Buying a Franchise: Checking the Franchisor’s Financial Stability

When joining a franchise network, it is not enough to assess whether you can fund your own launch. You also need to check whether the franchisor can sustain the system you will depend on: business model development, specialist staff, digital tools and network coordination. Its financial difficulties can become your operational problem even if you pay all your fees on time. Check its financial stability before signing, separately from the brand’s profile and the prospects for your own outlet.

1. Establish whose finances you are actually checking

The company behind the brand, the company signing the agreement and the company providing support may not be the same legal entity. In an international franchise network, your contractual counterparty may be a local rights holder, while concept development and technical support sit with another company.

Start by recording the full legal name, registered office and identification details of the company you will be contracting with. For a Croatian company, check the details in the Court Register (Sudski registar), including the people authorised to represent it and any entries relating to proceedings that could affect its operations. For foreign entities, use the relevant official register in their country.

Then clarify:

• who receives your initial and ongoing fees;
• who employs the staff responsible for support;
• who contracts for key IT services;
• whether there is a binding commitment of support from the parent company or merely a shared name.

The group’s financial strength does not automatically guarantee your franchisor’s obligations. If the sales presentation relies on the parent company’s results, ask why those results are relevant to the agreement you will be signing. A newly established local company is not necessarily an unsuitable partner, but it calls for clearer evidence of funding and responsibility for support.

2. Read the accounts with the system’s sustainability in mind

For a Croatian franchisor, review the available annual financial statements in the Register of Annual Financial Statements maintained by Croatia’s Financial Agency (FINA). The availability and scope of the documents depend on the reporting obligations of the particular entity. Ask for more recent figures too, as annual accounts describe a past period, not necessarily the company’s current liquidity.

With an accountant, compare several consecutive years where available. One good result can mask longer-term difficulties, while a loss in a single year may reflect investment backed by a credible funding plan.

Pay particular attention to four areas:

• Equity: are there accumulated losses, and how do the owners intend to cover them?
• Liquidity: can the company meet its short-term obligations with the funds available?
• Receivables: is revenue growing while payments from customers and franchisees are arriving more slowly than expected?
• Debt: when do significant liabilities fall due, and are arrangements in place to fund their repayment?

If an auditor’s report is available, read the opinion, any qualifications and any comments on going concern. The absence of an audit is not a warning sign in itself, as not all businesses are required to have one.

Do not look for a single magic indicator. The aim is to understand whether the franchisor can pay for the people and services needed to keep the network running, rather than simply report an accounting profit.

3. Check whether support depends on continually selling new franchises

Initial fees can be a legitimate source of revenue, as bringing a new franchisee into the network involves costs. The risk arises when the franchisor cannot fund its existing commitments without a constant flow of new franchisees.

Ask for an explanation of the revenue mix: how much comes from initial fees, ongoing fees, company-owned outlets and other sources. These figures may not be shown separately in public accounts, so ask management for an explanation and supporting information that an accountant can reconcile with the accounts.

Ask a specific question: How would you maintain your current level of support if no new franchisees joined for an extended period?

A good answer explains funding sources, costs and priorities. Simply announcing plans for rapid expansion is not an answer. In particular, check whether support staffing is keeping pace with network growth and whether funds are available to maintain essential tools.

Pressure to pay quickly, unexplained changes to the company receiving your payments or a refusal to discuss significant losses are reasons to investigate further. They are not proof of wrongdoing in themselves, but they should not be ignored.

4. Turn your findings into conditions for proceeding

Croatia has no dedicated franchise law or mandatory franchise-specific pre-contractual disclosure document. The contractual relationship is governed by the Civil Obligations Act, including the principle of good faith and fair dealing and the rules on negotiations. Financial reporting and company status are governed, among other legislation, by the Accounting Act and the Companies Act.

This does not mean you have an automatic right to all internal financial information. Request its disclosure as a condition of continuing negotiations, subject to a confidentiality undertaking where appropriate. Inclusion in the Croatian Chamber of Economy’s (HGK) Franchise Register is neither confirmation of solvency nor a substitute for your own due diligence.

If you identify significant dependence on another company, discuss an appropriate guarantee or a direct contractual commitment from that company with a lawyer. Also agree on notification requirements for circumstances that seriously threaten the provision of support. Such clauses do not eliminate insolvency risk, and their enforceability needs to be checked.

Practical conclusion: before signing, you need to know who owes you support, how they fund it and what happens if those funds dry up. If the answers remain unclear, postpone the decision, not the checks.