They’re looking at existing stores, transfers, resales — opportunities with history.
There’s comfort in numbers that already exist. There’s psychological safety in seeing revenue that has already been generated. There’s perceived security in past performance.
But here’s the truth: a profit and loss statement (P&L) does not tell you whether a business is safe. It tells you whether you understand what you’re looking at.
If you’re buying an existing franchise, your ability to interpret a P&L correctly will determine whether you’re buying a stable asset or inheriting someone else’s problem. Let’s break this down the right way.
Step one: start with revenue, but don’t stop there
Yes, top-line revenue matters. Look at total annual sales (preferably three years if available), year-over-year growth or decline, and seasonality trends to plan for potential cash flow shortages during slower periods. Average ticket size and transaction volume are indicative of your ability to grow the business based on capacity.
Is revenue stable, declining or growing?
Here’s what most buyers miss: revenue is often the most misleading number on the page. A $1MM store can be terrible and an $800K store can be fantastic. Revenue tells you activity. Profit tells you viability.
Step two: understand the cost of goods sold (COGS)
COGS is what it costs to produce the product you’re selling. In food, that’s ingredients. In retail, that’s inventory. In service, that may be direct labour tied to delivery.
Look at COGS as a percentage of revenue. If the franchise system benchmarks COGS at 30% and the store you’re reviewing is running at 38%, ask why. Is it waste, theft, poor management, pricing issues or supplier changes?
A high COGS percentage is often operational inefficiency — and that’s fixable. If it’s tied to systemic pricing pressure or market competition, that’s structural. Know the difference.
Step three: labour is where stores live or die
Labour is usually the biggest controllable expense.
Look at:
- Total labour cost as a percentage of sales
- Overtime
- Manager salaries
- Whether owner compensation is included or excluded
That last point is critical. Many transfer sellers remove their own salary from the P&L to make profitability look stronger. Others overpay themselves and suppress profitability. You need to normalise the numbers.
Ask yourself: what would this look like if I paid myself a fair market wage? That’s the real performance indicator.
Step four: fixed costs vs variable costs
Here are some of the fixed costs that are crucial to consider:
- Rent
- Royalties
- Marketing
- Utilities
- Insurance
A store that looks barely profitable at $850K may become very healthy at $950K if fixed costs are stable. Conversely, a store that looks strong at $1MM may collapse quickly if sales dip and margins are thin.
Look at the breakeven point. At what sales number does this store start losing money? If sales drop 10%, does the store survive? That’s recession resilience.
Step five: EBITDA — and be careful
EBITDA (earnings before interest, taxes, depreciation and amortisation) is often used to price transfers. However, EBITDA is not cash flow.
Ask the important questions:
- What capital expenditures are coming?
- Is equipment ageing?
- Are renovations due?
- Is the lease secure?
If the franchise requires a renovation in two years, that impacts your valuation today. Profitability must be viewed alongside future capital obligations.
Step six: why is the seller selling?
This question matters as much as the numbers.
If the P&L is clean, stable and profitable, what is the motivation to sell? Retirement, relocation, burnout, health reasons, divorce or life changes can all be driving factors.
On a store with declining performance, cross-reference:
- P&L trends
- Staff turnover
- Online reviews
- Local competitors
- Lease expiry timeline
Numbers don’t lie — but they don’t volunteer the full story either.
Step seven: adjust for the change in ownership style
This is the most overlooked step.
A P&L represents how they ran the business, not how you will. If you plan to be an owner-operator, improve labour scheduling, tighten controls, improve local marketing or build community relationships, you may outperform historical numbers.
However, be careful not to price based on potential upside. Buy based on survivable downside.
A final thought
In this economic climate, buying an existing franchise can be a smart move. You get established staff, sales history, operational data and community presence.
However, security does not come from history alone. It comes from understanding what the numbers actually mean.
A profit and loss statement is not just a financial document. It’s a story. It tells you:
- How disciplined the operator was
- How efficient the systems are
- How resilient the business is
- How exposed you might be
If you can read that story properly, you dramatically reduce your risk. If you can’t, you’re guessing — and in franchising, guessing is expensive.
Before you buy a resale, sit with the numbers. Ask hard questions. Normalise compensation. Stress test the downside. Understand the breakeven point.
Confidence should come from clarity, not comfort. And clarity comes from knowing how to read the P&L the right way.
