Buying a Franchise: Check the Franchisor’s Financial Health

Busy outlets do not automatically prove that the franchisor’s business is financially sustainable. Prospective buyers also need to establish whether the company has enough cash and revenue to meet its obligations. Across a franchise network, financial difficulties at head office can disrupt training, supplies, technology and support for many franchisees at once. Before buying, therefore, carry out a focused review of the financial health of your prospective business partner.

1. Ask for accounts for the company you will actually be contracting with

Start by checking that the financial statements provided belong to the legal entity named as the franchisor in the draft agreement. Accounts for a parent company, supplier or flagship outlet are no substitute for those of the entity that will receive your payments and owe obligations to you.

Indonesia has specific franchise rules under Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. These rules cover, among other things, the criteria for franchise businesses, disclosure prospectuses, agreements and registration. Demonstrated profitability and ongoing support are important elements of the franchise requirements.

The disclosure prospectus includes financial statements for the past two years. However, the availability of accounts does not guarantee that a franchisor will always be able to meet its financial obligations. Your review still needs to examine their content, reporting periods and the consistency of the figures.

Request the following documents for review:

• Complete financial statements, including the accompanying notes.
• The auditor’s report, if the accounts have been audited, including the audit opinion and any significant observations.
• More recent financial information if a substantial period has passed since the last reporting date.
• An explanation of financial relationships with other companies in the group.

These additional documents are due diligence requests; the law does not automatically give you unrestricted access to all of them. If necessary, offer to sign a confidentiality agreement so that your accountant can carry out the review.

2. Separate recurring revenue from new franchise sales

The key question is not simply “is the company profitable?”, but “where do its profits and cash receipts come from?” A franchisor may earn revenue from company-owned outlets, royalties, supplies, services and initial franchise fees.

Ask for a breakdown of each source’s contribution over the reporting period. Then ask what would happen if the company took on no new franchisees for a while. Would revenue from the existing network be enough to fund the support team, technology systems and administration?

Heavy reliance on initial fees is not, in itself, evidence of wrongdoing. A growing brand may have a different revenue mix from an established one. However, that reliance makes it all the more important to understand how long-term support will be funded once the initial fees have been spent.

Also check whether profits have risen because of core business activities or non-recurring transactions, such as asset sales. Do not treat a one-off gain as a regular source of funding.

As an exercise, ask the franchisor to explain how it would respond to a slowdown in new outlet openings. A useful answer identifies alternative sources of cash, spending that could be deferred and franchisee services that would be maintained—not merely confidence that the brand will keep growing.

3. Examine cash, debt and transactions within the group

Accounting profit is not the same as available cash. A company may record sales before receiving payment. Conversely, money received in advance may come with obligations to provide services in the future.

With your accountant, compare profit with operating cash flow. If profits look healthy but operating cash flow remains under pressure, ask for an explanation covering receivables, stock, supplier payments and other liabilities.

Focus your review on the following practical questions:

• Can debts falling due soon be paid from available cash and realistically expected receipts?
• Are there overdue payments to key suppliers that could disrupt the network?
• Does the company depend on funding injections from its owners without a written commitment?
• Has money been lent to affiliated companies, leaving it unavailable for operations?
• Are there any material liabilities or disputes that have not been explained?

No single ratio suits every type of business. Compare changes between reporting periods and ask for evidence-backed explanations of unusual movements. A large cash balance on one date does not necessarily reflect normal conditions throughout the year.

4. Use your findings to inform the buying decision

Prepare a one-page summary of your findings, supporting documents, unanswered questions and the implications for your outlet. Distinguish verified information from verbal promises or management projections.

If support depends on another company, ask about the basis of that relationship. A statement that the franchisor is “part of a large group” does not automatically mean the group will cover its obligations. Ask a legal adviser to assess whether any support commitments should be set out in legally binding documents.

You can also negotiate an obligation to notify you of material financial difficulties affecting services to franchisees. Clearly define the triggers, notification procedure and steps to address the problem. This is a contractual safeguard that must be agreed, not an automatic guarantee that all losses will be compensated.

Postpone your decision if the accounts provided relate to a different entity, explanations keep changing or material questions go unanswered. The practical takeaway: do not buy simply because the outlets are busy; make sure the company behind the brand can fund its obligations to you.