsheet does not automatically tell you what your own business will earn. Franchising brings together independent business owners, and you need to assess the evidence behind your own investment. Before buying, check where the figures come from, what is missing and how sensitive the projected profit is to changes in the assumptions.

1. Distinguish historical results from illustrative figures

Start by asking the franchisor to label each part of the forecast: is it based on actual results, a budget or an illustrative example? An established outlet’s sales are not the same as an assumption about what a new franchisee can achieve.

Ask for a written description of the data used for comparison. It should answer the following questions:

• How many outlets are included, and how were they selected?
• Do the figures relate to franchisees’ businesses or the franchisor’s own outlets?
• What period do they cover, and does it reflect current cost levels?
• How long had the outlets been open when their results were measured?
• Are businesses that subsequently closed or changed hands included?

An average for surviving, well-established outlets can give a misleading picture of the start-up period. Ask to see the range of results across outlets, rather than a single average figure. Where possible, new businesses should be shown separately.

You do not need to demand identifiable accounting records from other business owners. Anonymised summaries and a clear explanation of the calculation can be useful. If the underlying data cannot be checked, however, treat the forecast as less certain, not as evidence of expected profitability.

2. Calculate profit after allowing for your own work

Ask exactly what terms such as ‘profit’, ‘surplus’ or ‘earnings’ mean in the forecast. A figure before the owner’s remuneration, interest and depreciation is not the same as money you can take out for personal use.

Review income and costs with an independent accountant. Make sure VAT is treated consistently and that all normal operating costs are included. In particular, check whether the calculation covers:

• franchise fees and compulsory central services,
• rent, running costs, maintenance and administration,
• wages, holiday pay, employer social security contributions and cover for absent staff,
• stock losses, customer claims, discounts and payment processing costs,
• depreciation and financing costs.

Your work as the owner needs to be valued, even if you plan to pay yourself very little at first. Otherwise, the forecast may describe a business that only works because of substantial unpaid labour.

If you operate through a Swedish limited company (aktiebolag), the budget should allow for your planned salary and the company’s associated costs. In a Swedish sole trader business (enskild näringsverksamhet), personal drawings are neither wages nor an expense in the profit and loss account. Instead, you need to assess whether the surplus will cover your living costs and taxes.

Also distinguish profit from the ability to meet payments. Loan principal repayments, for example, reduce the money in your bank account without being an expense in the profit and loss account. A profit forecast therefore needs to be accompanied by a cash flow forecast.

3. Test the assumptions behind sales

Break turnover down into factors you can discuss and monitor: the number of purchases, average transaction value, trading days and repeat customers. Ask what evidence supports each assumption and how much work will be needed to achieve it.

Check that the projected sales can be delivered with the staffing and capacity assumed in the forecast. If higher turnover requires additional staff or equipment, costs cannot remain unchanged.

Then prepare three versions with your adviser: the franchisor’s base case, a more cautious scenario and a stressed scenario. Use reasoned assumptions, not arbitrary percentages. For example, test a slower sales build-up, lower margins and higher staffing costs.

Also calculate the sales needed to cover costs, including reasonable remuneration for your work. Then ask yourself what would have to be true to reach that level. If a forecast only works when every assumption holds, that should weigh heavily in your buying decision.

4. Clarify the forecast’s legal significance

In Sweden, the Act on Franchisors’ Duty to Provide Information (2006:484) applies. Well before an agreement is signed, the franchisor must provide clear, comprehensible written information about what the agreement entails and any other matters needed in the circumstances. This information must include the financial terms.

The Act does not, however, provide any general guarantee of turnover or profit. Nor should you assume that the duty to provide information automatically entitles you to an individually tailored profit forecast.

If the franchisor presents a forecast, ask for its date, assumptions, limitations and intended use. Keep the version on which you actually based your decision. Ask an independent lawyer to assess how specific financial claims relate to the wording of the agreement and any disclaimers. General contract law, including the Swedish Contracts Act, is also relevant.

Practical takeaway: Do not buy on the strength of a single profit figure. Insist on assumptions you can verify, allow for your own work and test a worse outcome before committing.