Written By: Khushboo Verma

Franchise buyers in India often spend more time picking a brand than studying whether the outlet actually makes money. The Profit and Loss statement gets an hour, if that. That is usually how the problems start.

Understanding how to read a franchise P&L is less about accounting and more about protecting your investment. It shows what the unit keeps after every cost has been paid. Two outlets of the same brand in the same city can show completely different returns depending on the rent negotiated or royalty terms buried in the contract. This guide walks through every section, in order, so you know what to look for.

Why the P&L Should Be the First Document You Ask For

Franchise pitches are built around what looks good: footfall, brand recognition, revenue from the strongest months. None of it answers the one question that matters: after rent, royalty, salaries, and every other cost is settled, how much is left? In food and beverage formats where aggregators charge 18 to 30 percent per order and raw material costs shift seasonally, that gap between revenue and actual profit can quietly hollow out a unit that looks healthy on the surface.

Step 1: Revenue Is the Starting Point, Not the Conclusion

Gross Revenue is what franchisors highlight first in every pitch, and it is rarely the number that tells the full story. The figure is not wrong. It is incomplete.

What it leaves out: the months where revenue halved because a festive period ended, the delivery platform discounts that inflate order counts without improving margins, and the single large client whose departure would reshape the numbers entirely.

Before accepting any revenue figure, ask for 12 months broken down by month, the split between delivery and counter sales, and whether revenue has ever fallen below 60 percent of the monthly average. A unit earning Rs 10 lakh steadily every month is a more reliable investment than one swinging between Rs 18 lakh and Rs 6 lakh.

Step 2: COGS Tells You What the Business Structurally Looks Like

Cost of Goods Sold covers every input that goes directly into producing what the franchise sells. Raw materials and packaging for a QSR. Gold, diamonds, and making charges for a jewellery outlet. Ingredients and cups for a tea chain. Whatever remains after COGS is deducted from revenue is the gross margin, and that figure sets the ceiling on everything else.

Gross Margin % = ((Revenue minus COGS) / Revenue) x 100

A jewellery outlet doing Rs 20 lakh monthly with 80 percent COGS has only Rs 4 lakh in gross profit to absorb every other cost. A tea chain doing Rs 6 lakh at 65 percent gross margin is often a structurally sounder business despite the lower revenue.

Step 3: Fixed Costs Are Where Investment Decisions Break Down

Unlike COGS, fixed costs do not adjust with sales. Rent arrives on the first of the month regardless of whether October was a record or a disaster. Staff salaries, software licences, maintenance contracts, royalty minimums: the clock runs whether the outlet is busy or empty.

Rent deserves the closest attention. Once it crosses 15 percent of monthly revenue, the unit is carrying structural risk. At 20 percent or above, almost nothing short of a lease renegotiation can fix it. A practical test before committing: stress-test the P&L at 70 percent of projected revenue. If EBITDA turns negative at that level, the fixed cost base is too heavy.

Step 4: Royalty Needs to Be a Named Line, Not a Buried Cost

Some franchisors present royalty clearly. Others fold it into broader categories or recover it through supply chain pricing. Either way, knowing how to read a franchise P&L means knowing exactly where royalty sits and what it actually costs you each month.

In food and beverage formats, royalty typically runs between 4 and 8 percent of gross sales, with a brand fund contribution of 2 to 5 percent on top. Tech platform fees, ERP subscriptions, and POS charges can add further. Beyond named charges, some franchisors recover additional margin by pricing central supply items 15 to 25 percent above open-market rates. Cross-check central supply costs against independent pricing before signing.

If the P&L shows royalty buried inside overheads with no separate line, ask for it to be broken out. How a franchisor responds to that request is itself useful information.

Step 5: EBITDA Shows Whether the Business Works Before Financing Gets Involved

After gross profit and operating costs are accounted for, the figure that matters most is EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortisation. It strips away the effect of how you structured and financed the investment and shows whether the operation itself is viable.

A healthy EBITDA margin for food franchise formats sits between 15 and 25 percent. Below 10 percent, the business has almost no room to absorb cost increases or revenue dips without sliding into loss.

In the above example, Rs 1,30,000 per month on a Rs 25 lakh investment gives an annualised ROI of roughly 62 percent. That figure only holds if performance is consistent month to month, not averaged across a strong peak and several weak ones.

Step 6: When compared across categories, the same profit and loss figures appear substantially differently.

