The franchisor should develop a break-even analysis for both the franchisor's organization and the franchisee's organization. This is a unique calculation. There are two distinct break-even points for both the franchisor and the franchisee: (1) break-even occurs when the cash revenues equal cash disbursements and (2) break-even occurs when total cash revenues equal total investments plus total expenditures.

These financial break-even points generally may only be determined from the cash budget statement or the income statement if projected into the future for 3-5 years. Most franchisors will not break even or be able to recoup their investment until the second or third year of operation. Some franchisees who require a heavy capital investment (fast food restaurants, hotels and motels) may not break-even until the fourth through seventh year.

A break-even plan may be solved algebraically from the following equation:

break-even sales = fixed expenses + variable expenses expressed as a percentage of sales

Adding a profit to this break-even equation would yield the following equation:

break-even sales = fixed expenses + variable expenses expressed as a percentage of sales + profit (or profit expressed as a percentage of sales)

A break-even chart may be developed simply by listing the sales volume or units on the horizontal axis and the income and expenses on the vertical axis of a break-even chart. A fixed expense line is drawn horizontal to the horizontal axis and on top of that a variable expense line is drawn. The total revenue line is drawn from the origin of the chart and where the total revenue line crosses the total expense line (fixed expense + variable expense) the break-even occurs.

Break-even analysis is useful to allow the franchisor to understand when profits will be reached. This analysis is also useful to help the franchisor to understand when franchisees may recoup their original investment and receive profits for their business.