The franchisor’s accounts: what to assess before buying

A well-known brand does not guarantee that the company behind it has the resources to support its network. Before buying a franchise, analysing the franchisor’s financial statements helps you assess its ability to meet its obligations. This check matters because financial difficulties at the franchisor could affect services that your future outlet will depend on.

1. Check which documents the law requires

Article 2, item III of Brazil’s current Franchise Law, Law No. 13,966/2019, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to include the franchisor’s balance sheets and financial statements for the last two financial years. This law repealed Law No. 8,955/1994, which still appears in older materials.

A sales presentation showing network turnover is no substitute for these documents. The combined turnover of franchise outlets is different from the franchisor’s revenue, and neither automatically amounts to profit or available cash.

When you receive the documents, check:

• Whether the registered company name and CNPJ (Brazilian corporate tax registration number) match those of the franchisor identified in the COF.
• Which financial years are covered and whether the statements are complete and legible.
• Whether explanatory notes are included to help you understand the figures presented.
• Whether statements from other group companies are being supplied instead of information about the franchisor itself.

If the company has completed fewer than two financial years, ask for documentary clarification of when it was incorporated and which statements are available. Discuss this with your accountant and lawyer rather than assuming that a business forecast satisfies the legal requirement.

2. Read the figures with practical questions in mind

You do not need to become an accounting expert. The aim is to take useful questions to an independent accountant who can compare the financial years and explain the risks in terms relevant to your proposed investment.

In the balance sheet, look at cash, receivables, debts and equity. Ask how much of the company’s obligations fall due in the short term and which resources can actually be used to pay them. Receivables are not cash in the bank: payment may be delayed or never arrive.

In the income statement, seek to understand where revenue comes from, what it costs to run the organisation and whether it made a profit or a loss. Compare the years and investigate significant changes. A positive result driven by a one-off asset sale, for example, does not necessarily show that normal operations are financially sustainable.

Also ask for information about cash generation. If a cash flow statement is available, review it with your accountant; otherwise, request further clarification. Do not assume that every additional document you request is specifically required under the Franchise Law.

Avoid jumping to conclusions. Negative equity or a loss warrants investigation, but neither tells the whole story on its own. Equally, an accounting profit does not prove that the company can meet its immediate payment obligations.

3. Investigate reliance on selling new franchises

One crucial question is whether the franchisor can fund its operations through recurring revenue or depends continually on new franchisees joining the network.

Where available, request a breakdown of revenue from initial franchise fees, royalties, product supply and other services. This may require additional management information beyond the statements included in the COF.

Ask in writing:

• How would head office operations be funded if the pace of new openings slowed?
• Does recurring revenue cover the costs of supporting existing outlets?
• Are loans or capital contributions from shareholders funding routine expenses?
• Are significant amounts owed by related companies or franchisees with overdue payments?

Growth can require investment and put temporary pressure on cash flow. What matters is understanding the cause, how long that pressure is expected to last and where the funds to cover the shortfall will come from. Vague promises of expansion are no substitute for explanations backed by evidence.

4. Turn the analysis into a documented decision

Organise your questions in a list with three columns: information observed, explanation requested and document supporting the answer. This helps distinguish accounting facts from commercial expectations.

If the financial statements cover a period well before your planned purchase decision, request a recent trial balance and information about significant changes in borrowing. These are useful additions to your analysis, but should not be confused with the minimum content expressly required by law.

If the franchisor mentions financial support from a parent company, check how that support has been formally documented. Membership of the same group does not, in itself, mean that another company will guarantee the franchisor’s obligations.

Practical conclusion: before investing, obtain the required statements, compare the financial years with an accountant and keep a record of the answers to important questions. If you cannot understand how the franchisor funds its operations, postpone your decision until that risk has been clarified.