How can I check a franchise’s finances before investing?

When considering a new franchise opportunity, understanding the franchisor’s financial position is vital. You need to know whether the business is viable, what level of profitability to expect and whether the financial information provided is reliable.

Here’s what our experts say about assessing a franchisor’s accounts, projections and overall financial track record…

Can I legally get hold of a franchisor’s company accounts?

The ability to access a franchisor’s accounts depends on its legal structure. Shelley Nadler, legal director at Bird & Bird, explains: “All limited companies, no matter how small, have to file annual accounts with the Companies House Registrar. Annual accounts report on the performance and activities of the company during its financial year.”

However, not all businesses make their accounts public. “Some franchisors may operate within a partnership structure. Unless the partnership is a limited liability partnership, there is no public source from which you can obtain the accounts,” Nadler notes.

Limited liability partnerships, like limited companies, have to file accounts. You can access these for a small fee.

It’s also important to remember that publicly available accounts can be out of date. “Companies can file accounts up to ten months from the end of a company’s financial year,” Nadler adds.

Does a franchisor have to provide income projections to a prospective franchisee?

Franchisors are not legally required to provide income projections. However, Nadler explains, “in most cases the franchisor will give the prospective franchisee cash flow or income projections.”

The British Franchise Association (BFA) has guidelines on how to present these projections. “Often franchisors illustrate what sort of gross and net profit you might achieve if you reach certain turnover levels.

“Sometimes franchisors show illustrations of what the franchisor or a franchisee have actually achieved in practice. The franchisor should clearly state which of the alternatives it has chosen for its illustration,” Nadler advises.

“Ask if a franchisor has used actual franchisor or franchisee accounts to provide these projections. If they have used actual accounts, ask to see them. If not, you should ask how they calculated the projections,” Nadler says.

“You should always remember that even if you are provided with a great deal of detailed financial information, financial projections are not promises of performance. The success of your franchise will depend on your own individual skills and commitment,” she adds.

How can I be sure the information provided by a franchisor is accurate?

Verifying a franchisor’s claims requires due diligence. Vicky Wilkes, head of legal at Aston Villa Football Club, recommends speaking with multiple franchisees, including those the franchisor has not suggested, and examining pilot operations for new franchises, alongside obtaining financial information from Companies House.

Nadler explains: “Franchise systems will be at different stages of development. The more franchisees there are, the easier your task will be. This is because there will be many franchisees who you can talk to about what the franchise and franchisor have done for them.”

Wilkes adds: “The British Franchise Association might be able to assist you if the franchise is registered with it.”

Other options include reviewing overseas disclosure documents or performing credit checks through global business databases. “This report will set out historical financial information and information on the risk rating of that company,” Nadler says.

How important is it to get an accountant to check the financial information?

Alan Wilkinson, head of franchise development at The Franchising Centre, stresses: “In my opinion, you should seek professional advice before taking on any business venture.

“A good accountant may well spot something you have missed and be able to advise on the most efficient way to structure your company. It is, however, perhaps more important to understand the basis upon which the franchisor has prepared the figures they are presenting to you.”

An accountant can help interpret turnover, profit margins, break-even points and how expenses are calculated, ensuring you make a fully informed decision.

What happens if the financial forecasts provided by a franchisor prove incorrect?

If a franchisor provides misleading information, a franchisee may have a claim for misrepresentation. Remedies vary depending on whether the misrepresentation was fraudulent, negligent or innocent, and could include damages or rescission of the agreement.

Conclusion

Checking a franchisor’s financial health is an essential part of due diligence before investing. From reviewing publicly available accounts and financial projections to speaking with existing franchisees and seeking professional advice, it’s crucial to understand the basis of any information a franchisor gives you.

As Nadler emphasises, “No franchisor can guarantee with any accuracy any financial performance in a particular case. It is extremely important that you take your own proper accountancy advice in considering the financial aspects of the franchise being offered to you.”

By carrying out thorough research and verification, you can make a confident, informed decision about whether a franchise opportunity is right for you.