Buying a US Franchise: Check Minimum Sales Targets

A franchise can suit your budget and still impose sales targets that your proposed business cannot comfortably meet. Before joining the US franchising community, establish whether minimum performance requirements are contractual obligations, planning goals or conditions attached to particular rights. The difference matters: disappointing sales could mean more than disappointing income.

Find every binding performance requirement

Start with the franchise agreement attached to the Franchise Disclosure Document (FDD). Search for terms such as ‘minimum sales’, ‘performance standards’, ‘quotas’, ‘minimum royalties’ and ‘default’. Ask the franchisor to identify every provision that makes a particular sales result compulsory.

Do not assume that a target presented during recruitment has the same status as one written into the agreement. Equally, a friendly description such as ‘benchmark’ does not settle whether missing it has contractual consequences.

Separate the requirements into three categories:

• Advisory targets: figures used for business planning or coaching, without a contractual sanction for missing them.
• Payment floors: minimum sums payable even when actual sales produce a lower percentage-based charge.
• Performance obligations: results you must achieve to remain compliant or retain specified contractual rights.

Ask whether any requirement appears in an addendum or another document incorporated into the agreement. If the franchisor says a target is optional, have your franchise solicitor check that the signed documents support that explanation.

Establish exactly how the target is measured

A sales threshold is difficult to evaluate without its calculation rules. Determine whether the test applies monthly, quarterly, annually or over a rolling period. An annual target may allow seasonal recovery; a monthly obligation may create problems during quieter trading periods even when the full year is satisfactory.

Get written answers to these questions:

• When does measurement begin: signing, opening or a specified later date?
• Is there a lower threshold during the initial trading period?
• Are sales measured before or after refunds, discounts and sales taxes?
• How are online orders, delivery sales and transactions involving other outlets allocated?
• Does an approved temporary closure alter the target?
• Can the franchisor increase the threshold, and under what formula or procedure?

Check whether the obligation applies to each outlet separately or to your combined business. Strong results at one location may not compensate for a shortfall elsewhere unless the agreement permits that treatment.

Also distinguish a contractual requirement from an earnings forecast. A franchisor requiring a certain turnover does not establish that an outlet can achieve it. Under the Federal Trade Commission’s Franchise Rule, financial performance representations are subject to specific disclosure requirements, generally through FDD Item 19. A contractual target is not a substitute for substantiated financial performance information.

Test the target against a cautious trading plan

Translate the required turnover into everyday operating demands. Divide it by your expected trading days, then by a realistic average transaction value. The resulting daily transaction count helps reveal what the obligation would mean for staffing, service capacity and customer acquisition.

Use assumptions you can explain, rather than adjusting your forecast until it matches the franchisor’s threshold. Where evidence is weak, show a range instead of one confident number.

Ask your accountant to model three situations: slower-than-planned opening sales, a sustained quieter period and growth that requires additional labour or equipment. For each, assess both contractual compliance and cash remaining after operating costs.

Meeting a turnover target does not necessarily mean making a profit. Discounting may increase transactions while reducing margins, and extra sales may require higher staffing expenditure. Conversely, an otherwise viable outlet could fall below a contractual sales floor.

Keep minimum payments separate in the calculation. If a payment floor applies, model the actual amount due during weak trading rather than assuming charges will fall proportionately with revenue.

Check consequences and applicable legal protections

Read what happens after a missed target. Does one shortfall trigger a notice, or must underperformance continue across several periods? Is there time to ‘cure’ the failure, and what would count as recovery? Ask whether a corrective plan is available and whether repeated failures receive different treatment.

The FTC warns that failure to meet performance standards can be a reason for termination. Its Franchise Rule requires pre-sale disclosure, generally at least 14 calendar days before signing a binding agreement with, or paying, the franchisor or its affiliate. It does not guarantee that a performance target is commercially reasonable or achievable.

State law also matters. Some states have franchise relationship laws that can affect termination grounds, notice and opportunities to cure. Ask your solicitor which protections apply to your transaction and whether the proposed terms comply; do not assume protections are identical nationwide.

Practical takeaway: Before committing, obtain a written explanation of each sales obligation, test it against cautious trading assumptions and understand the consequences of falling short. Treat unresolved calculation rules or discretionary relief as risks, not reassurance.