Turnover requirements in franchising: set realistic targets before expanding

When turning your existing business into a franchise network, it may seem natural to require each new outlet to achieve a certain level of sales. But your own business’s turnover is not automatically a fair minimum requirement for an independent franchisee. A useful turnover requirement needs to reflect relevant operating conditions, be easy to understand and specify what happens if the target is not met. Here is a practical route from ambition to a well-considered contract term.

1. Distinguish between forecasts, targets and binding requirements

Start by deciding why you want to introduce a turnover requirement. Is it intended to flag when extra support is needed, guide a joint development plan or impose an obligation whose breach may have contractual consequences? These are three different functions and should not be confused.

Use clear terminology:

• Forecast: an estimate of potential future sales based on stated assumptions.
• Development target: a level that both parties work towards and review together.
• Binding minimum requirement: an agreed obligation with expressly stated consequences if it is not met.

A budget submitted by a franchisee should not inadvertently become a binding sales commitment. Specify the status of the budget and how any contractual requirements are agreed.

Also consider whether turnover really measures what you want to achieve. High sales can go hand in hand with poor profitability, heavy discounting or overstretched staff. A turnover requirement is therefore not a complete measure of an outlet’s health and should not be presented as one.

2. Tailor the level to the outlet’s actual circumstances

Use documented experience from your existing business as a starting point, but examine what is genuinely transferable. An established outlet may have repeat customers, a well-known local name and an owner with years of experience. Your first franchisee may have none of these advantages.

Review at least the following before proposing a minimum requirement:

• the time needed to establish the outlet and the expected start-up period;
• the capacity of the premises and available opening hours;
• seasonal fluctuations and the local customer base;
• access to essential goods, systems and supplies;
• the support and activities expected from the franchisor to help generate sales.

Document the assumptions underpinning the required level. If it depends on a particular service being available from opening day, make clear how a delayed launch will be handled.

Also decide when measurement begins. The agreement may not be signed on the day the outlet actually opens. For a seasonal business, a short measurement period can give a misleading picture. Choose a period that reflects the business’s trading cycle, rather than simply what is easiest to administer.

3. Define the calculation and explain the term before the agreement is signed

A requirement for “annual turnover” leaves several questions unanswered. Specify whether the figure means sales excluding VAT, how returns and credit notes are handled, and the period to which sales should be allocated. Also explain how centrally placed orders, online sales and work carried out by several outlets are counted.

Consider asking an accounting professional to check that the definition can be applied consistently. Use the same calculation method in the agreement and in subsequent reviews, and avoid changing it when results fall short of expectations.

In Sweden, the Act (2006:484) on Franchisors’ Duty to Provide Information applies. It requires franchisors to provide clear, understandable written information about the meaning of the agreement and other relevant matters well before the agreement is entered into. This information must cover, among other things, fees and other financial terms, as well as termination provisions and their financial consequences.

A binding turnover requirement and its consequences should therefore be clearly set out in the pre-contractual information, rather than appearing for the first time at signing. Sweden has no comprehensive franchise legislation; general rules, such as the Swedish Contracts Act, also matter. Under certain circumstances, unreasonable contract terms may be adjusted or set aside under section 36 of that Act. Seek legal advice on drafting rather than assuming that a signed requirement can always be enforced as intended.

4. Establish a fair process for when sales fall short

Design the review process before any outlet misses its target. A practical approach is to check the figures first, then analyse the causes and agree an action plan with clear deadlines. Distinguish between shortcomings within the franchisee’s control and problems that require action from the franchisor.

The action plan can specify what support will be provided, which activities the franchisee is responsible for and when the next assessment will take place. Explain how prolonged supply disruptions, delays in franchisor-led activities or other significant obstacles will be assessed. Avoid arbitrary exceptions by documenting the reasons for each adjustment.

If failure to meet a minimum requirement could lead to consequences such as loss of exclusivity or termination, the conditions need to be clear and legally reviewed. Missing a budget does not, in itself, create a right to end the relationship. The consequences must be assessed in light of the agreement and applicable law.

Practical takeaway: Do not introduce a binding turnover requirement until you can explain the level, the calculation and the consequences. A clear development target is better than an unclear minimum requirement that creates conflict within the franchise network.