Franchise Disclosure Document Update: Do I Need an Audit?

Yes, it is that time of year.  Every year 120 days post the close of the franchisor’s fiscal year, the franchisor disclosure document must be updated with the previous year’s data.  The update is required by the federal FTC Franchise Disclosure Laws.  For must franchisor’s the deadline to update the franchise disclosure document is April 30th.

It does not matter if you sold any franchises, if you tried to sell franchises last year, you will need an audit.

In the first year of franchising, startup franchisors may have been able to evade getting an audit.  However, post the first year of franchising and every year thereafter, all franchisors must have an auditor completed of the franchisor entity incident to the annual franchise disclosure update[i].

If you offered franchises in last year, you will need an audit.  It does not matter if you only offered franchises for 1 month, 3 months, or 12 months-you will need an audit.

The audit must be prepared in accordance with GAAP, and the audit must be done by an independent auditor.  The audit cannot be completed your in-house accountant or the accountant that you use to complete your taxes.  

[i] In leu of a franchisor audit, an audit may be completed “…of any of its affiliates if the affiliate’s financial statements satisfy paragraphs (u)(1)(i) and (ii) of this section and the affiliate absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor under the franchise agreement. The affiliate’s guarantee must cover all of the franchisor’s obligations to the franchisee but need not extend to third parties. If this alternative is used, attach a copy of the guarantee to the disclosure document