The franchisor’s financial health: what to check before buying a franchise

A well-known brand is no guarantee that the company behind the network has the resources to maintain training, technology and support for its franchisees. Before buying a franchise, assess the business that will receive your fees and take on contractual obligations towards you. A franchisor’s financial health deserves just as much attention as the viability of your future outlet.

1. Identify the company behind the brand

Start with the registered company name and CNPJ, Brazil’s corporate taxpayer registration number, of the legal entity that will sign the agreement. The brand presented during the sales meeting may belong to a group of companies, but that does not mean they will all be liable for the franchisor’s obligations.

Law No. 13,966/2019, Brazil’s Franchise Law, requires the Franchise Disclosure Document, known locally as the Circular de Oferta de Franquia (COF), to identify the franchisor and its associated companies. It also requires the franchisor’s balance sheets and financial statements for the two most recent financial years to be provided.

Compare the CNPJ numbers in the COF, the financial statements and the draft agreement. If you receive consolidated group figures, ask for clarification on the financial position of the specific company you will be contracting with. Another group company’s positive results do not, on their own, establish the franchisor’s financial capacity.

If the company is newly established and has not completed two financial years, request the available documents and a formal explanation of its history. Do not automatically accept another company’s statements as a substitute: discuss the situation with an accountant and a lawyer before proceeding.

2. Read the accounts with ongoing support in mind

You do not need to be an accounting expert, but you should understand the questions the figures need to answer. Engage an independent accountant to analyse the balance sheet, profit and loss account and any other financial statements provided.

Structure the assessment around four areas:

• Liquidity: are available funds and expected receipts sufficient to meet short-term obligations?
• Debt: are there substantial loans, repayments falling due at the same time or debts putting pressure on cash flow?
• Financial performance: does the company consistently report profits or losses? What explains changes between financial years?
• Asset quality: do the recorded values represent recoverable assets, or do they depend on uncertain payments?

An accounting profit is not the same as cash in the bank. A franchisor may recognise revenue in its accounts yet still struggle to pay its staff if payments arrive late. Equally, a one-off loss does not necessarily indicate financial incapacity: it may warrant further investigation into investment, exceptional expenses and funding sources.

Ask for explanations of significant changes, such as growing receivables, rising debt or falling equity. If the annual statements are no longer recent by the time negotiations take place, request more up-to-date management information. This additional request is a due diligence measure, not a general requirement under Brazil’s Franchise Law to provide monthly information.

3. Understand where the franchisor’s money comes from

One crucial question is how heavily the company relies on recruiting new franchisees to keep its business running. The initial franchise fee may pay for legitimate set-up activities, but it should not be confused with recurring revenue from outlets already trading.

Where available, request a breakdown of revenue from initial fees, royalties, product supplies, services and company-owned outlets. Then ask:

• If new outlet openings slow down, how will support activities be funded?
• Is the support team and infrastructure keeping pace with network growth?
• Are significant amounts owed by franchisees overdue, and what is the financial impact?
• Is the funding needed for expansion already available, or does it depend on future franchise sales?

There is no universal revenue mix that makes a business financially secure. The aim is to assess whether revenue, commitments and sales promises are consistent with one another. A rapidly expanding network may need to recruit staff and upgrade systems before it generates enough revenue to cover those costs.

Ask for important answers to be documented. Projections are assumptions, not guarantees of performance.

4. Cross-check the figures against debts and external indicators

Check the company’s registration status and request the relevant tax clearance certificates, including federal, state and municipal certificates. In Brazil, a ‘positive certificate with the effects of a negative certificate’ can provide clearance even where tax debts exist under qualifying conditions. Do not automatically treat it as evidence of unresolved non-payment: ask your accountant to explain its scope and the conditions involved.

The COF must disclose legal proceedings covered by the Franchise Law, particularly those challenging the franchise system or potentially jeopardising operations in Brazil. With legal support, assess the potential financial exposure arising from them. The existence of a lawsuit does not, by itself, prove wrongdoing.

Trade references can also help identify recurring payment delays. Cross-check this information against the financial statements, rather than drawing conclusions from isolated reports.

Practical takeaway: record each concern, the document needed to clarify it and the response received. Before making any commitments, ask an accountant for a written assessment of the risks identified. If there is insufficient evidence to assess the franchisor’s ability to meet its obligations, postpone your decision.