Buying a franchise can feel like the safer way into business. You get a proven brand, a system that already works, and a network behind you instead of starting cold. A lot of that is real.
But in my work as an accountant, I’ve seen the same pattern often enough to flag it: the profit in the brochure and the profit in your bank account can be very different numbers. The franchisees who do well are usually the ones who ran the figures properly before they signed, not after. Here’s the financial due diligence worth doing first, including the parts most buyers skip.
Start with the disclosure document, then go further
Under the Franchising Code of Conduct, overhauled with a new Code from 1 April 2025, a franchisor must give you a disclosure document and a copy of the Code at least 14 days before you sign anything or hand over money. That window is now called the consideration period, and it exists for a reason. Use all of it. You also get a 14-day cooling-off period after signing, when you can still pull out.
The disclosure document is genuinely useful. It sets out the fees, the franchisor’s litigation history, any significant capital expenditure you may be required to make, and contact details for current and former franchisees. (One change under the new Code: the old Key Facts Sheet has been scrapped, so the disclosure document is now your main written source.)
The single most valuable thing in it is the franchisee contact list. Call them, and pay particular attention to the ones who’ve left. People who walk away tend to tell you things the sales process never will.
Run the actual numbers, not the brochure
Here’s a simplified, illustrative example of why margin matters more than revenue. Say a food franchise turns over $600,000 a year. The rates vary by system, but take a 7% royalty and a 3% marketing levy:
- Royalty: $42,000
- Marketing levy: $18,000
That’s $60,000 gone to the franchisor before you’ve bought a single item of stock or paid one wage. Now add the usual costs: cost of goods of around $210,000, staff wages of $100,000, rent and occupancy of $65,000, and other overheads of about $45,000. Strip a fair market wage for yourself, say $80,000 for running it full-time, and the business itself is left with roughly $40,000.
On $600,000 of sales, that’s a return under 7%. Whether that’s good depends on what you put in and the risk you’re carrying, but notice this: the $60,000 of franchise fees was the difference between a comfortable result and a marginal one. That’s the calculation you need to do for your own situation, not the headline turnover the brochure leads with.
Royalties and marketing levies come off your revenue, not your profit. A busy store can still be a poor business.
The costs that don’t show up in the brochure
Some of the biggest surprises sit outside the headline fees, and they vary a lot between systems.
Approved suppliers and rebates. Some franchises require you to buy stock or equipment through the franchisor or a list of approved suppliers, occasionally at prices higher than you could negotiate yourself. In some systems the franchisor also earns a rebate from those suppliers based on what franchisees buy. None of this is necessarily a problem, and the new Code now requires rebates to be disclosed, but you want to understand it before you sign rather than after.
Compulsory refits. Some agreements require you to refurbish the premises every few years at your own cost, which can be a serious capital hit the entry figure never mentions. The Code now requires franchisors to disclose and discuss significant capital expenditure, so ask directly.
Territory. Is your area exclusive, or can the franchisor open another outlet nearby, or sell online into your patch? Encroachment can quietly erode the customer base you paid to build.
The lease. In some arrangements the franchisor holds the head lease and you sub-lease the site. Check what happens to the premises if the franchise ends, and whether the lease term and the franchise term actually line up.
None of this means franchising is a trap. It means the systems differ enormously, and the only way to know which kind you’re looking at is to ask specific questions and read the agreement closely.
Sanity-check the numbers against an independent benchmark
If the franchisor gives you projected figures, don’t take them on trust, and don’t only compare them to other stores in the same network. The ATO publishes small business benchmarks: typical ranges of costs and expenses as a percentage of turnover, drawn from over two million businesses and broken down across around 100 industries. They’re free and neutral.
Hold the projection up against them. If a franchise’s numbers only work because they assume you’ll run a far lower wages-to-sales or cost-of-sales ratio than almost everyone else in that industry, that’s worth a hard question. Real businesses tend to cluster around the benchmarks for a reason.
The tax treatment most buyers get wrong
This is where I see good people make an expensive assumption. The upfront franchise fee is not immediately tax-deductible as an operating business expense. The ATO generally treats it as capital: it forms part of the cost base of your franchise licence, which matters when you eventually sell the business and work out any capital gain, rather than reducing this year’s tax bill. Buyers routinely expect to write that fee off in year one. Generally, you can’t.
The ongoing fees are different. Royalties and marketing levies are generally deductible as business expenses in the year you incur them, because they’re a continuing cost of running the business. Those fees usually include GST too, so if you’re registered you can claim the credit.
One more decision belongs here, before you sign rather than after: the structure you buy the franchise in. Whether you operate as a sole trader, a company or through a trust affects your tax, your asset protection, and how easily you can later sell or bring in a partner. Changing it down the track is harder and can trigger costs, so it’s worth getting right at the start.
The upfront fee builds your cost base for the day you sell. It generally won’t cut your tax bill the day you buy.
Before you sign: advice, exit, and a checklist
The Code expects you to seek independent legal, accounting and business advice, and you’ll be asked to confirm you had the chance to. Treat that as more than a box to tick. A good advisor can model your specific numbers, test the franchisor’s projections, and tell you plainly whether the deal stacks up while you can still walk away. That’s the work we do at Hopkan Partners, and for owners who want the numbers kept clear month to month once they’re trading rather than reviewed once a year, an advisory or virtual CFO arrangement does exactly that.
Plan your exit while you’re still planning your entry, too. Almost everyone models getting in; far fewer check what getting out involves. Look at the transfer fees, whether the franchisor has to approve your buyer, what happens to the goodwill at the end of the term, and any restraint of trade that limits what you can do afterwards. Renewal is rarely automatic.
Before you commit, make sure you can tick off:
- The total real cost to open, including working capital, not just the entry fee.
- Your modelled profit after every franchise fee, with a market wage for yourself included.
- A cash flow forecast that covers the slow ramp-up months.
- The franchisor’s numbers checked against ATO industry benchmarks.
- Notes from conversations with current and, especially, former franchisees.
- The right ownership structure decided before signing.
- An independent legal and accounting review of the agreement and disclosure document.
The bottom line
A franchise can be a genuinely good way into business. But the brand on the door doesn’t guarantee the numbers work for you, in your location, with your costs. Do the financial homework during the consideration period, while walking away is still an option. Getting the figures checked costs very little. Signing into the wrong deal costs a great deal more.
Written by Ben Feng – CPA and the founder of Hopkan Partners, a Sydney-based bookkeeping and business advisory firm that helps business owners across Australia understand their numbers and grow profitably.
Before founding Hopkan, he spent years in corporate finance and management accounting roles with ASX-listed companies and multinationals. He works with owners, including franchisees, to turn messy financials into clear decisions on pricing, cash flow and growth.
Email: [email protected]
Phone: 0404 293 025
