Check Franchisor Solvency Before Recruiting in New Zealand

A profitable existing business does not automatically make a financially sound franchisor. Once you franchise, you take on commitments to other business owners, often before recurring franchise income can cover them. Before recruiting, check the financial position of the entity making those commitments and establish how you will keep its solvency information accurate. This is an important foundation for trust within the franchising community.

Understand what New Zealand requires

New Zealand has no franchise-specific legislation regulating the ongoing franchisor–franchisee relationship, no statutory franchise disclosure regime and no government franchise registration requirement. That does not remove the need for honest financial disclosure or compliance with general law.

The Fair Trading Act 1986 prohibits misleading or deceptive conduct, unconscionable conduct in trade and unsubstantiated representations. A reassuring statement about your financial strength therefore needs a sound basis. Omitting important financial difficulties can also make the overall picture misleading.

For a franchisor operating through a New Zealand company, the Companies Act 1993 is relevant to directors’ duties and financial decision-making. Contract law also matters when assessing the commitments the franchisor has undertaken. Ask a New Zealand lawyer to explain how these obligations apply to your circumstances.

Membership of the Franchise Association of New Zealand (FANZ) is voluntary, but members must comply with its Code of Practice and Ethics. Its prescribed disclosure contents include a current franchisor solvency certificate. Disclosure must be updated at least annually and supplied at least 14 days before signing a franchise agreement or becoming bound by a preliminary agreement to proceed.

A solvency certificate is not a government approval or a guarantee of future performance. Obtain the current FANZ requirements rather than drafting a generic declaration and assuming it will comply.

Examine the entity that will sign the agreement

Start with the proposed franchisor’s own financial position. Your established outlet may generate healthy cash flow, but that money might belong to a different company. Common ownership does not automatically make funds available to meet the franchisor’s obligations.

Prepare an evidence file with your accountant covering:

• Current management accounts and bank balances.
• Debts, repayment dates and outstanding tax obligations.
• Receivables, including whether collection dates are realistic.
• Existing contractual commitments and contingent liabilities.
• Related-party loans and the terms on which they can be recalled.
• Any funding arrangements on which continued operations depend.

Distinguish accessible cash from assets that cannot readily be converted into money. Equipment, intellectual property and amounts owed by related businesses may have value without providing funds for next month’s bills.

If the franchisor depends on another group company or the founder for support, document the arrangement. Record the amount available, conditions, duration and withdrawal rights. Have advisers assess whether the promised support is both credible and legally effective; an informal intention to help is not the same as committed funding.

Test the ability to honour existing promises

This review is not simply a calculation of how much it costs to launch franchising. Its purpose is to check whether the franchisor can meet obligations as they fall due, including when recruitment or receipts disappoint.

Prepare a cash-flow forecast that separates dependable income from uncertain receipts. Do not treat unsigned franchise sales, unapproved borrowing or hoped-for investment as cash already secured.

Test scenarios such as:

• No additional franchise sales during the forecast period.
• A delayed opening that postpones recurring income.
• A franchisee falling behind on payments.
• Higher support costs for the first franchisees.
• A significant refund or unexpected professional expense.

For each scenario, identify when cash becomes tight and which commitments would be affected. Include training, supplier payments, staff costs and support already promised in signed agreements.

Agree warning points with your accountant and board, where applicable. These might trigger a funding review, tighter spending controls or a pause in recruitment. If the review raises solvency concerns, obtain legal and accounting advice promptly rather than assuming another franchise sale will solve the problem.

Keep financial assurances current

Assign responsibility for maintaining the evidence behind any solvency certificate and financial statements made to candidates. Record who prepared the information, who reviewed it and when it was approved.

An annual disclosure update is not a reason to ignore a material deterioration between reviews. Lost funding, overdue liabilities or a major claim should trigger an assessment of whether information already issued remains accurate. Ask your lawyer what must be corrected and how to handle candidates currently considering an offer.

Keep earlier versions and a record of what each candidate received. Ensure recruitment conversations do not promise financial backing beyond what the documents and evidence support.

Practical takeaway: Before recruiting, have your accountant and franchise lawyer review the franchisor entity’s financial evidence, funding dependencies and solvency disclosures. Proceed on the strength of accessible resources and supportable statements, not anticipated franchise sales.