A franchise financial model has two linked halves. The first is the franchisee's unit economics: what it costs to open a location, how sales ramp up, the monthly P&L after royalties and the advertising fund, break-even and payback. The second is the franchisor's own P&L: fee income against the cost of selling franchises, training and supporting the network. The model sets your fees, tells you whether franchising makes sense, and supplies the start-up cost list and any earnings information for the disclosure document. In Ontario, any earnings projection you give must come with its basis, assumptions and supporting data available for inspection.
Contents · 9
- The franchisee side: unit economics
- The franchisor side: does the network pay
- Feasibility study: should you franchise at all
- What goes from the model into the disclosure document
- Earnings claims: where franchisors get into trouble
- The franchisee's business plan
- Next step
- Franchise development FAQ
- Laws and sources we cite
The franchisee side: unit economics
We build the unit model from the actual results of your locations, month by month, and only then adjust for a franchisee.
| Block | Lines | Where the numbers come from |
|---|---|---|
| Start-up investment | Franchise fee, fit-out, equipment, initial inventory, signage, deposits, permits, opening marketing, training travel, working capital | Your last opening, contractor quotes, supplier price lists |
| Financing | Owner equity, bank loan, equipment leasing, repayment schedule | Franchisee's assumptions; any financing the franchisor offers must be disclosed |
| Revenue | Customers or transactions per day, average ticket, seasonality, ramp-up months | Your locations' history |
| Variable costs | Cost of goods, packaging, card fees, delivery commissions | Supplier invoices, POS data |
| Fixed costs | Rent and common area costs, staff, utilities, insurance, software, maintenance | Leases, payroll, bills |
| Franchise fees | Royalty, advertising fund, technology fee | Your fee model |
| Owner | Salary if the owner works in the business | Format design |
| Result | EBITDA by month, cumulative cash, break-even month, payback | Calculated |
Three scenarios are the minimum: base case from your typical location, a weak case with lower sales and higher rent, and a slow ramp-up case. The weak case is the one a careful franchisee and their bank look at first.
The franchisor side: does the network pay
| Block | Lines |
|---|---|
| Unit plan | Franchises sold per year, opening lag, closures |
| Income | Initial fees, royalties, technology fees, product margin, advertising fund (shown separately, as it is spent on the network) |
| Franchise sales costs | Recruitment marketing, landing page and ads, sales staff or broker commissions, travel |
| Support costs | Training team, field support and audits, help desk, software, manual updates |
| Development costs | Package development, legal fees, annual financial statements, trademark filings |
| Result | Franchisor EBITDA by year, break-even year, cash needed until then |
The franchisor model often shows that the network loses money for the first years, because sales and support costs arrive before royalties grow. Knowing the cash you need until royalties cover support is one of the most useful outputs of the whole exercise.
Feasibility study: should you franchise at all
A feasibility study is the first run of the model, done before money goes into documents. It answers four questions:
- Do your locations make money consistently, with a manager in place?
- After royalties and the fund, does a franchisee earn a salary and a reasonable return on the investment in a weak scenario?
- Does the franchisor company reach break-even at a realistic number of units, and can you finance the gap?
- Is there demand for the format in the cities you plan to sell in?
If one answer is negative, alternatives include a second company-owned unit, a licence model with less support, or a different format such as a kiosk or station. Each needs its own legal assessment, since the Arthur Wishart Act defines a franchise by the payment and the control or assistance involved, regardless of what the contract calls it.
