Franchise New Zealand | Autumn 2026 | Year 35 Issue 01
32
If you’re thinking about buying a franchise, you will often be presented with
a profit and loss projection indicating what profit a business could earn.
However, there is more to know and consider. The balance sheet is often
skipped over, but it provides vital information to consider when buying a
franchise business.
What is a balance sheet?
Imagine the balance sheet as being like a medical report for a business.
It shows what the business owns (assets), what it owes (liabilities), and what’s
left over for the owner at a specific point in time (equity). The basic formula is
Assets = Liabilities + Equity.
There are five ‘vital signs’ the balance sheet can reveal about a business’s health.
1. Liquidity: Blood Pressure
Liquidity tells you whether the business can pay its short-term bills. Think of
it as a blood pressure reading. If it’s stable, the body functions normally. If it’s
too high or too low, problems follow.
You assess liquidity by comparing current assets, such as cash and stock,
to current liabilities, such as bills due within 12 months. If current assets
comfortably exceed current liabilities, the business has healthy circulation. It
can meet its obligations without stress.
If liabilities are higher, financial pressure builds. You may need to inject extra
cash just to keep things steady.
2. Capital Structure: Heart Strength
The mix of debt and cashed up capital an owner invests is the heart
of the business.
Some debt is normal. Just like a heart works harder during exercise,
borrowing can support growth. But if the business relies too heavily on loans,
the heart may already be under strain.
By comparing total debt to equity, you can see whether the franchise has a
strong, steady financial core or whether it is overworked. You can also see if it
resilient enough to ride out rising interest rates or soft sales. If the debt-to-
equity balance is right, it will mitigate risk of heart failure.
3. Working Capital: Oxygen Supply
Working capital is the oxygen that keeps daily operations alive. It’s the
difference between current assets and current liabilities.
This is the money available to pay wages, rent, suppliers, and utilities while
waiting for customer payments. If working capital is healthy, the business
breathes easily. If it’s tight, the franchise may feel like it’s gasping for air,
constantly juggling bills.
For a new franchise owner, this is critical. Even a profitable business
can struggle if it runs out of oxygen. A business will be under stress if
it underfunds the working capital required. You can read more about
figuring out how much working capital you need at https://franchise.co.nz/
articles/1872.
4. Asset Efficiency: Muscle Strength
Assets are the muscles of the business. Equipment, vehicles, and inventory
should all be working hard to generate income.
If a franchise owns expensive equipment that sits idle or carries excess stock
that doesn’t sell, that’s like carrying unused muscle mass. It adds weight but
not strength.
When assets are used efficiently to produce steady revenue, the business is
lean and fit.
5. Net Worth: Overall Health Score
Equity is the business’s overall health score. It shows the value remaining
after all debts are paid.
If equity is positive and growing, the business has built strength over time. If it
is negative, liabilities outweigh assets. That’s a serious warning sign. It means
the business may require financial rehabilitation or introduction of more
capital before it can thrive.
Buying a franchise is a major commitment. You wouldn’t ignore a medical
report before making an important life decision. The same logic applies here.
The balance sheet won’t
tell you everything. You
still need to review profit
and loss reports and
understand cash flow. But it
gives you the vital signs.
Before you invest, get help
reading the vital signs
to avoid costly problems
tomorrow. Good advice
pays, not costs.
Franchise Accountants check out the
numbers that tell you how healthy a
business is looking
FIVE VITAL
SIGNS
Franchise Management
Franchise Accountants
www.franchiseaccountants.co.nz
Contact
Philip Morrison & Hayden Cargo
P 0800 555 80 20
hcargo@franchiseaccountants.co.nz
pmorrison@franchiseaccountants.co.nz
Advertiser Info
Westpac New Zealand
Franchise Awards 2025
Service Provider of the Year
7-Time Winner