Franchising in Canada: preparing your financial statements

A profitable business is not necessarily ready to provide the financial statements required to offer franchises. Before recruiting your first franchisees, you need to establish which accounts to disclose, what work to commission from your accountant and when the documents will be available. This preparation helps you welcome future members of your franchise network with consistent financial information that meets the applicable requirements.

1. Establish the requirements before commissioning the work

In Canada, franchise disclosure obligations are governed at provincial level. Financial statements are therefore not simply an optional addition to your sales materials: they may be a mandatory part of the disclosure document given to a prospective franchisee.

In Manitoba, the Franchises Act and its regulation govern this disclosure. Provincial guidance states that the franchisor’s financial statements must be included in the disclosure document unless the franchisor meets the applicable exemption criteria. In New Brunswick, section 5 of the Franchises Act also requires the prescribed financial statements.

In provinces that require this disclosure, the requirements generally cover the franchisor’s financial statements for its most recent financial year, accompanied by an audit or review engagement report, subject to the applicable rules and exemptions. A tax return, an internal balance sheet or a cash flow spreadsheet should not automatically be treated as a substitute.

Quebec has no specific franchise legislation imposing the same documentation requirements. The general provisions of the Civil Code of Québec, particularly those concerning good faith and consent, remain relevant. The absence of a mandatory format does not justify presenting misleading financial information.

First step: ask your lawyer to confirm the applicable requirements, then pass them to your accountant before agreeing the scope of their work.

2. Present the accounts of the correct legal entity

Prospective franchisees need to understand the financial position of the business they are entering into an agreement with. However, the company operating your original outlet is not necessarily the one that will grant the franchises.

Prepare a fact sheet setting out:

• the legal name of the franchisor signing the agreement;
• its incorporation date and financial year-end;
• the entities that receive its revenue or bear its expenses;
• loans, advances and other transactions between related companies;
• the financial statements already available and the type of report accompanying them.

If you have set up a new company to develop the franchise network, do not simply replace its accounts with those of your original business. The success of the original operation does not mean that the new company has the same resources.

A recently incorporated entity may not yet have completed its first financial year. In that case, ask your accountant and lawyer to establish together which documents are required, including whether an opening balance sheet is needed. Do not assume either that a new company is exempt or that consolidated accounts will always be acceptable.

3. Plan the accounting engagement without cutting corners

An audit and a review engagement do not provide the same level of assurance. An audit provides reasonable assurance, while a review engagement provides limited assurance. A compilation engagement alone provides no assurance. Your choice must therefore meet the applicable rules, rather than simply fit the available budget.

Prepare the records the accountant will need: bank reconciliations, key contracts, trade receivables and payables, debts, transactions between related companies and supporting documents for major assets. Ask for their own checklist rather than assuming that the records prepared for your tax return will be sufficient.

Also distinguish between three sets of information:

• the franchisor’s financial statements, which describe its financial position;
• the existing outlet’s results, which relate to its operations;
• development budgets, which set out assumptions about the future.

These documents can complement one another, but they are not interchangeable. Encouraging results at your outlet do not, on their own, prove that the franchisor has the resources needed to fulfil its contractual commitments.

4. Build the accounting work into your disclosure timetable

In Manitoba and New Brunswick, subject to the applicable exceptions, prospective franchisees must receive the disclosure document at least fourteen days before the first signing or payment covered by the legislation. This waiting period does not replace the time needed to prepare the financial statements.

Work backwards when planning your timetable: availability of accounting records, the accountant’s work, legal review, compilation of the disclosure document and, finally, delivery to the prospective franchisee. Avoid promising a signing date while these stages remain uncertain.

Appoint someone to take responsibility for annual updates as well. Between financial year-ends, financial difficulties or a change in financing could constitute a material change requiring separate disclosure before the agreement is concluded. Have the situation assessed rather than waiting for the next set of accounts.

Key takeaway: before offering your first franchise, bring your lawyer and accountant together to answer three questions: which entity must present its accounts, what report is required and when will the complete documentation be ready?