What goes from the model into the disclosure document
| Disclosure item in Ontario (O. Reg. 581/00) | Source in the model |
|---|---|
| All start-up costs, with assumptions for estimates (s. 6, item 1) | Start-up investment block |
| Basis and assumptions of any annual operating cost estimate (s. 6, item 2) | Fixed and variable costs |
| Reasonable basis, assumptions and inspection location for any earnings projection (s. 6, item 3) | Revenue and result blocks, base case |
| Financing terms offered by the franchisor (s. 6, item 4) | Financing block |
| Advertising fund projection for the current year (s. 6, item 6) | Franchisor income and fund plan |
| Franchisor's financial statements (s. 3) | Prepared by your accountant, separately from the model |
Earnings claims: where franchisors get into trouble
An earnings claim is any statement about what a franchisee can earn: a monthly profit figure on a landing page, a payback period in a presentation, "earn up to" in an ad, a sales figure from your best location said in a sales call. In Ontario a projection in the disclosure document needs a reasonable basis, its assumptions and a place where supporting information can be inspected. A misrepresentation in the document gives the franchisee a right to damages against the franchisor and every signer, with reliance deemed.
Our practice: decide early whether you will give earnings information at all. If yes, build it from real location data, write the assumptions in plain language, and let the lawyer place it in the document. Sales materials then refer candidates to the document for any figures.
On Fast Coffee, our own group's self-serve coffee brand, we prepared a business plan, unit economics, a presentation, FAQ and a one-pager for franchisee-operators, and we removed income promises and a "guaranteed money back" claim from the website, because these statements were not backed by a disclosure document. See the Fast Coffee case.
The franchisee's business plan
Prospective franchisees need a business plan for their lender. The franchisor's job is to give them a template and the system data they need to fill it in, while the franchisee enters their own location, rent, financing and staffing. That keeps responsibility for location-specific numbers with the franchisee and keeps the franchisor's data consistent with the disclosure document.
Next step
Fees are derived from this model, see franchise fees and royalties. Disclosure rules are in the franchise disclosure document guide and the Arthur Wishart Act article; the sales side is in franchise sales and marketing. Book a paid 30-minute consultation (100 €), or send us your location results for a written feasibility review (from 200 €). Full package: franchise development in Canada. Related service: marketing strategy development.
Franchise development FAQ
What is a franchise financial model?
It is a spreadsheet model with two linked parts: the franchisee's unit economics (start-up investment, monthly P&L, ramp-up, break-even and payback) and the franchisor's P&L (fee income against the cost of franchise sales, training and support). It is used to set fees, to test whether the franchise is viable, and to prepare the start-up cost and any earnings information in the disclosure document.
What is a franchise feasibility study?
A feasibility study answers whether a business should franchise at all. It combines the unit's historical results, a market check for the format in target cities, the fee model, the franchisor's cost of building and supporting the network, and a sensitivity analysis. If the franchisee cannot earn a reasonable return after fees in a realistic scenario, the study says so before money is spent on documents.
Can a franchisor give earnings projections in Canada?
In Ontario a franchisor may include an earnings projection, but the disclosure document must state the reasonable basis for it, the assumptions underlying it and a location where information substantiating it is available for inspection (O. Reg. 581/00 s. 6). The same applies to estimates of annual operating costs. A franchisee who relied on a misrepresentation in the document can claim damages from the franchisor and every signer.
What start-up costs must be listed for franchisees?
Ontario's regulation requires all of the franchisee's establishment costs: deposits and franchise fees and whether they are refundable; estimates for inventory, leasehold improvements, equipment, leases, rentals and other property needed to open, with the assumptions behind the estimates; and any other costs, including any payments to the franchisor, their amount and when they are due.
What is the difference between the franchisor's business plan and the franchisee's business plan?
The franchisor's plan shows how the network grows: units sold per year, fee income, team and support costs, marketing for franchisee recruitment and break-even of the franchise company. The franchisee's business plan is for one location and its lender: investment, financing, monthly P&L and payback. The franchisor usually provides a template and data; the franchisee completes it with their own location, rent and financing.
Laws and sources we cite
- O. Reg. 581/00, s. 3 (financial statements) and s. 6 (costs, operating cost estimates, earnings projections) (Ontario e-Laws)
- Arthur Wishart Act (Franchise Disclosure), 2000, s. 7 (damages for misrepresentation) (Ontario e-Laws)
- Marketing MIX case: Fast Coffee
