Preparing Evidence of Profitability Before Franchising Your Business

A busy outlet does not necessarily generate profits you can substantiate. Before developing a franchise network in Indonesia, make sure your financial records explain where revenue comes from, account for all costs and show the profits actually earned. This preparation is more than an administrative exercise: prospective franchisees need a sound basis for assessing the business, while owners need to understand whether past profits have depended on personal sacrifices that do not appear in the accounts.

1. Understand the applicable requirements for proving profitability

The key reference is Indonesia’s Government Regulation No. 35 of 2024 on Franchising (PP 35/2024), which replaced Government Regulation No. 42 of 2007. Do not, therefore, rely on older guidance that refers only to a two-year trading or profit history.

Under PP 35/2024, evidence that a business is profitable consists of:

• The business to be franchised having operated for at least three consecutive years.
• Financial statements for the past two years showing profits, audited by a public accountant with an unqualified audit opinion.

Franchisors classified as micro or small enterprises are exempt from this audit requirement. That exemption does not remove the need to demonstrate profitability or a trading history. Check that your business is correctly classified under the applicable rules, rather than assuming it qualifies simply because it has few outlets.

Evidence of profitability is not the only requirement. The regulation also requires a business system, recorded or registered intellectual property, and ongoing support. This guide focuses on financial evidence; satisfying the financial requirements does not automatically mean that all franchising requirements have been met.

2. Build your evidence file from transactions, not estimates

Start by identifying the business to be franchised and the entity that will act as franchisor. If one company operates several brands or business activities, company-wide accounts alone may make it difficult to trace the performance of the business you intend to franchise. Prepare supporting breakdowns by activity and outlet, but do not replace the accounts with statements presented as though they came from separate entities.

Collect the following documents systematically:

• Sales records from tills, bank accounts and payment providers.
• Purchase invoices, inventory records and stocktake results.
• Payroll records, rent payments, utility bills and marketing costs.
• Records of assets, depreciation, payables, receivables and tax liabilities.
• Evidence of trading throughout the relevant period, such as a continuous record of sales and purchases.

Carry out monthly reconciliations: match recorded sales to receipts, then explain any differences. For example, payouts from sales platforms may already have had commission deducted and may not arrive until the following month. Do not automatically treat every incoming payment as revenue for the current month.

Keep personal and business funds separate. Capital introduced by the owner is not sales revenue, while personal withdrawals are not necessarily operating expenses. Ask an accountant to help classify transactions so that inconsistent accounting treatment does not distort profits.

3. Keep reported profits separate from adjustment analysis

Historical financial statements must reflect actual transactions. However, to assess whether expansion is viable, you also need to understand whether performance depends on circumstances that may not be available to prospective franchisees.

For example, the owner may work full-time without a salary, the outlet may occupy a family-owned building rent-free, or a supplier may offer a temporary special discount. The business may report a profit, but the costs of running the outlet under another operator could differ.

Prepare a separate analysis showing:

1. Results as reported in the historical financial statements.
2. Any exceptional circumstances affecting those results.
3. The estimated impact of replacing the owner’s labour with paid staff or renting premises at commercial rates.

Explain the basis for each estimate. Use relevant rental quotations or verifiable pay ranges, rather than figures chosen to produce an attractive profit. Do not alter historical statements to make them resemble a simulation of a franchisee’s outlet.

Also distinguish profit from cash flow. A profitable business can still run short of cash because stock has built up, receivables remain unpaid or debt repayments are due. Record working capital requirements so that the owner can accurately assess the business’s financial readiness to expand its franchise network.

4. Complete the checks before presenting figures

Assign responsibility for bookkeeping and draw up a list of missing documents. If an audit is required, involve a public accountant during the preparation stage, rather than waiting until a signing date has been agreed with a prospective franchisee. Do not assume that a particular audit opinion will be issued before the audit is complete.

PP 35/2024 requires financial statements for the past two years to be included in the franchise offering prospectus. The prospectus must be provided to prospective franchisees at least 14 calendar days before the agreement is signed. The franchisor must also hold a Franchise Registration Certificate, known as a Surat Tanda Pendaftaran Waralaba (STPW), before entering into a franchise agreement.

Make sure every figure in your franchise presentation can be traced to a clearly identified statement or analysis. Label projections explicitly, disclose their main assumptions and do not present historical profits as a guarantee of a prospective franchisee’s results.

Practical next step: before launching your franchise offering, review three things with your accountant: evidence of your trading history, financial statements showing profits for the past two years, and whether an audit is required. If any of these is not ready, address the gaps first—do not substitute sales promises for evidence.