Buying a franchise: checking the franchisor’s financial health

Before investing in a franchise network, it is not enough to assess whether your own outlet could be viable. You also need to check whether the franchisor has the financial resilience to keep operating and meet its commitments. A recognisable name, new franchisees and well-designed outlets do not, on their own, demonstrate financial stability. This assessment concerns the business on which a significant part of your investment will depend.

1. Request evidence of financial resilience

Start with the latest available annual financial statements and, where available, the accompanying notes and auditor’s report. Request statements for several financial years so that your accountant can assess the company’s performance over time rather than a single snapshot. Supplement these with a recent financial update, as the annual statements may cover a period well before the date you sign.

You can search Greece’s General Commercial Registry (GEMI) for published corporate filings and financial statements where the business is required to publish them. GEMI does not certify financial soundness, nor is it a dedicated register of franchisors. Equally, the absence of published statements does not automatically indicate a problem: the business’s legal form and specific filing obligations need to be considered.

Also request written clarification of:

• Significant borrowing commitments and their upcoming repayment dates.
• Overdue debts or repayment arrangements that affect liquidity.
• Financial dependence on related companies or key providers of finance.
• Significant unresolved disputes that could give rise to financial liabilities.

These are requests for pre-investment due diligence, not a statutory list of documents that must be supplied to every prospective franchisee.

2. Examine where the money comes from

Ask your accountant to distinguish profitability from available cash. A company may report profits yet struggle to meet its current obligations, for example because a substantial proportion of its revenue remains uncollected. Conversely, a loss-making year requires an explanation but is not, in itself, proof that the business cannot continue trading.

The key question is whether the franchisor’s operations are supported by recurring revenue or mainly by upfront payments from new franchisees. Request a breakdown of its main revenue sources: company-owned outlets, ongoing royalties, product sales and initial franchise fees. Dependence on new franchisees does not prove wrongdoing, but it makes it especially important to consider what would happen if growth slowed.

Also examine whether positive results come from normal trading or one-off events, such as asset sales. If you are shown financial information for an entire group, ask separately for the figures of the company that will owe you contractual obligations. The financial strength of another group company does not automatically amount to a binding commitment to provide support.

3. Understand what Greek law provides

Greece has no dedicated law comprehensively regulating franchise agreements as a distinct type of contract. There is no specific statutory pre-contractual disclosure regime, mandatory standardised disclosure document or requirement for franchisors to register on a dedicated franchise register.

This does not permit misleading presentations of a company’s financial position. The general rules of the Greek Civil Code on contracts and obligations apply. In particular, Articles 197 and 198 concern good faith during negotiations and pre-contractual liability. Providing misleading information or concealing material circumstances may give rise to liability, depending on the facts.

The general corporate and accounting obligations applicable to the particular business also apply. Disclosure requirements in codes of ethics are self-regulatory rules and should not be presented as a specific Greek disclosure law. Your lawyer should assess which information is material to your negotiations and how it should be reflected in the contract.

4. Turn your findings into a decision

Work with your accountant to draw up a short table covering each finding, the franchisor’s explanation, the supporting evidence and the implications for your business relationship. Do not treat every negative finding as a reason to reject the opportunity, but do not accept general assurances in place of specific answers.

Test a practical scenario: if fewer new franchisees join, how will the franchisor cover its core operating costs? Ask for evidence supporting the answer, not simply an optimistic growth forecast.

Where you identify a material risk, discuss appropriate contractual representations about the financial position, and an obligation to disclose significant changes, with your lawyer. These provisions need to be clearly defined and are no substitute for financial due diligence. If key information is withheld or contradictions remain unexplained, postpone your decision until the risk has been assessed.

Practical takeaway: Check the franchisor’s financial resilience before committing funds. Ask for documents, independent assessment and evidence-backed answers — not just an attractive picture of growth.