Buying a franchise: check the franchisor’s financial health

When buying a franchise, your first concern is usually whether your outlet will be profitable. It is equally important to ask whether the franchisor will still be able to meet its obligations in a few years’ time. A financially weak partner may cut back on training, neglect development or discontinue essential services. Before joining a franchise network, check its financial health, not just the appeal of its brand.

1. Establish which company you are actually checking

The brand name is not necessarily the name of the company you will sign a contract with. A presentation may showcase the achievements of an international group, while your contractual partner is a recently established local company with few assets. If you are dealing with a master franchisee, its financial capacity matters too, not just the reputation of the international franchisor.

Take the partner’s full registered name, registered office and company registration number from the draft agreement. Then draw up a simple overview: who receives the initial payment, who receives the ongoing fees and who is responsible for providing each service. If these are different companies, check each one on which your business will significantly depend.

For Slovenian companies, use the Slovenian Business Register and the annual reports publicly available through AJPES, Slovenia’s Agency for Public Legal Records and Related Services. Check the company’s authorised representatives, incorporation date and published changes. For a foreign partner, look for comparable information in its national register. A group’s financial strength does not automatically guarantee its subsidiary’s obligations. If the partner refers to support from its parent company, ask whether a legally binding guarantee exists.

2. Read several years of reports, not just the latest profit figure

Review several consecutive annual reports with an accountant, where available. A single good year may conceal earlier losses or one-off income. Equally, a loss alone does not prove that a partner is unsuitable: it may reflect investment in development, but how that development is funded must be clear.

Focus on the following questions:

• Equity: does the company have sufficient equity to absorb losses, or is its capital base shrinking?
• Short-term liabilities: does it have enough readily available funds to meet upcoming payments?
• Receivables: are they growing faster than revenue, and why do they remain unpaid?
• Debt: when do loans fall due, and how does the company intend to repay them?
• Cash flow: does the business generate cash, or does the company depend on new loans and capital contributions from its owners?

Not every company publishes equally detailed financial statements. If a cash flow statement is unavailable, ask your accountant to explain the limits this places on the assessment. A substantial accounting profit does not necessarily mean there is cash in the bank.

Read the notes to the financial statements and the auditor’s report, if there is one. In particular, seek clarification on any going concern warnings, large loans to related companies and significant developments after the financial year-end.

3. Check where the money to run the network comes from

As a prospective franchisee, you need to know whether your partner funds the system through ongoing operations or mainly through initial fees from new franchisees. Dependence on continually recruiting new members can become a problem when expansion slows.

Ask for a revenue breakdown covering initial fees, ongoing fees, sales of goods and company-owned outlets. If the company is unwilling to share this information on commercial confidentiality grounds, suggest a review under a confidentiality agreement. A refusal is not evidence of wrongdoing, but it does leave greater uncertainty when making your decision.

Also ask how the company would fund its support team if it opened no new outlets for a while. Compare the answer with the actual figures and the experiences of existing franchisees. With their consent, ask whether they have noticed delayed reimbursements, staff cuts or unusual requests for early payment.

Advance payment is not inherently suspicious. However, repeated urgent requests without a clear business explanation warrant further checks.

4. Understand Slovenia’s legal framework and the limits of the data

Slovenia has no specific franchise law, compulsory franchise register or dedicated statutory disclosure document for franchise purchases. A company’s entry in the business register is therefore not an endorsement of the quality of its franchise offer.

The Obligations Code (Obligacijski zakonik, OZ) is relevant to negotiations and the contractual relationship, particularly the principle of good faith and fair dealing and the rules on liability during negotiations. The Companies Act (Zakon o gospodarskih družbah, ZGD-1) governs obligations relating to accounting records, annual reports and their publication. The Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju, ZFPPIPP) is relevant to insolvency proceedings.

Also check public notices concerning insolvency proceedings through AJPES. The absence of a published proceeding does not prove that a company can pay its debts. Annual reports cover a past period, so if a significant amount of time has elapsed, request more recent interim figures.

Franchise associations’ codes of conduct can provide a useful benchmark for responsible behaviour within a franchise network, but they are neither a state-backed financial guarantee nor a substitute for investigating the company.

5. Turn your findings into conditions for signing

Work with an accountant to draw up a short list of identified risks, missing supporting documents and explanations needed. Then consult a lawyer about suitable contractual safeguards: written confirmation of specific financial representations, notification of significant financial difficulties or an appropriate guarantee from a financially stronger related company. These rights must be expressly agreed; they do not arise automatically.

Practical takeaway: do not sign solely on the strength of the brand’s reputation. First check the company you will be contracting with, several years of financial statements and the source of funds used to meet its obligations. If you cannot resolve key uncertainties, postpone your decision.