How to structure your franchisor business before expanding

Turning a business into a franchise means deciding which company will take on obligations towards future franchisees. This choice affects contracts, accounting, brand rights and the ability to fund expansion. Before offering franchise units, establish the corporate structure that will support your franchise network — without confusing the running of your outlet with the management of the franchisor business.

1. Decide which company will act as franchisor

The company that runs your existing business may not have been set up to license a brand, transfer operating methods and manage relationships with franchisees. The first step is to assess, with legal and accounting advice, whether it will also act as franchisor or whether you will establish a separate legal entity.

Brazilian Law No. 13,966/2019, known as the Franchise Law, does not require you to register a new company with its own CNPJ (Brazilian corporate taxpayer registration number) solely to offer franchises. Separating the companies may be a business organisation and risk management decision, but it should not be presented as a universal legal requirement.

Compare the options, considering:

• the activities specified in the company's constitutional documents and whether they cover the intended operations;
• the ownership structure and management authority;
• the tax regime and treatment of different revenue streams;
• the costs of maintaining another company and its accounting records;
• the contracts, assets and obligations that will remain with the original business.

Do not assume that setting up another company automatically protects you against all liability. The separation must also exist in practice, with consistent documentation, accounts and commercial arrangements.

This stage should result in a documented decision: which company will be the franchisor, who will have authority to represent it and which activities each company will carry out.

2. Organise rights and contracts between the companies

When the original outlet, the brand owner and the future franchisor are not the same legal entity, you need to clarify how they relate to one another. Belonging to the same group is no substitute for authorisation or a clearly defined contract.

Article 1, paragraph 1, of the Franchise Law states that the franchisor must own, or have applied for, the rights to the trade marks and other intellectual property covered by the franchise arrangement, or be expressly authorised by the owner. It is therefore not enough to assume that the new company can grant rights to use the brand simply because it has the same owners as the original company.

Draw up a simple map of the resources the franchisor uses: the brand, training materials, systems, premises and shared staff. For each resource, identify the owner, how it will be used and whether specific documentation is needed.

If employees of the company-owned operation also carry out tasks for the franchisor, have these arrangements reviewed from an employment law and accounting perspective. The aim is to avoid a structure in which everyone works for every company, but nobody can show who employs and pays each person, or who is responsible for each activity.

Also decide which company will sign contracts with service providers and which will receive the revenue specified in the franchise documents. These decisions must reflect how the business actually operates.

3. Separate the finances of the existing operation and the expansion

A financially healthy outlet does not, on its own, mean that the franchisor will be able to cover its costs. The expansion operation may consume funds before it establishes recurring revenue streams.

Prepare a separate budget for the franchisor business, even if it operates under the same CNPJ as the existing business. In that case, cost centres and management reporting help distinguish the activities, but do not replace the legal entity's accounting records.

Identify spending on legal structuring, accounting, systems, staff and administration. Distinguish set-up costs from expenses that will continue after the first franchise outlet opens.

Avoid funding ongoing commitments by relying solely on the sale of the next franchise. Prepare a conservative cash flow forecast and decide how the owners will fund any shortfalls. Capital contributions, loans and payments between companies must be properly documented and accounted for.

If expenses are shared, establish verifiable allocation criteria. For example, the full cost of a room used by both operations should not be arbitrarily charged to the franchisor to improve the outlet's financial results.

4. Make sure the documentation reflects the chosen structure

The corporate structure must be clear to anyone considering joining the franchise network. Law No. 13,966/2019 requires the Circular de Oferta de Franquia (COF), Brazil's franchise disclosure document, to identify the franchisor and the companies to which it is connected, along with their respective CNPJ numbers. It also requires the franchisor's balance sheets and financial statements for the previous two financial years.

If the legal entity has only recently been established, disclose this transparently and seek legal and accounting advice. Do not present another company's financial statements as though they belong to the franchisor, or confuse the age of the brand with the trading history of the new legal entity.

Before you begin marketing franchises, check that the company details are consistent across the COF, the agreement, proposals and payment instructions. The COF must be provided at least ten days before a franchise agreement or preliminary agreement is signed, or any fees are paid to the franchisor or a person or company connected to it.

In practice: proceed only when you can demonstrate which company enters into contracts, what rights it holds, how it funds its obligations and where each item of revenue and expenditure will be recorded.