Franchising in Canada: preparing your financial statements

Your business is doing well and you are considering franchising it. Before welcoming your first franchisees into your network, however, one question deserves your attention: what financial statements will you be able to give them? The accounts you use to manage your existing business may not meet the requirements that apply to the future franchisor. Here is how to prepare without unnecessarily delaying your launch.

1. Identify the entity whose accounts will be presented

Start by deciding which legal entity will grant the franchises. Will it be your existing operating company or a new company? This decision affects the contracts, tax arrangements and financial information you must disclose.

A company running a profitable outlet and a newly incorporated company set up to grant franchises do not have the same financial history. The former’s results do not automatically become those of the latter, even if they have the same shareholders.

Prepare a simple diagram showing:

• the company that will sign the franchise agreements;
• the company that owns the trade mark;
• the company that operates the existing outlets;
• the entities that will provide services or receive payments;
• the loans, guarantees and agreements between these companies.

Ask your accountant and franchise lawyer to review this diagram together. The aim is to establish which financial statements must be included and which financial relationships constitute material facts that must be disclosed. Do not create a new company solely to simplify the financial presentation: its disclosure obligations will also need to be assessed.

2. Check the requirements in your target province

In Canada, franchise-specific rules are set at provincial level. Ontario applies the Arthur Wishart Act (Franchise Disclosure), 2000. Manitoba applies The Franchises Act and its regulation. Alberta, British Columbia, New Brunswick and Prince Edward Island also have franchise-specific legislation. In Saskatchewan, the disclosure regime comes into force on 30 June 2026.

In provinces covered by these regimes, the disclosure document must generally include the franchisor’s financial statements for its most recent financial year, prepared to the prescribed standards and level of assurance. A review engagement or audit is normally required, subject to provincial rules and applicable exemptions. A compilation alone should therefore not be assumed to be sufficient without checking.

Special provisions may apply to new franchisors, interim financial statements or certain exemptions. Neither the small size of the business nor its owner’s experience determines whether these provisions apply.

The general rule requires the disclosure document to be delivered at least 14 days before the signing or payment covered by the legislation, subject to applicable exceptions. There is no general procedure for registering the document with an authority that would validate its contents.

In Quebec, no franchise-specific disclosure legislation requires the same documentation. The Civil Code of Québec, particularly its rules on good faith and consent, still applies. The Charter of the French Language must also be taken into account. The absence of a specific regime never justifies misleading financial information.

3. Organise the accounting work before marketing your franchise

Ask your accountant for an engagement letter setting out the work to be done, the documents required and the expected timescale. A review engagement provides limited assurance; an audit provides reasonable assurance, which is higher but not absolute. Neither guarantees future profitability.

To help the work proceed smoothly, gather the following in particular:

• bank reconciliations and supporting documents;
• detailed records of trade receivables and payables;
• details of borrowings, guarantees and contractual commitments;
• records of transactions with related companies;
• evidence supporting opening balances, if the entity is newly established.

Also clarify the accounting treatment of initial franchise fees, royalties and funds intended for advertising. The date on which money is received does not, on its own, determine when it should be recognised as revenue.

Then work backwards to build your timetable: the proposed signing date, the statutory disclosure period, legal review and, before that, completion of the financial statements. Allow extra time to address gaps in the supporting documentation. Avoid promising a signing date until you know when the complete documentation will actually be ready.

4. Keep the documentation consistent and up to date

The financial statements should not be treated separately from the rest of the disclosure. Check that they are consistent with the descriptions of related companies, guarantees and financial obligations in the contractual documents.

Appoint someone to monitor changes, such as new borrowing, a significant guarantee, the loss of an asset or cash flow difficulties. Not every event automatically constitutes a material change in legal terms. Your lawyer must nevertheless be able to assess it promptly and determine whether a statement of material change or another update is needed before the transaction is concluded.

Keep copies of the versions delivered, their appendices and proof of delivery. Also schedule the annual preparation of financial statements and review of the disclosure document.

Key takeaway: before offering your first franchise, bring your accountant and lawyer together to address three points: the franchisor entity, provincial requirements and the preparation timetable. Complete, consistent financial documentation helps safeguard the quality of information within your future franchise network.