It should do! Clearly there is absolutely no point in a franchisee investing very considerable sums of money on a franchise business that is unlikely to provide adequate returns.
Most franchise agreements last for five years although five year agreements should be renewable at least twice by a franchisee. As a rough rule of thumb, a franchisee’s business will be loss making in the first one or two years, will break even in years two or three and make a profit in years three, four and five. The amount of profit that it is likely that a franchisee will earn during that initial term should, in most franchises, be enough to reimburse the franchisee for all of the initial costs in taking the franchise, including working capital requirements. In franchises which involve very substantial expenditure like a McDonald’s then you would certainly expect a much longer term than five years and you would expect substantial levels of profit.
In a nutshell, what this means is that the initial costs incurred by a franchisee do need to be linked not only to the term of the franchise, but also to the level of profit that could be earned. It is for this reason that prospective franchisees will almost always want their franchisor to provide them with projections for at least the first two or three years of their franchise operation – for much longer it becomes a bit more of a guess. It is also essential that the basis on which the franchisor provides those projections are clearly set out. Generally, the basis should be the average performance of franchisees because that is the only sure way of ensuring that franchisors’ projections are based on reality.