It’s estimated that on average, one new franchise concept is being created each day this year. That’s hundreds of new franchise concepts annually, which could lead to thousands of new business locations nationwide. And it’s not just food-related enterprises — businesses in all industries are electing to grow via franchising instead of opening their own new locations.
The FTC’s Franchise Rule is designed to ensure prospective purchasers of franchises receive the material they need to weigh the risks and benefits of investing in a franchise. That’s when a quality accounting firm is so important. To comply with the rule, franchisors have to provide financial disclosure documentation containing 23 specific items informing the potential franchisee about the franchise, its officers, and other franchisees.
First, franchisors must provide three years of audited financial statements. If the business has not been operating for three years, they must disclose that they are unable to provide the required three years of information. All other disclosures must compare at least two fiscal years. The audited financial statements can be prepared according to Generally Accepted Accounting Principles (GAAP) or on a basis permitted by the Securities and Exchange Commission (SEC).
If the company looking to franchise is new, there is a three-year phase-in for the audited financial statement requirements. In fiscal year one, the company may present an unaudited opening balance sheet. In fiscal year two, the business must submit an unaudited balance sheet opinion of the company’s financial condition based on its opening balance sheet from year one and the closing balance sheet of year two. In year three, the company will be required to have fully audited financial statements.