Now that you have decided to franchise your business model, establishing the proper financials is essential.  Your financial statements must be included in the Franchise Disclosure Document (FDD), which is distributed to prospective franchisees and scrutinized by state regulators.  This fact sheet is geared at answering some common questions regarding franchisor financial requirements.

 What financials must be included in my initial FDD offering?  Under federal law, start-up franchisors are required to include an opening balance sheet in Item 21 of the FDD.  If there are transactions (either debits or credits) after the initial capitalization of the franchisor entity, additional financials will be required.  Under federal law, start-up financials are not required to be audited.  Some states, however, require start-up financials to be audited.

 How much capital or assets must be reflected on my start-up financials?   There is no magic number required to start a franchise.  Some experts put the minimum at $25,000, but there is no true guide post.  When determining how much capital is enough, consider your audience.  Prospective franchisees will be reviewing your financials in your FDD.  Low capital may be less appealing to prospective franchisees.  If your capital reserves are less than 2x the initial investment listed in Table 7 of the FDD, some states will require you to include an additional risk factor on the state cover page in capital letters and escrow initial franchise fees until the franchisee business opens.

 I am registering in a state that requires audited financials, what is required? Audited financials must be completed by an independent accountant in accordance with General Accepted Accounting Principles (GAAP).  The audited financials will include the financial statements (typically just the balance sheet if no transactions have occurred) along with notes and comments from the accountant.  The auditor must also issue a template-written auditor’s consent granting you permission to include the audited financials in the FDD.  A copy of the auditor’s consent must be included with your state franchise registrations.  The cost of an audit will fall between $5,000 and $7,500 depending upon the auditor and your business activity.

For your franchising needs contact Gettins & Nelson, LLC at 513-831-6660 or by email at mbgettins@gettinsnelsonlaw.com

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