The Federal Trade Commission Franchise Disclosure Laws [FTC Franchise Disclosure Rule] requires disclosures in item 21 of the Franchise Disclosure Document [FDD] of the franchisor’s financials. Typically, the financials of the franchisor must be audited by an accountant. This can be costly and timely.
The FTC Franchise Disclosure Rule cuts new franchisors a little slack. It allows startup financials for new franchisors. In the first year of franchising, the franchisor financials do not need to be audited. The franchisor simply needs to include an opening balance.
What is Required
|Year 1||Unaudited opening balance sheet|
|Year 2||Audited balance sheet opinion|
|Year 3||All required financial statements for the previous fiscal year, plus any previously disclosed audited statements.|
For year two, franchisors are going to need to contact an accountant. But, a full-blown audit is not required. For year two franchisors will need an audited balance sheet opinion.
Year 3 the franchisor is like established zors. A standard audit is required.
This is the federal law. Most states accept the federal law startup financials for the franchisors. But caution, there are a few states that do not accept startup franchisor financials including Minnesota, New York, and Rhode Island, Illinois, and Virginia.