Buying an existing franchise: how to assess prepaid sales

Buying an operating franchise in Brazil can mean taking on customers who have already paid but are still waiting for products or services. The seller received the money; you may have to fulfil the order. In a franchise acquisition, this gap deserves a dedicated review before the transfer. Here is how to identify these obligations, calculate their impact and decide who will fund fulfilment after the handover.

1. Identify what has been sold but still needs to be delivered

Do not look only at loans, taxes and overdue bills. An outlet may be up to date with its suppliers yet still have significant commitments to customers: beauty treatments, classes, prepaid subscriptions, products on order, gift vouchers and credit issued following exchanges.

Ask for a report with a defined cut-off date, drawn from the sales and customer service systems. For each commitment, check:

• The product or service purchased, the quantity sold and the outstanding balance.
• The amount received, any instalment arrangements and outstanding receivables.
• The terms of use, cancellation and refund promised to the customer.
• The outlet responsible for fulfilment and whether customers can redeem their purchase at other outlets.
• Outstanding bookings, complaints and return requests.

The aim is to distinguish money received from obligations fulfilled. Historical turnover alone does not show how much work will remain after the purchase.

Cross-check the report against customer contracts, tax invoices, payment platform statements and customer service records. Initially, request aggregated or anonymised data; access to personal data must comply with Brazil’s General Personal Data Protection Law (LGPD), Law No. 13,709/2018, with a defined purpose and appropriate security measures.

2. Calculate the cost of fulfilment without being paid again

The total value of packages sold does not automatically equal the cost you will incur. Ask an accountant for an assessment that distinguishes revenue, receivables, fulfilment obligations and potential refunds.

To estimate future cash outflows, consider materials, commissions payable when services are provided, staffing, taxes under the applicable treatment and fees set out in the franchise agreement. Check when royalties are charged: at the point of sale, on receipt of payment or on another contractual basis. Do not assume that an earlier charge eliminates all subsequent costs.

Also consider available capacity. A diary filled with prepaid services may limit new sales, while rent, wages and other expenses still fall due. Even services with low material costs can therefore put pressure on cash flow.

Prepare a monthly forecast showing three separate flows:

1. Future receipts that will actually belong to the buyer.
2. Cash outflows needed to fulfil commitments made before the transfer.
3. Cash inflows and outflows from new sales.

Test a scenario in which many customers redeem their credits shortly after the transfer. If the business only works with optimistic sales assumptions, negotiate additional working capital, a price reduction or another form of financial protection before proceeding.

3. Check the franchise network’s rules and the purchase structure

Law No. 13,966/2019, Brazil’s current Franchise Law, requires the Franchise Disclosure Document, known locally as the Circular de Oferta de Franquia (COF), to disclose any existing transfer or succession rules. When joining as a new franchisee, insist on receiving the COF and having the transfer documents reviewed by a lawyer.

The COF must be supplied at least ten days before the franchise agreement or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. This period does not replace due diligence on the outlet’s commitments.

Ask the franchisor for written confirmation of which credits can be redeemed at other outlets, how balances are settled between franchisees and who is operationally responsible for fulfilment. A voucher issued through a national platform may be subject to different rules from a package sold exclusively by the outlet.

With a lawyer, clarify whether the purchase involves equity interests in the company or the transfer of the business establishment and specified assets. Using a different CNPJ — Brazil’s corporate tax registration number — does not guarantee freedom from past liabilities. The consequences depend on the transaction structure and the legal rules on successor liability. Moreover, allocating responsibilities between buyer and seller does not, in itself, override customers’ rights under applicable legislation, including Brazil’s Consumer Protection Code.

4. Turn your findings into contractual protection

Attach a reconciled schedule of commitments to the purchase agreement, with rules for updating the outstanding balance up to the transfer date. Specify who receives outstanding instalments, who bears the cost of refunds and how undisclosed packages or subsequent discrepancies will be handled.

Negotiate safeguards proportionate to the risk: a price adjustment, retention of part of the purchase price, guarantees and indemnity obligations. These protections need clear rules on evidence, time limits and enforcement; a general promise that the seller will “pay for everything” may not be enough.

Also set limits on promotions and advance sales between the offer and the handover. At completion, repeat the reconciliation and formalise communications to customers, without seeking to impose restrictions incompatible with their rights.

In practice: before paying for the franchise transfer, establish how much remains to be delivered, what cash will accompany those obligations and who will cover any shortfall. An existing customer base is only an advantage when the cost of serving it is factored into the purchase.