Financial statement requirements for franchisors

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franchisors, financial statements, restaurant, accountingIf you’re looking to start a franchise, be sure to look into all rules and requirements set by the Federal Trade Commission, or FTC. There are many items required to stay in compliance. Providing audited financial statements is one of those. Here is a brief overview of the financial statement requirements for U.S. – domestic franchisors.

  • You must provide three years of audited financial information. If you have not been in business for three years, you must disclose that you are unable to provide the required three years of information.
  • All other disclosures must compare at least two fiscal years.
  • The audited financial statements may be prepared in two different manners. One is according to Generally Accepted Accounting Principles in the U.S., or GAAP. The other is as permitted by the U.S. Securities Exchange Commission, or the SEC, with reconciling notes. However, in both instances, the audit must be completed according to U.S. Generally Accepted Auditing Standards.
  • If the Franchisor has a parent company, the financial information of the parent is only required if the parent has committed to post-sale obligations or guarantees the obligations of the franchisor.
  • The financial statements of an affiliate of the Franchisor may be substituted for the Franchisor’s if the statements meet the requirements and the affiliate absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor to the franchisee under the franchise agreement.
  • Subfranchisors, when an individual takes on both pre-sale activities and commits to perform under the franchise agreement, must have his or her financial information disclosed with the Franchise Disclosure Document.

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However, if a company looking to franchise is new, there is a three year phase-in component to the audited financial statements requirement, as follows:

  • In Fiscal Year One, you may have an unaudited opening balance sheet presented.
  • In Fiscal Year Two, you must have an audited balance sheet opinion of your financial condition based on your opening balance sheet from FY1 as well as a closing balance sheet of FY1
  • Fiscal Year Three is when you are required to begin having fully audited financial statements.

Outside of audited financial statements, there are state level requirements that can vary from state to state. These requirements should be researched based on targeted locations and should not be taken as a broad umbrella.

Alyssa Borrego