How accurately can a franchisor forecast income projections?

Shelley Nadler writes:

There are many different ways in which franchisors present financial projections.

Franchisors may illustrate what sort of gross and net profit might be achieved if certain turnover levels are reached. Sometimes franchisor’s show illustrations of what the franchisor or a franchisee or franchisees have actually achieved in practice. A franchisor should clearly state which of the alternatives it has chosen for the illustration.

Remember, even if you’re provided with detailed financial information, financial projections are not promises of performance. The success of your franchise will depend on your own skills and commitment.

If a franchisor does not provide you with any financial projections, you should ask for information regarding the financial performance of the franchise. The sort of questions you should ask are:

• What level of gross profit margin should the franchise expect to achieve?
• What expenses would the franchise expect to incur?
• What level of turnover would a franchise need to achieve to break even and how long should it take to reach that level?

You should also ask if actual franchisor or franchisee accounts have been used to provide these projections. If actual accounts have been used, ask to see them. If not, you should ask how projections have been calculated.

Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.