Buying a franchise: checking the franchisor’s financial standing

Choosing a franchise network is not just about brand recognition. It also depends on the financial resilience of the business that will be your contractual counterparty. A franchisor with cash flow problems may struggle to maintain essential systems and services, even if its outlets look busy. Before you commit, assess its financial standing with a lawyer and an accountant, separately from the forecasts for your own outlet.

1. Identify which company is taking on the obligations

Start with the prospective counterparty’s full registered name, Greek tax identification number (AFM) and General Commercial Registry number (GEMI). The sales presentation may describe a group, while the contract is signed by a different, newer company with limited assets. The financial strength of an associated business does not automatically extend to the company granting you the franchise.

Use the public records of Greece’s General Commercial Registry to check the company’s status, who is authorised to act on its behalf, its published filings and its financial statements, where publication is required. Review changes to its name, management, registered office or business objects, and ask for explanations where these affect your working relationship.

Also ask for a simple diagram showing which company collects the fees and which operates the essential infrastructure. If a different company manages the software or order-processing centre, you need to understand its relationship with the franchisor. A brand is not a legal entity: commitments must be tied to specific companies.

2. Look beyond turnover when assessing the finances

Ask for financial statements covering consecutive financial years and, where available, the auditors’ reports. Request interim financial information to understand recent developments. If the company is newly established, the absence of a track record does not prove there is a problem, but it makes evidence of its funding all the more important.

Your accountant should consider the following together:

• Equity and losses: whether there are recurring losses and how they are covered.
• Liquidity: whether cash and expected receipts are sufficient to meet short-term obligations.
• Borrowing: when liabilities fall due and how dependent the business is on refinancing.
• Receivables and transactions with related companies: whether significant amounts are genuinely recoverable and where resources are being directed.
• Auditor’s observations: whether the auditor highlights uncertainties about the company’s ability to continue as a going concern or limitations on the audit.

Distinguish recurring revenue from income generated by new franchisees joining the network. Heavy reliance on initial fees does not, in itself, prove insolvency. It does, however, raise an important question: can the company support its existing franchise network if expansion slows?

Do not treat a tax or social security clearance certificate as an overall guarantee of financial health. Check its validity period, scope and conditions.

3. Check the explanations against day-to-day operations

The figures need to be checked against operational experience. Ask to speak to existing franchisees who have been in the network for different lengths of time, not just those presented as success stories. Ask about specific incidents: have there been system outages, delays in agreed payments or unexpected demands for additional payments?

Record the answers without drawing conclusions from isolated complaints. Look for recurring incidents, dates and documents. Give the franchisor an opportunity to respond in writing to material findings.

Ask for information about significant outstanding disputes, insolvency proceedings and commitments that could affect performance of the contract. Your lawyer can identify the appropriate public-register checks and certificates. No single search will necessarily reveal every claim or dispute.

If confidentiality is raised as a concern, propose a non-disclosure agreement and access to the necessary information for your advisers. Persistent refusal to provide basic supporting documents is a reason to postpone your decision, not automatic proof of unlawful conduct.

4. Relate your findings to Greek law and the contract

Greece has no dedicated law providing a comprehensive framework for franchising, nor a specific mandatory pre-contractual disclosure document with standardised content. This does not mean there is no protection. Articles 197 and 198 of the Greek Civil Code concern good faith in negotiations and pre-contractual liability. Articles 288 and 281 concern, respectively, performance in accordance with good faith and the prohibition of abuse of rights.

The European Code of Ethics for Franchising provides for material written information to be supplied a reasonable time before a commitment is made, but it is not legislation. Check whether and how it binds the particular franchisor. General disclosure obligations do not amount to an unlimited right of access to its books.

Negotiate specific written representations about the information supplied to you, an obligation to notify you of material financial developments, and clear consequences for inaccurate representations. If you are relying on a parent company’s financial backing, ask your lawyer to consider a substantive contractual commitment from that company, rather than a mere reference to its name.

Practical conclusion: before signing, compile a file linking the counterparty’s identity, its financial information and its written commitments. If there are material gaps, postpone your decision until they have been clarified.