Buying a franchise: check the franchisor’s financial position

When buying a franchise, you need to look beyond whether your own business could be profitable. It is equally important to establish whether the franchisor has the money, people and operational resources to sustain the support it promises. Even a well-known brand does not automatically make a reliable contractual partner. Before joining a franchise network, make a separate assessment of the franchisor’s financial and operational capacity.

1. Identify the company that is actually taking on the obligations

The brand name in the promotional material and the company named in the contract are not necessarily the same. You may be signing with a Hungarian partner rather than the international brand owner, while another business provides training, IT support or purchasing coordination.

Ask for the contracting company’s full legal name, company registration number, tax number and details of its representative. Cross-check these against the company register, the draft agreement and the payment instructions. If you are asked to pay the initial franchise fee into another company’s account, obtain written clarification of the legal basis for this and confirmation that the payment will discharge your obligation under the contract.

Draw up a simple table of responsibilities:

• Who is signing the contract with you? This company will be your primary contractual partner.
• Who receives your payments? Ask for a clear explanation of any discrepancies.
• Who provides the support? Identify the service provider, not just the brand name.
• Who is liable if support is not delivered? Outsourcing a task should not leave contractual responsibility unclear.

Membership of a well-capitalised corporate group does not, in itself, mean that the parent company is liable for the Hungarian partner’s debts. If such backing is claimed, ask to see the specific undertaking.

2. Read the accounts alongside an explanation of the business

Published accounts for Hungarian companies can be checked through Hungary’s Electronic Financial Reporting Portal (Elektronikus Beszámoló Portál). Where possible, review several consecutive financial years rather than just the latest results. The balance sheet, profit and loss account and, where available, notes to the accounts together provide a useful picture.

With an accountant’s help, examine changes in equity, recurring losses, current liabilities and available cash. Also check whether reported revenue is accompanied by substantial receivables that have not yet been collected. Profit is not the same as the ability to pay: a company that is profitable on paper can still face a temporary cash shortage.

One particularly important question is how ongoing support for the franchise network is funded. Ask how the franchisor’s revenue is split between fees from new franchisees, recurring payments from operating outlets and other activities. The published accounts may not reveal this, so request a separate explanation.

Reliance on initial franchise fees does not, on its own, prove that there is a problem. It does, however, justify asking what happens to the support team if expansion slows temporarily. Nor is a new franchisor’s limited financial track record an automatic reason to rule it out, but in that situation the funding available and the security behind its commitments become more important.

Accounts record a past position. Ask about significant changes since the reporting date, particularly the withdrawal of funding, substantial debts or the loss of key service providers.

3. Check whether financial resources translate into real support

Complement your financial review with operational checks. Ask the franchisor to explain who handles new openings and who supports existing franchisees. Establish whether these are employees or external service providers, and who steps in if a key person becomes unavailable.

Speak to several current franchisees, ideally in different locations and with varying lengths of experience in the network. Rather than asking for trade secrets or access to someone else’s full accounting records, ask about their direct experience:

• Does the promised help arrive on time?
• Has their main contact changed frequently?
• Have any services failed to materialise because of insufficient capacity?
• Have they experienced persistent disruption at head office?

Do not draw a firm conclusion from a single poor experience. However, compare recurring problems reported independently by different franchisees with the franchisor’s responses. Record facts, explanations and unanswered questions separately. This helps ensure that an enthusiastic brand presentation does not overshadow the evidence you need to make a decision.

4. Turn identified risks into contractual protection

Hungary has no standalone, comprehensive franchise law, but franchising is not unregulated: Act V of 2013, the Civil Code, contains specific provisions on franchise agreements. General rules on contracts, cooperation and the provision of information are also important. There is no generally mandatory US-style franchise disclosure document, so do not assume that you will automatically receive a complete financial due diligence pack from the franchisor.

Based on your findings, discuss with a lawyer whether substantial advance payments should be linked to delivery milestones. Specify which services must be demonstrably delivered before each instalment becomes due. Where appropriate, negotiate separate security or a parent company undertaking; neither is provided automatically.

Also ask for a notification clause requiring the franchisor to report changes that materially threaten its ability to deliver support. The agreement should address service interruptions and set out a process for restoring delivery. Do not treat unilateral withholding of fees as an automatic remedy: whether it is lawful must always be assessed separately.

Practical takeaway: before paying, make sure you have identified your contractual partner, assessed its financial position and verified its capacity to provide support. Back up your confidence in the brand with this evidence.