Pre-contract disclosure when franchising in Argentina

Before welcoming someone into your franchise network, you need to show them how the business you are offering works financially. An estimated investment or an attractive forecast is not enough: Argentina requires disclosure before the agreement is signed. Providing verifiable data allows prospective franchisees to assess the proposal and avoids confusing actual results with expectations.

What the Civil and Commercial Code requires

Franchising is specifically regulated by Articles 1512 to 1524 of Argentina’s Civil and Commercial Code. On pre-contract disclosure, Article 1514(a) requires the franchisor to provide, before signing the agreement, economic and financial information covering two years of performance by units similar to the one being offered, which have operated for a sufficient period, either in Argentina or abroad.

The obligation concerns the track record of comparable units, not simply a forecast for the proposed outlet. An opening budget can supplement this information, but cannot replace it.

Nor should the rule be reduced to saying that ‘the company must be at least two years old’. The provision sets out a disclosure requirement with a specific period and characteristics. If your business does not yet have sufficient historical data, seek legal advice on how this affects your ability to offer and enter into a franchise agreement; do not fill gaps with estimates presented as actual results.

This article does not specify a minimum disclosure period of twenty days before signing. A legislative proposal should not be confused with a rule in force. In practice, arrange disclosure far enough in advance to give the prospective franchisee and their advisers reasonable time to review the information before making a commitment.

How to select genuinely comparable units

Choosing only the most successful outlet can give an unrepresentative picture of what is being offered. Comparisons should be based on business characteristics that the prospective franchisee can identify and assess.

Prepare a profile for each unit used as a reference, covering these criteria:

• Format: floor area, sales channels and range of products or services.
• Trading environment: location, customer footfall and characteristics of demand.
• Operations: opening hours, staffing levels and duties undertaken by the owner.
• Maturity: opening date and stage of development during the reporting period.
• Unit-specific costs: rent, logistics, shared services or advantages that another outlet may not have.

If a company-owned unit receives administrative support free of charge, explain this. If it pays no rent because the owner owns the premises, highlight that difference. A result can be accurate yet still misleading without context.

Where historical data comes from overseas, identify the currency, trading conditions and relevant differences compared with Argentina. The fact that the law permits the use of these units does not remove the need to explain their limitations as a benchmark.

How to prepare a clear financial information pack

The Code establishes the disclosure obligation, but the provision cited does not prescribe a single template. You can organise an information pack that allows the figures to be traced from their sources through to the summary provided, with accounting and legal review.

As a documentation practice, divide it into three sections:

1. Historical results: revenue, costs and expenses for the selected units, with clearly identified reporting periods.
2. Basis of preparation: sources used, treatment of taxes, currency, and items included or excluded.
3. Estimates for the new outlet: assumptions about sales, expenses and start-up costs, explicitly distinguished from actual historical performance.

In an inflationary environment, avoid comparing amounts from different periods without explaining the basis on which they are presented. State whether they are nominal figures or have been adjusted, leaving the accountant to determine the appropriate adjustment method.

Also distinguish sales from cash receipts, and operating profit from available cash. If company-owned outlets do not pay royalties, make this clear and explain separately how the charges proposed for a franchise would affect the figures.

There is no need to disclose customers’ or employees’ personal data to describe financial performance over time. Protect that information and use a confidentiality agreement where appropriate, without making it an excuse to withhold the historical information required.

How to record disclosure and handle queries

Give the information pack a version number and date. Keep a file index, identify the units and periods covered, and record who received the documentation and when.

An acknowledgement of receipt helps establish that disclosure took place, but it does not remedy incomplete information or amount to a guarantee of profitability. Nor should it be used to make prospective franchisees declare that they have verified data they were never able to access.

Keep queries in one place and respond in writing. If you discover an error, issue a corrected version, explain the change and allow time for the proposal to be reviewed again before signing.

Putting this into practice: before proceeding with your first agreement, gather comparable historical data, separate facts from forecasts and document disclosure. A strong franchise network starts with informed decisions, not figures that are difficult to verify.