Part 3: Franchise Financial Due Diligence: Building Honest Numbers Before You Commit
- Neda Whelan (LLB, LLM, GDLP)
- 23 hours ago
- 5 min read
Introduction
Every franchisor presents its system in the best light, and the strong ones have good reason to. The task for a prospective franchisee is to use financial due diligence and not to second-guess that optimism but to translate it into numbers that reflect your situation, your site and your appetite for risk. A franchise that holds together on conservative numbers is one worth committing to; a franchise that works only on optimistic ones is not, however appealing the brand.
Franchise Financial Due Diligence: Earnings Figures, and the Ground Beneath Them
The Code does not require a franchisor to provide earnings projections, so the absence of figures is not in itself a red flag. Where a franchisor does provide earnings information, formally or in conversation, it must have reasonable grounds for the figures. If you are given projections, ask to see what sits behind them. Verifiable benchmarks drawn from real outlets are worth considerably more than a confident forecast, and a franchisor who can point to the trading performance of comparable sites is giving you something you can actually use. One who cannot, but presses the figures anyway, is giving you grounds for pause.
It is also worth knowing that the Code now reinforces this from the other direction: since 1 November 2025, a franchise agreement must give you a reasonable opportunity to earn a return, during the term, on any investment the franchisor requires of you. This is not a guarantee of profit, and you still carry the commercial risk, but it gives you a standard against which to weigh the franchisor’s own figures.
Beware the System Average
A franchisor’s network-wide averages can be reassuring, but they conceal the spread between the strongest and weakest outlets, and they say little about how a new site in your particular location will perform. Two outlets in the same system can return very different results depending on rent, local competition, labour costs and foot traffic. For a mobile or home-based franchise, the same point holds, though the variables differ: the size and density of your territory, travel time and vehicle running costs, and the level of local demand rather than passing foot traffic. Where you are given averages, ask how wide the range is, and where comparable sites (similar in size, age and location to the one you are considering) sit within it. The figure that should drive your decision is not the system’s average but the realistic performance of a site like yours.
Make sure the numbers actually add up before you sign. Protect your investment by ensuring your franchise agreement supports a sustainable, profitable business model. Explore our franchising law services to secure your financial foundation.
Build the Franchise Overlay into Your Model
Prepare financial statements that set out the full cost of operating the business, not merely the headline royalty rate. A realistic model accounts for the upfront costs: the initial franchise fee, fit-out and equipment, initial stock, training and travel, and sufficient working capital for the first several months. It then accounts for the ongoing costs: royalties, marketing fund contributions, technology fees, rent and outgoings, wages including a market salary for yourself, any margins built into mandatory supply arrangements, and insurance.
A model that omits the working capital required to survive the ramp-up period is the single most common error first-time buyers make. The brand may be established, but your particular outlet still has to trade its way to a sustainable level, and that takes time and cash. It is also worth carrying a contingency above your base working-capital figure, because the costs that catch first-time operators out are rarely the ones already itemised in the disclosure document.
Pay Yourself in the Model
It is worth isolating one figure that buyers routinely leave out: a market salary for your own labour. A business that returns a profit only because the owner works full time for nothing is not profitable; it is subsidised. Build a reasonable wage for yourself into the model, then see whether the business still earns a return on top of it. That is the number that tells you whether you are buying a business or buying a job.
Stress-Test Against a Weaker Year
Once the model is built, test it against a weaker year. If revenue came in twenty per cent below expectation, would your position still hold? Could you meet your commitments to the franchisor, your landlord and your staff, and still pay yourself? The systems that disappoint are rarely the ones that fail outright in year one; more often they are the ones that never quite reach the level of trading the model assumed. A model that survives a conservative, stress-tested revenue figure is far more reassuring than one that depends on everything going right.
When the Royalty is the Problem
Royalties are sometimes set by reference to the franchisor’s desired income rather than the franchisee’s viability. Structures exist in which the combined royalty and marketing levy squeeze margins so tightly that the operator cannot pay themselves a reasonable wage. Before you sign, model the business at a realistic level of trading and confirm that, after every franchise cost, the operator earns a fair return for the hours involved. If the numbers only work on the franchisor’s best case, treat that as a material finding, not a detail to be smoothed over.
Financial due diligence is where enthusiasm meets arithmetic. The discipline is not pessimism; it is building a model honest enough that you can trust the answer it gives you. Where the figures are complex or the supply arrangements opaque, a financial adviser or accountant with franchise experience can help you pressure-test the model against the system’s real cost structure rather than the version in the sales material. Against the size of the commitment, that cost is modest, and far smaller than the cost of discovering the same problem after you have signed.
This article forms part of Whelan Lawyers’ series for prospective franchisees, drawn from the firm’s guide Your Guide to Buying a Franchise: How to evaluate the opportunity before you commit.
Neda Whelan
Neda Whelan is the Founder and Principal of Whelan Lawyers. With over a decade of experience as former General Counsel for major national networks such as Clark Rubber and Jim's Group, she provides practical, commercial-first legal strategies for franchisors and business owners.
Disclaimer: This article has been prepared by Whelan Lawyers as general information for those considering the purchase of a franchise. It is not legal advice and is not a substitute for advice tailored to your specific circumstances. Where particular circumstances apply, such as industry-specific licensing or the purchase of an existing franchised outlet, you should obtain advice from an experienced franchise lawyer.