At 15 percent EBITDA on Rs 6 lakh, a tea chain generates Rs 90,000 in monthly operating profit with minimal inventory on hand. A jewellery outlet at 10 percent EBITDA on Rs 20 lakh generates Rs 2 lakh, but often has Rs 40 to 80 lakh of stock sitting on shelves with its own carrying cost. Revenue alone does not make either business better. The P&L structure does.

Step 7: Understanding What the Franchisor Doesn’t Show You

The franchise P&L may look good but be deceiving. Statistics and disparities matter.

Before signing anything, verify the following:

• Data coverage: A couple of months of figures is not enough to establish a pattern. Push for the full year, month by month.
• Rent visibility: If rent is not its own line item, you cannot assess how much of your revenue it is consuming.
• Royalty transparency: Royalty merged into a broader overhead category cannot be tracked or challenged. It needs its own line.
• Breakeven claims: A 6-month breakeven figure means nothing without the month-by-month workings that support it.
• GST returns: If the franchisor has not offered these without being asked, ask. Repeated delays are a red flag.
• Inventory turnover: For retail and jewellery formats, an inventory figure without turnover data tells you nothing about how efficiently that stock is moving.

If they do not, ask for a written explanation. How the franchisor handles that question will tell you more than any document they hand over.

Step 8: One Profit & loss is just a piece of information, not a trend.

A single outlet's numbers, even from a high-performing unit, should never be the sole basis for a franchise decision. You need comparison: Tier-1 against Tier-2, high street against mall, early-stage units against mature ones.

Talk to franchisees the brand did not put forward. Find them through independent searches, outlet visits, or trade networks. Ask what their worst month actually netted, whether launch costs matched what they were told, and what the franchisor did when sales slowed.

Pre-Investment Checklist

A Note on F&B Franchise P&Ls

Input costs move with commodity cycles. A spike in edible oil or dairy prices hits COGS within weeks, narrowing the gross margin before the franchisee has had time to respond.

Revenue quality is the second issue. An outlet reporting Rs 12 lakh in monthly sales may have 60 percent of that flowing through delivery apps. After platform cuts and order-level discounts, the cash that actually arrives is materially lower than the gross figure suggests. Ask what the outlet earns per channel after deductions, not what it collects before them.

Frequently Asked Questions

Q1. Between EBITDA and Net Profit, which one should I look at first?

Start with EBITDA. It reflects how the business performs operationally, before your borrowing structure influences the outcome. Net Profit comes next, once you know the operation itself is sound.

Q2. The franchisor only has annual P&L data. Is that acceptable?

No. Annual figures average out the weak months and make the business look more stable than it is. Monthly breakdowns are non-negotiable. If they are unavailable, treat that as a problem worth noting before you proceed.

Q3. A franchisor gave me a P&L. How much should I rely on it?

Cross-check it independently. Match the revenue against GST filings. Verify the rent figure against the lease. Speak to franchisees outside the brand's referral list. A document prepared by the party selling you something is a starting point, not a conclusion.

Q4. The P&L shows higher revenue than what the GST return reflects. What does that mean?

It means either the P&L revenue is inflated or some sales were not reported for tax purposes. Both are problems. Ask for a clear written explanation. If one is not forthcoming, that tells you enough.

Q5. A jewellery franchise shows Rs 25 lakh monthly revenue. Is that a strong investment?

Not necessarily. At 80 percent COGS, the gross profit is Rs 5 lakh. After fixed costs, royalty, and working capital tied up in Rs 50 to 80 lakh of inventory, the actual return may compare unfavourably to a lower-revenue format with stronger margins and no stock exposure.

Q6. My setup budget is ready. What else should I be financially prepared for?

Working capital. This is the money needed to cover operations from day one until the unit reaches breakeven, including rent, salaries, restocking, and vendor payments during that period. For jewellery and retail formats, this figure alone can run Rs 30 to 80 lakh, separate from the setup cost entirely.

Final Thoughts

Skipping a proper P&L review before signing a franchise agreement is not confidence, it is a due diligence failure. Any franchisor with a sound operation will share the data without being pushed.

Reading a franchise P&L does not demand a finance background. It demands attention: checking the numbers against independent sources and walking away when something does not hold up. That is what separates investors who build profitable businesses from those still recovering from their first mistake.

Not sure where to begin your franchise search? Explore verified opportunities across QSR, F&B, retail, and more on our platform, with unit-level financial disclosures included so you can invest with confidence.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.