How to Model Your Break-Even Point Before Signing the FDD

Every franchisor has a slide in their discovery day presentation that shows a hockey-stick revenue curve. Month 1 is rough. Month 6 is better. Month 12, you are profitable. Month 24, you are printing money.

This chart is fiction. Not because franchisors lie — though some do — but because their model assumes average performance in an average market with average execution. You are not average. Your market is not average. And "average" includes the top performers pulling up the numbers while bottom-quartile operators quietly bleed out.

Your job is to build your own break-even model. One that uses conservative assumptions, accounts for the costs the FDD buries in footnotes, and stress-tests against realistic downside scenarios. If the deal still works after you torture the numbers, it might actually be a good investment.

What Break-Even Actually Means

There are three definitions of "break-even," and franchisors strategically choose whichever one sounds best:

Operating Break-Even: Monthly revenue covers monthly operating expenses (rent, labor, COGS, royalties, utilities). This is the lowest bar. It means you are not losing money on a cash basis each month — but you are not paying back your initial investment or paying yourself.

Cash Flow Break-Even: Monthly revenue covers operating expenses plus debt service on your startup loan. Now you are actually sustainable. The business pays its own bills, including the bank. But you still have not recouped your down payment or paid yourself a salary.

Total Investment Break-Even: Cumulative profits equal your total initial investment (cash injected plus opportunity cost). This is when you have actually "made your money back." For most franchises, this takes 3-5 years — not the 12-18 months the sales team implies.

When a franchisor says "most owners break even in 12 months," ask which definition they are using. Then model all three for yourself.

The Variables That Kill Your Model

Most break-even models fail because they underestimate a handful of critical variables. Here is where optimism gets expensive:

1. Ramp-Up Time

New locations do not open at full revenue. You need to build awareness, train staff, work out operational kinks, and develop a customer base. The FDD might show "mature unit" revenue of $75,000/month — but Month 1 might be $25,000.

Reality check: Assume 40-50% of mature revenue in Month 1, scaling to 80% by Month 6, and 100% by Month 12. Some concepts ramp faster (established brands in high-traffic locations). Some ramp slower (service businesses that depend on referrals). Talk to franchisees about their actual ramp curves.

2. Labor Costs

The FDD estimate assumes efficient scheduling and low turnover. Reality is messier. You will be overstaffed during slow periods while you learn demand patterns. You will pay overtime when someone quits unexpectedly. You will hire at above-minimum wage because the labor market is competitive.

Reality check: Add 15-20% to whatever labor percentage the Item 19 shows for your first year. If they show 25% labor cost, model 29-30%. You can optimize later; budget for inefficiency now.

3. Your Own Salary

Many break-even models assume you work for free. This is insane. Your time has value. If you left a $120,000 job to operate a franchise 50 hours a week, that is $120,000 per year in opportunity cost — or $10,000 per month — that should appear somewhere in your model.

Reality check: Include a market-rate owner salary in your expenses from Day 1. Even if you do not actually pay yourself that amount initially, the model should reflect the true cost of the business. A franchise that only "works" if the owner works for free is not a business — it is a trap.

4. Working Capital Burn

The FDD shows "estimated working capital: $30,000-$50,000." This covers 3 months of losses. But if you ramp slower than expected, or face unexpected repairs, or need to fund a marketing push, that cushion evaporates.

Reality check: Model your cumulative cash burn month by month. If the FDD says you need $40,000 in working capital, what happens if you actually need $80,000? Where does that money come from? Have a contingency plan, not just a contingency prayer.

5. The "Hidden" Costs

Technology fees. Local marketing requirements. Insurance premiums. Accounting and legal. Equipment maintenance. Credit card processing fees. These line items add up to 5-10% of revenue that does not appear in the simplified P&L the franchisor shows you.

Reality check: Build a detailed expense model with every category. Ask franchisees what you are missing. The answer is always "something."

