Profit projections before franchising: account for all the work involved

A profitable business is not automatically a profitable franchise model. If the founder works without market-rate pay, or head office solves problems without the cost appearing in the accounts, the results can be misleading. Before building a franchise network, you therefore need a profit projection that shows what an independent franchisee's business will actually have to cover. Here is a step-by-step approach to separating the company's historical profit from financial figures you can use to assess expansion.

1. Make the work behind the results visible

Start with a representative period in the existing business, ideally a full financial year if there are clear seasonal variations. Use the accounts as your starting point, but also map out who does the work. The accounts do not always show the full resources required.

The founder may handle purchasing in the evenings, a family member may help during busy periods, or another part of the company may take care of administration. These contributions need to be described and costed, even if they do not affect the unit's reported profit.

Create a simple task list with four headings:

• Task: what needs to be done to keep the unit running?
• Time required: how much work is needed during normal weeks and peak periods?
• Person responsible: who does the work today, and who will do it in the franchisee's business?
• Cost: what is a reasonable cost for staffing or external support?

In particular, distinguish between pay for the owner's work and a return on invested capital. A projection that includes no cost for the franchisee's full-time work may show a surplus even though the business generates no real return once that work is paid for. Ideally, show profit both before and after a clearly stated allowance for the owner's pay.

2. Make costs comparable

The next step is to adjust the historical figures to reflect the conditions a future franchisee is actually expected to face. The aim is not to improve the results on paper, but to make the differences visible.

The existing business may have unusually low rent, older equipment or purchasing terms that will not be available to a new unit. Conversely, the founder's company may bear development costs that a franchisee will not have to pay directly. Every adjustment therefore needs an explanation.

Use three columns: actual figures from the accounts, adjustment and estimated cost for the franchise unit. Retain the original figures so that the reader can follow how the projection has been built.

Include the agreed ongoing franchise fees and other mandatory costs without counting services twice. If administration is included in a fee, the same work should not also remain as a separate outsourced service. If the service only provides access to a system, however, you still need to account for the time spent using it.

Keep profit and cash flow separate. An investment may affect profit through depreciation, while the payment itself affects cash flow. Loan principal repayments are not operating expenses. A profit projection is therefore no substitute for a funding or cash-flow plan.

3. Test turnover against actual capacity

Do not simply copy across the existing unit's sales figures. The founder's personal customer relationships, local knowledge or specialist expertise may generate revenue that a new franchisee will not have from the outset.

Instead, explain the basis for the turnover assumption: the number of purchases or jobs, average order value, opening hours and available capacity. Check that the staffing allowed for in the cost projection is sufficient to handle the assumed sales volume.

Then build a base-case scenario and a more cautious scenario. Show what happens if, for example, customer volumes are lower or more paid staff are needed. Specify which costs vary with sales and which remain even when demand weakens.

Also calculate the sales needed to cover costs, including the assumed pay for the owner's work. This makes the projection more useful than a single profit figure. The question becomes practical: can the unit achieve the necessary sales given its capacity and local conditions?

4. Present assumptions without promising results

Sweden has no comprehensive franchise-specific legislation. It does, however, have the Act (2006:484) on the Duty of Franchisors to Provide Information. This requires franchisors to provide clear, understandable written information about the meaning of the agreement and relevant circumstances well before a franchise agreement is signed. Among other things, fees and other financial terms must be described. General legislation, such as the Swedish Contracts Act, also applies.

The Act does not prescribe the projection model described here. However, when you present financial calculations, the recipient needs to be able to understand what the figures actually represent. Clearly distinguish between historical results, adjusted calculations and assumptions about the future.

State the period covered, the supporting information, which costs are included or excluded, and which local conditions are still unknown. Avoid presenting a scenario as a promise of earnings. A general disclaimer is no substitute for clear explanations of the figures.

Have someone with accounting expertise review the calculations, and give the prospective franchisee an opportunity to assess them with their own adviser. Keep dated versions so that there is a record of which information was presented.

Practical takeaway: First calculate profit after allowing reasonable pay for all the work required. If the figures only work when the founder works for free, the business model needs further development before others are invited to join the franchise network.