Franchisor accounts: get organised before you franchise

Before turning a business into a franchise, you need to organise not only the outlet’s figures, but also those of the company that will take on the franchisor’s obligations. The distinction matters: a profitable operation does not, on its own, demonstrate the financial capacity of the company that will support expansion. In franchising, accounting transparency helps prospective franchisees assess who they are contracting with and prevents the offer from blurring assets, results and expectations.

1. Understand which statements the law requires

Article 2, item III of Brazil’s Law No. 13,966/2019, the current Business Franchising Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to contain the franchisor company’s balance sheets and financial statements for the two most recent financial years. This law repealed Law No. 8,955/1994.

The key phrase is franchisor company. A sales spreadsheet for the original outlet, the founder’s bank balance or a royalty forecast is not enough. These materials may support an assessment, but they do not replace the required accounting documents.

The balance sheet shows assets, liabilities and equity at a particular date. The income statement sets out revenue, expenses and the profit or loss for the period. The accountant is responsible for identifying and preparing the set of statements applicable to the company under the relevant accounting standards.

The COF must be factual, accessible and written in Portuguese. It must be provided at least ten days before a franchise agreement or preliminary agreement is signed, or any fee is paid to the franchisor or a person or company connected with it. Accounting preparation therefore cannot wait until after the deal has been closed.

2. Separate the franchisor from the original operation

Start by identifying which legal entity will act as the franchisor and which activities are actually recorded within it. Then ask the accountant for a simple overview of the companies involved, including their respective CNPJs (Brazilian corporate tax registration numbers) and financial relationships.

If the same company operates company-owned outlets and also begins franchising, its statements will reflect all those activities. In this case, separate management reports can help prospective franchisees understand how the overall result is made up, without replacing the legal entity’s financial statements.

If the franchisor is a different company, the original outlet’s track record must not be presented as its own. You can provide supplementary information about the operation from which the brand originated, provided its source and scope are clearly identified.

Before finalising the documents, check in particular:

• loans and advances between related companies;
• personal expenses of the owners paid by the company;
• expansion costs paid by the original outlet;
• tax liabilities, employment obligations and amounts owed to suppliers;
• capital contributions and withdrawals by the owners.

Separating these transactions is not merely a matter of presentation. It enables the documents to show accurately who holds the resources and who is responsible for the obligations.

3. Handle a limited track record without inventing requirements

A common question arises when the prospective franchisor has only recently been incorporated: how can it present two financial years that it has not yet completed?

Law No. 13,966/2019 does not impose a general minimum trading period of one year before a business can be franchised. Nor should the requirement for two years of financial statements be confused with permission to fabricate a history that does not exist.

For a newly established company, gather the accounting documents actually available since incorporation and clearly state the incorporation date and the periods covered. Discuss the situation with the accountant and the lawyer responsible for the offer to determine the appropriate documentation in light of the legal requirement. Explaining the limited history should not be treated as an automatic exemption from the obligation.

Do not use another company’s balance sheets to fill the gap. Nor should you present forecasts as actual results. If estimates are provided, identify their assumptions and forward-looking nature in separate material.

4. Establish a checking process before disclosure

Compile a financial reporting file containing the statements, the periods they cover and the company’s identifying details. Maintain version control so that the sales team does not send outdated or incomplete documents.

Arrange a joint review by the accounting, management and legal teams. Check that the registered company name, CNPJ, dates and figures are consistent with the other offer documents. Also prepare clear explanations for significant changes, losses, indebtedness or reliance on funding from the owners, without artificially playing down the facts.

After each financial year-end, schedule a review of the documentation used for new offers. Record which version was provided to each prospective franchisee and when, retaining evidence of delivery and compliance with the statutory notice period.

In practice: before offering your first franchise, confirm whose figures you are presenting, which periods they cover and whether they have been formally prepared. Accounting transparency starts with presenting the company as it actually is, not the expansion you hope to achieve.