Buying a franchise: check the franchisor’s financial resilience

When joining a franchise network, you will usually assess the prospects for your own outlet. It is just as important to establish whether the franchisor can maintain shared systems, develop the business concept and meet its obligations throughout your relationship. A strong consumer brand alone tells you little about the finances of the company you will be contracting with. Carry out these checks before signing or paying substantial initial fees.

1. Establish which company underpins the relationship

Start with the company named in the draft agreement. Note its registered name and Finnish Business ID (Y-tunnus), and check its details in the Finnish Trade Register. Do not rely on the network’s trading name: your contract partner may be a different company from the brand owner or the business running the network’s company-owned outlets.

Ask the franchisor for a simple outline of its corporate structure. Establish which company receives your initial franchise fee, invoices ongoing fees, employs support staff and procures shared IT systems. If these functions are spread across several companies, ask what agreements secure their cooperation.

Turn your checks into a practical list of questions:

• Which company is responsible for delivering the services promised to me?
• Does that company have its own staff, assets and recurring income?
• Does the business depend on loans from its parent company or other financial support?
• Is that support backed by a written commitment, or is it simply the current practice?

A group’s reputation or its parent company’s strong results do not, in themselves, mean that the parent is liable for your contract partner’s debts. If the franchisor relies on group support, ask a professional adviser to assess how binding that support is. Do not treat a verbal promise of group support as financial security.

2. Read the accounts alongside up-to-date information

Obtain the available annual accounts for several financial years and, where necessary, request the latest interim report. Older accounts describe the past, whereas your decision to join concerns a future relationship. Ask for the notes to the accounts and any auditor’s report too, rather than just a summary of the profit and loss account.

Review the material with an accountant or business finance adviser. The aim is not to find a single acceptable financial ratio, but to understand where the money comes from and how it is spent. A loss-making year may reflect a justified development project, but recurring losses combined with a weak financial position require closer investigation.

Pay particular attention to:

• Profit trends: does the ongoing business cover normal operating costs?
• Liquidity: is enough cash available to meet near-term obligations?
• Debt structure: are substantial loans due for repayment soon, and how will those repayments be funded?
• Quality of receivables: are large amounts owed by franchisees or group companies genuinely recoverable?
• Auditor’s findings: does the report contain qualifications, observations or information about uncertainty over the company’s ability to continue as a going concern?

Also check the available public records for tax debts and insolvency proceedings. A register entry alone should not determine your buying decision, and the absence of entries does not guarantee solvency. Request written explanations of any unclear points and assess them alongside the other information.

3. Test whether the network’s finances can withstand slower recruitment

A franchisor’s income may come from initial franchise fees, ongoing franchise fees, sales of goods and profits from company-owned outlets. The balance between these sources indicates how heavily the funding of shared services depends on new franchisees joining.

Ask for a breakdown of one-off and recurring income. Detailed customer-level information may not be available for disclosure, but the franchisor should be able to explain its revenue model clearly. Ask how support for existing franchisees would be funded if the opening of new outlets slowed significantly.

Work through a qualitative stress test with the franchisor. What would happen if no new franchisees joined for a while, some outlets closed or a key system became more expensive? Which costs would be cut first? Could the services promised to existing members of the network deteriorate?

Identify critical dependencies at the same time. If a single external supplier runs the entire network’s booking or point-of-sale system, ask how service continuity would be maintained if the franchisor ran into payment difficulties. The aim is not to assume bankruptcy, but to identify situations in which another company’s problems could bring your own sales to a halt.

Above all, watch for inconsistencies: marketing promises strong growth and extensive support, but the financial information shows limited resources with no credible plan to strengthen them. Growth alone is not proof of financial resilience.

4. Turn your findings into a well-founded buying decision

Finland has no dedicated franchising law, no legally required standard franchise disclosure document and no specific registration system for franchise agreements. A company’s entry in an official register therefore does not mean that it has received separate approval to operate a franchise network or that its financial resilience has been verified.

The relationship is governed by general legislation, including Finland’s Contracts Act, Unfair Business Practices Act, and competition and trade mark law. Misleading information must not be provided, and general contractual principles of good faith affect the disclosure of material information. However, this does not give you an unrestricted right to all of the franchisor’s internal financial records. Buyers must also actively investigate the information available to them.

The Finnish Franchising Association’s code of ethics is binding on its members. It is not law, and membership does not guarantee a company’s solvency. Financial checks are therefore necessary even when the network belongs to the association.

Finally, prepare a written decision memo: record what you checked, what remains unresolved and why you consider the risk acceptable. If significant uncertainty remains unresolved, postpone committing. Also discuss the timing of advance payments and any potential security with a lawyer: a contractual obligation to refund payments does not, by itself, guarantee that you will recover your money in the event of insolvency.

Practical summary: check the correct contracting company, its current financial position and how ongoing services are funded. Join a franchise network only once you understand what underpins the franchisor’s ability to deliver on its promises.