1. BACKGROUND
As requested by the president of the “Franchise Association” (AFH), I conducted a study on behalf of a group of franchisees of the ***** brand. These franchisees expressed concerns about the profitability of their restaurants, low sales, and difficulties in aligning their operations with the business model provided by the franchisor prior to signing their agreements.
The key objective of this study was to evaluate whether the business model sold by Grupo ***** for its restaurants is realistic and achievable in terms of economic results, or if it only works under specific market conditions. To ensure objectivity, I analyzed the accounts of 20 companies managing 30 restaurants of the ***** brand, with turnovers ranging from €240,000/year to €1,500,000/year and a combined turnover exceeding €21 million. The study included on-site visits to various locations to gain firsthand insights into the operations.
2. DOCUMENTATION REVIEW
The following documents were analyzed:
- Franchise Agreements
Included sets of pre-contractual documents provided by the franchisor, titled: “Estimate, Monthly Sales Income Statement, Break-even Points, and Estimate of Return.” - Sales Forecasts and Targets
Documents detailing expected sales performance and associated targets. - Official Accounts
The accounts for the companies examined, obtained from Public Registries (Registro Mercantil) for the year ****.
3. THE ***** BUSINESS MODEL
The pre-contractual economic estimates provided by the franchisor were examined in collaboration with the franchisees. These estimates form the basis of the business model and are broadly summarized as follows:
- Investment Required per Point of Sale: > €500,000
- Turnover per Annum: > €600,000
- Cost of Sale: 24%
- Personnel Costs: 34%
- Other Expenses: 26%
- Annual EBITDA: 14-16%
4. COMPARISON WITH OBTAINED DATA
Cost of Sale (C.O.S.)
The study found that 16 out of the 20 companies investigated reported a C.O.S. greater than 27%. The only company that achieved a C.O.S. of less than 27% had an annual turnover exceeding €3 million. Excluding this outlier, the average C.O.S. for the remaining companies was over 30%, representing a 6 percentage point increase compared to the franchisor’s model.
Potential reasons for this deviation include:
- Differences in accounting criteria, such as including promotional items and packaging in the C.O.S.
- Price increases over the last two years.
- Franchisee learning curves affecting operational efficiency.
- Mandatory purchasing from approved suppliers, which may not pass on all savings to franchisees.
Personnel Costs
Only 5 out of 20 companies reported personnel costs below 36%. Excluding the high-turnover company, the average personnel cost was above 39%, reflecting a 5 percentage point increase.
Factors contributing to higher personnel costs include:
- The franchisor’s stringent service standards requiring larger teams.
- Additional training costs for new units.
- High staffing levels mandated by the franchisor for various operational requirements.
Other Expenses
The average of other operating expenses, including controllable, non-controllable expenses, and occupation expenses (rents/leases), was 28.59%, representing a 3 percentage point increase.
Key points:
- Lease expenses varied widely, with some exceeding 15% of sales.
- Energy bills ranged from 5% to 10% of sales, further increasing the burden on franchisees.
5. OTHER PRE-CONTRACTUAL INFORMATION
Sales Performance
The study revealed that sales of recently opened restaurants were significantly below the franchisor’s targets:
- Best results: 35% below target.
- Worst results: 40% below target.
The average expenditure per diner was approximately €13, compared to the €15.5 indicated in the pre-contractual documents, representing a 15% shortfall.
Sales Deviations by Day of the Week
Sales performance also deviated significantly from estimates based on the day of the week:
- Weekdays: 60% below estimates.
- Fridays: 33% below estimates.
- Saturdays: 45% below estimates.
- Sundays: 47% below estimates.
Population and Sales Data
The study highlighted discrepancies between the franchisor’s sales forecasts and actual sales in towns with varying populations, indicating that the model’s projections were not grounded in realistic or well-studied demographic data.
6. GENERAL CONCLUSIONS
From the study of 20 companies managing 30 franchises, with turnovers between €240,000 and €1,500,000 per annum, several conclusions were drawn:
- The pre-contractual data provided by the franchisor regarding operating costs and profits were found to be erroneous and misleading. The figures were outdated and largely unobtainable.
- Sales projections/forecasts were not based on real data or adequately studied demographics.
- There was no consideration of factors such as tourist influence or seasonal trade in the documentation provided by the franchisor.
- The model presented by the franchisor is not a real and achievable economic model under the conditions experienced by the franchisees studied.
STUDY AND LEGAL OUTCOMES
The study’s findings align with several legal rulings against the franchisor, where the courts found that the franchisor had inflated balance sheets and provided adulterated data. The Spanish Supreme Court in 2018 upheld lower court rulings in favor of franchisees, finding that the franchisor had concealed pre-contractual information and failed to provide truthful information required by law.
The court emphasized the franchisor’s obligation to provide potential franchisees with accurate and substantiated forecasts. The franchisor’s failure to do so resulted in a ruling that the franchise agreements were breached, with the franchisor being held liable for the resulting damages.