Building Your Model: A Step-by-Step Framework

Here is how to construct a break-even model that actually reflects reality:

Step 1: Establish Your Revenue Assumptions

Start with Item 19 data, but adjust it:

• Use the median, not the average (averages are skewed by top performers)
• Use the data for franchisee-owned locations, not corporate stores
• Adjust for your specific market if the data is geographically limited
• If there is no Item 19, use the midpoint of what franchisees tell you in validation calls

Then build a monthly ramp:

This is a conservative ramp. If franchisees tell you they hit full run rate in Month 6, you can be more aggressive — but verify with multiple sources.

Step 2: Build Your Expense Structure

Create a detailed monthly expense model with these categories:

Variable Costs (scale with revenue):

• Cost of Goods Sold: 25-35% depending on concept
• Royalties: per your franchise agreement (typically 5-7%)
• Ad Fund: per your franchise agreement (typically 2-4%)
• Credit Card Processing: 2.5-3.5%

Semi-Variable Costs (scale partially):

• Labor: 25-35% (higher percentage at lower revenue)
• Utilities: base cost plus variable component
• Supplies and smallwares: 1-2%

Fixed Costs (do not scale):

• Rent: your actual lease amount
• CAM and property taxes: per lease terms
• Insurance: $500-$1,500/month depending on concept
• Technology fees: per franchise agreement
• Accounting/bookkeeping: $500-$1,000/month
• Local marketing: your budget (minimum $1,000-$2,000/month)
• Loan payments: per your financing terms
• Owner salary: your target or market rate

Step 3: Calculate Monthly Cash Flow

For each month, calculate:

In early months, this number will be negative. That is expected. The question is: how negative, and for how long?

Step 4: Track Cumulative Cash Position

Start with your working capital (let's say $60,000). Each month, add or subtract your monthly cash flow. Watch the balance:

The lowest point in this curve is your "maximum cash burn." If that number goes below zero, you run out of money before you reach break-even. You need either more working capital or a faster path to profitability.

Step 5: Identify Your Break-Even Points

From your model, extract three dates:

Operating break-even: The first month where cash flow is positive (before debt service). This is when the business sustains itself operationally.

Cash flow break-even: The first month where cash flow covers all expenses including loan payments. This is when you stop needing outside capital.

Investment break-even: The month where cumulative profits equal your total cash investment (down payment + working capital + any capital calls). This is when you have made your money back.

Stress Testing: The Three Scenarios

A model is only useful if you test it against adversity. Build three versions:

Base Case

Your realistic assumptions. Median revenue, conservative ramp, honest expense estimates. This is what you actually expect to happen.

Downside Case

Everything goes wrong. Revenue comes in 20% below projections. Ramp takes 6 months longer. Labor costs run 3 points higher than planned. What happens?

If your downside case shows you running out of cash in Month 8, you do not have enough margin for error. Either increase your working capital, reduce your fixed costs, or reconsider the investment.

Upside Case

Things go well. Revenue hits the 75th percentile. Ramp is faster than expected. You nail the hiring. What does the return look like?

The upside case tells you the potential — but never make an investment decision based on upside. Make it based on base case with downside survivability.

In this example, the base case works — 36-month payback is reasonable for a franchise. But the downside case requires $95,000 in working capital and takes 4 years to recover the investment. If you only have $60,000 in reserves, the downside case bankrupts you.

What the Numbers Tell You

Your break-even model is not just a forecasting exercise. It is a decision tool. Here is how to interpret the output:

If break-even takes longer than 18 months: You need substantial working capital reserves. Make sure you can survive the cash burn without stress. Many franchisees fail not because the business was bad, but because they ran out of runway before it matured.

If the downside case is unsurvivable: You are undercapitalized or the unit economics are too fragile. Either raise more equity, negotiate better lease terms, or walk away. Hope is not a strategy.

If investment payback exceeds 5 years: Question whether this is the right use of your capital. A 5+ year payback means you are tying up $300,000+ for half a decade before you see any real return. What else could that capital do?

If the model only works with zero owner salary: You are not buying a business. You are buying a job — and paying $300,000 for the privilege. Factor in your time at market rates or admit you are subsidizing a failing model with free labor.

"A franchise that requires perfect execution to break even is a franchise that will break you. Build your model assuming you will make mistakes — because you will."