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How can I check a franchisor’s financial status before I invest?
Where the franchisor is a limited company in the UK, you can request its latest published annual accounts for a nominal fee from Companies House.
However, you need to be aware a company has nine months to file its accounts from the end of its financial year. This means the information publically available through Companies House could be out of date.
If the franchisor is an overseas business, it may well be that it has had to comply with certain disclosure requirements that include providing detailed financial information. Requesting a copy of the disclosure document would give you information on the franchisor’s financial track record.
Under the British Franchise Association’s code of ethics, a franchisor must present a franchisee with certain financial information under the pre-contractual disclosure requirements as follows:
• A set of the franchisor’s latest certified balance sheet and profit and loss accounts, which should be dated as certified by its auditors or a qualified accountant not more than 12 months prior to the date they are handed to the franchisee.
• Confirmation the franchisor has never had any action taken against it in consequence of debt, save for any genuine disputes to which it was professionally advised that it had at the least an arguable case or, if confirmation cannot be given, a full explanation of the position.
Finally, it’s possible to carry out credit checks on companies through global business databases such as Dun & Bradstreet. A report will cost around £65 plus VAT and will set out historical financial information and information on the risk rating of that company.
Shelley Nadler is a legal director in Bird & Bird’s international franchising team and has many years’ experience of advising on all aspects of franchising.
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