Prepare Audited Accounts Before Franchising Your Business

A busy business does not necessarily have financial records ready for franchising. Strong sales figures may sit alongside finances muddled by the owner’s personal funds, new outlet costs or unrecorded expenses. Before building a franchise network, owners need to prepare financial evidence that can be examined. Audited accounts support this process, but their value depends on accurate underlying records and a clear explanation of business performance.

1. Understand the role of audited accounts in franchising

In Malaysia, franchising is governed by the Franchise Act 1998, including amendments under the Franchise (Amendment) Act 2020, which came into force on 28 April 2022. Registration guidance from Malaysia’s Ministry of Domestic Trade and Cost of Living (KPDN) lists copies of audited financial statements for the latest three years among the documents required for a franchise registration application.

This requirement is more than an administrative formality. These statements provide a basis for assessing a prospective franchisor’s financial position, including assets, liabilities, revenue and expenditure. Prospective franchisees also need to understand the financial health of the party that will support them throughout the franchise relationship.

However, an audit does not confirm that a business concept is certain to be profitable. Nor does it guarantee that the company’s performance will be replicated at every franchisee’s outlet. Company accounts may cover several brands, wholesale sales and other activities outside the franchise concept.

If your company does not yet have three years of audited accounts, seek clarification from the Registrar of Franchises about your application before setting a launch timetable. Do not assume that management accounts or another entity’s records can automatically replace the required documents.

2. Put your records in order before handing them to the auditor

Start by reconciling each source of records with the accounting ledger. Figures from sales systems, bank statements, delivery platforms and supplier invoices must be traceable. Do not wait until the audit begins to investigate discrepancies.

Prepare the following checklist for each financial year:

• Sales: reconcile cash receipts, card payments and platform receipts, allowing for refunds and associated charges.
• Purchases and stock: ensure invoices are complete, stock count records are retained and adjustments for damaged goods are supported by evidence.
• Payroll: reconcile employee records, salary payments and statutory contributions.
• Assets: distinguish equipment purchases from routine maintenance expenses, applying the appropriate accounting treatment.
• Outstanding balances: review amounts owed by customers, amounts due to suppliers and outstanding loans from the owner.

Separate personal transactions from business transactions. If the owner advances money to buy stock, record it correctly; do not let that payment disappear from operating costs. Equally, money withdrawn by the owner is not necessarily a business expense.

Appoint an internal co-ordinator to gather documents and respond to the auditor’s queries. Retain original files and records of corrections so that every change has a clear audit trail. The auditor’s role is to conduct the audit, not to take over management’s responsibility for preparing complete records.

3. Separate the franchise concept’s performance from the company accounts

Once the underlying records are in order, prepare management reports showing the performance of the concept you intend to franchise. These reports supplement the audited statements; they do not replace them and must not be presented as though they too have been audited.

Use separate codes for each outlet and main business activity. Distinguish shop sales, online sales, wholesale supplies and other income. This prevents profits from unrelated activities from masking weaknesses in the shop operations you intend to offer to franchisees.

Pay attention to centrally funded costs as well. For example, a shop may appear profitable because head office pays for supervisors’ salaries, accounting services and marketing. Establish a reasonable, consistent allocation method that you can explain, rather than choosing one simply to make outlet profits look better.

If the owner works without drawing a salary, disclose this in the management analysis. Show a separate estimate of the cost of replacing the owner’s work with paid staff. Label the figure as an estimate and explain how it was calculated; do not alter historical figures in the audited statements to include it.

The aim is to distinguish three things: reported historical results, management cost allocations and assumptions used in the analysis. A prospective franchisor must be able to explain these differences in plain language.

4. Use audit findings to decide whether to proceed

Discuss the auditor’s report and any matters raised before proceeding with your franchise plans. Do not simply check whether the report has been signed. Understand issues such as insufficient stock evidence, debts that may be difficult to recover or excessive reliance on loans from the owner.

Prepare a brief action log setting out each issue, the person responsible, supporting documents and the target completion date. Where corrections involve accounting treatment, seek advice from the relevant accountant and auditor.

Before approving the next step, make sure management can answer these questions: Are the records complete? Can the franchise concept’s performance be identified? Have the main financial weaknesses been understood and addressed? If not, postpone expansion rather than filling information gaps with sales promises.

Practical takeaway: gather three years of records, reconcile transactions and separate out the franchise concept’s performance. Audited accounts backed by clear explanations help build a franchise network based on evidence, not merely the owner’s confidence.