Treat every franchise earnings claim as a proposition to test, not a result to adopt. Identify exactly what the number represents, reconcile it to source records for the relevant outlet and period, normalise it for the costs a buyer will actually incur, then stress-test the few assumptions that drive the result.

An earnings statement may comply with disclosure requirements and still be unsuitable for your decision. Network averages, selected high-performing outlets, a seller’s adjusted profit and a forecast for a new location answer different questions. Your acquisition case should rest on evidence that is comparable to the business you may buy.

What the buyer is assessing

First define the claim. Is it revenue, gross profit, EBITDA, cash available to an owner, or a projected return on the purchase price? Is it historical or forecast, before or after royalties, and does it include a market salary for the owner’s work?

Under item 20 of the current Franchising Code disclosure document, earnings information can include historical data for the franchised business or another franchise, projected earnings and other information from which earnings can be assessed. If a franchisor gives earnings information, it must appear in the disclosure document or an attachment with a prescribed accuracy statement. If no earnings information is given, the disclosure document must say so. Forecasts must state their facts and assumptions, research, period, and treatment of depreciation, franchisee salary, loan servicing, interest and tax.

Those rules improve transparency; they do not guarantee the income. The ACCC says franchise income is not guaranteed and recommends checking the basis of financial information, speaking with current and former franchisees, and obtaining independent advice (ACCC buyer guidance).

Evidence to request

For an existing outlet, request records for at least the periods used in the claim, preferably with monthly detail:

  • profit and loss statements, balance sheets, general ledger extracts and the chart of accounts;
  • BAS records, business bank statements, point-of-sale or job-system exports, invoices and debtor reports that support revenue;
  • payroll reports, rosters, superannuation records and the seller’s actual working hours;
  • supplier invoices, stock or wastage reports, occupancy costs, utilities and insurance;
  • royalty, marketing, technology and other franchisor fee statements;
  • the calculation behind every add-back or adjustment, with source evidence;
  • current disclosure documents, franchise and lease agreements, and notices of upcoming price, fee, equipment or refurbishment changes; and
  • the original forecast file, including version date, author, source population, exclusions and assumptions.

Financial statements provide a useful structure, but source records matter. ASIC describes a financial report as including statements of financial position, profit and loss, cash flows and changes in equity, together with notes and other declarations where applicable (ASIC). A buyer should also establish whether the figures supplied are audited, accountant-prepared, management accounts or a sales presentation.

Questions to investigate

  • Which outlet, outlets or network cohort produced the claim, and why are they comparable by age, location, format, opening hours and owner involvement?
  • Is the figure an average, median, range or selected example? Are closed, transferred or immature outlets excluded?
  • Can reported sales be traced through operational records to bank receipts and tax records?
  • Which costs are omitted, allocated elsewhere or expected to change after settlement?
  • How many owner and family hours are embedded in the result, and what would replacement labour cost?
  • Are rebates, incentives, once-off income, deferred maintenance or temporary rent relief affecting the period?
  • What capital expenditure and working capital are required to achieve the forecast?
  • What evidence would disprove the claim, and has the seller or franchisor provided it?

Ask for material answers in writing. The ACCC specifically advises buyers to obtain franchisor answers in writing and to speak with at least five current and five former franchisees for a range of perspectives (ACCC). Use the same questions in each interview, while recognising that another outlet’s experience is context rather than proof of this outlet’s earnings.

How to reconcile and stress-test the claim

Use a five-step evidence bridge:

Step Buyer task Output
1. Define Record the metric, period, entity, accounting basis and who prepared it One unambiguous claim
2. Trace Reconcile revenue and major costs to operational, bank, tax, payroll and supplier records Supported historical result plus unexplained differences
3. Normalise Remove genuine one-offs; add market owner labour, recurring fees and maintainable operating costs Buyer-normalised earnings
4. Rebuild Model volume × price, gross margin, labour, occupancy, franchise fees, working capital and capital expenditure Transparent base case
5. Stress Apply credible downside to the sensitive drivers and test cash needs through the agreement and lease term Base, downside and break-even cases

Hypothetical example: a seller presents $180,000 of adjusted profit after adding back the owner’s $90,000 wage. If the buyer still needs a full-time operator costing $100,000 including employment on-costs, only a genuine non-recurring adjustment should be added back; owner labour should be restored at the buyer’s expected market cost. If a 7% sales decline then pushes the business below break-even, the question is not whether the original arithmetic was correct, but whether the price and funding can withstand that exposure.

Keep an exceptions schedule. Each difference should be classified as resolved, priced, protected in transaction terms or unresolved. Pause when a material claim cannot be traced, when the forecast depends on performance outside the observed range, or when the downside case exceeds the buyer’s available cash and risk limit.

When specialist advice is needed

An accountant experienced in acquisitions and franchising should reconcile the records, assess accounting policies and add-backs, and rebuild maintainable earnings. A franchise lawyer should review what was represented, the disclosure material, agreement, lease, guarantees and any contractual protections; do not assume a written earnings claim replaces legal review.

Tax, employment, property, valuation or finance advice may also be needed where the case depends on tax treatment, owner replacement labour, premises costs, price or debt capacity. The ACCC’s current disclosure guidance says franchisors must give specified documents and, depending on the circumstances, earnings information; it also directs prospective franchisees towards independent legal, business and accounting advice (ACCC).

Frequently asked questions

Does an earnings claim in the disclosure document mean it is verified?

No. It means the information has been presented within the Code’s disclosure framework. You still need to test its source, scope, assumptions and relevance to the outlet you may buy.

Is a network average useful?

It can be a benchmark, but ask for the distribution and composition behind it. An average can conceal wide variation and does not establish what a particular outlet can earn.

Sources

Disclaimer

This article provides general information only. It does not constitute legal, tax, accounting, financial, credit, valuation or other professional advice. Circumstances differ. Obtain advice from appropriately qualified advisers before acting or entering a transaction.