Proving Your Business Track Record Before Franchising

A busy business is not necessarily ready to franchise. Before offering a franchise opportunity, owners need to prove that the business has genuinely been operating and making a profit, rather than simply having a name that was registered years ago. In the franchise sector, a verifiable track record is a foundation of trust. Here is how to prepare that evidence without confusing the age of the company, the age of the brand and the length of time the business activity has been carried out.

1. Understand what needs to be proved

Indonesia’s Government Regulation No. 35 of 2024 on Franchising replaces Government Regulation No. 42 of 2007. It sets out the criteria for a franchise, including having a business system, an established record of profitability, recorded or registered intellectual property, and ongoing support.

To meet the profitability criterion, the regulation requires the business activity being franchised to have operated for at least three consecutive years. The supporting evidence also includes financial statements for the past two years showing a profit, audited by a public accountant with an unqualified opinion. Franchisors classified as micro or small enterprises are exempt from this audit requirement.

Exemption from an audit does not mean exemption from proving profitability or the length of time the business has been operating. Make sure the business’s size classification can be substantiated, rather than simply asserting that it is still small.

Also distinguish between two questions: have the legal requirements been met, and is the business model robust enough for franchisees to operate? Complete documentation answers the first question. Reviewing the sources of profit and continuity of operations helps answer the second.

2. Build an operating timeline, not just a file of incorporation documents

Start by clearly defining the business activity you intend to franchise. For example, a company may have traded in food supplies for many years but only later opened a café business. The company’s incorporation date does not automatically prove that the café business has been operating for the same length of time.

Create a working table with columns for the period, activity, location, operator and supporting evidence. Use documents that corroborate one another, such as:

• Licences and documents relating to the opening of the premises.
• Lease agreements or evidence of the right to use the premises.
• Sales and payment receipt records.
• Invoices for purchases of goods or raw materials.
• Payroll records and work schedules.
• Accounting records and relevant tax documents.

This list is an internal review tool, not a list of mandatory attachments prescribed by the regulation. The aim is to make the business’s history traceable through several sources, rather than relying on a single opening-day photograph or social media post.

Flag significant changes, such as a change of legal entity, relocation, a change in concept or a suspension of operations. Do not automatically assume that every change breaks continuity, but do not assume that none has any effect either. Seek a legal assessment where continuity of the business activity to be franchised is unclear.

3. Link the operating history to evidence of profitability

A well-organised timeline is not enough if the financial records do not reflect the same business activity. A company with several business lines needs to be able to explain how its financial statements relate to the business it intends to franchise. Profits from another business line must not be used to conceal weaknesses in the model being offered to franchisees.

Ask the person responsible for finance to reconcile sales, bank receipts, purchases, stock and operating expenses. Discrepancies should be explained and corrected through proper accounting procedures, not by changing figures to make them look attractive.

For the internal readiness review, identify costs that have not been clearly recognised so far. Examples include unpaid work by the owner, rent-free use of a family-owned building, or staff support from another business. These arrangements can make company-owned outlets appear more profitable than a franchisee’s outlet might be.

Keep historical financial statements separate from management’s adjusted calculations. Historical statements record what actually happened; adjusted calculations help assess whether the model remains viable when normal costs are applied. Do not present adjusted calculations as though they were actual trading results.

If an audit is required, involve a public accountant early enough. Scattered documents, unclear opening balances and stock that has never been counted can make the audit difficult. An audit is not simply a formality to complete just before offering franchises.

4. Record the decision to proceed or postpone in writing

Conclude the review with a summary approved by the owner, the person responsible for finance and whoever reviews the legal aspects. Record the activity to be franchised, the verified operating period, the status of the financial statements and any unresolved issues.

Use three internal outcomes: ready to continue preparations, further evidence required, or postponement needed. Assign responsibility and corrective action for each shortcoming. Avoid declaring the business ‘ready’ simply because a prospective franchisee is willing to pay.

Retain original documents alongside well-organised copies, and restrict access to sensitive financial information. This file provides a basis for further checks; it does not replace obligations relating to the franchise prospectus, agreement and registration.

Practical step: draw up a single operating timeline and cross-check it against the financial statements before accepting a commitment from a prospective franchisee. If the operating history or profitability cannot yet be substantiated, address those gaps first.