Three Numbers to Know Before You Sign a Franchise Agreement

A polished pro forma can make almost any franchise look reasonable. It shows where the business could end up. It rarely shows what it takes to get there.

Before committing capital, I want every buyer to know three numbers. Not estimates from the franchisor. Numbers you have worked out for your own location.

Free download: the 7 questions every franchise buyer should answer before signing. Get the Capital Risk Checklist.

1. Break-even revenue, after debt service

This is the monthly revenue that covers every bill: rent, payroll, royalties, marketing, supplies, and your loan payment.

Most models show operating break-even, which leaves out debt service. If you are financing the build-out, that is the wrong number. Your loan payment starts whether the business is ready or not.

Here is a hypothetical example. A service business carries $35,000 a month in fixed costs: $8,000 rent, an $18,000 payroll floor, a $5,500 loan payment, and $3,500 in other fixed costs. Royalties, brand fund, and supplies take another 17% of every dollar of revenue.

That business needs about $42,200 a month in revenue just to cover its bills. Below that, it loses money every month.

2. Months of negative cash flow

New locations rarely open at break-even. They build toward it.

In the same example, say revenue starts at $15,000 in month one and climbs steadily to about $42,000 by month twelve. The business loses money every month along the way. The worst month is the first, at roughly $22,500. The total loss over the first year comes to about $136,000.

That total is what your working capital has to cover. It is usually far more than the working capital line in the Franchise Disclosure Document (FDD).

3. The capital required if the ramp slips

Now assume the same ramp takes 15 months instead of 12. Nothing dramatic. Marketing takes longer to convert, or hiring runs behind.

The cumulative loss rises to about $170,000. Three extra months of ramp cost roughly $34,000 in additional cash.

This is the number most buyers never calculate. A slower ramp is not a worst case. It is one of the most common outcomes for a new location.

Why these three numbers matter more than the pro forma

Together, they answer one question: can your capital plan absorb normal friction?

If you know your break-even revenue, how long you will run below it, and what a few extra months cost, you know how much cash you actually need. If you don't, you are relying on the ramp going exactly to plan.

A lot of deals look attractive when everything goes right. These numbers show you what happens when it doesn't.

Next step: Download the free Capital Risk Checklist to work through these numbers for your own deal. If you're evaluating a franchise now, book a free 30-minute call. I'll tell you plainly whether an independent review would help.