Can you imagine that there are 23 Items in the Franchise Disclosure Document (FDD)? We are closing in on the end covering all the Items, and we are now covering Item 21 which is the financial statements of the franchisor in general.
The most important part about this Item 21 is that there are two sets of financial statements that are covered in this particular item of the FDD: one is the statement of cash flows or the income statement for the last three years, and the balance sheet for that same franchisor for the last two years.
So Why Are the Franchisor's Financial Statements Important?
So a lot of times when you look at them, you're going to see big numbers. Remember, this is not a franchisee. This is not like a one-franchise location type of thing, this is the franchisor with multiple locations under it. So it's not like you need to pay huge attention to these financial statements, but it does kind of help you understand the financial stability of the company that you're about to go into business with because there is a big investment on the franchisor's part to launch and grow and scale a franchise. They have to put a lot of money upfront into salespeople, marketing and advertising and building out their tools and technology, and that can be a big investment. So depending on what phase of growth that franchise is in these financial statements will probably look very different from one franchisor to another.
If you're looking at a newer franchise or an emerging brand type of franchise, it wouldn't be uncommon to see a very different set of financial statements from someone who is in that status of business versus someone who has been franchising for 20 years, has hundreds of units, and has kind of developed into the mature stage as a franchisor.
So you're going to see a lot of different numbers if you're looking at different franchises. The one very important thing I do want to suggest to you is that you make sure that these statements are audited, meaning that these are audited financial statements by a reputable entity. This document is reviewed by the Federal Trade Commission (FTC), but we don't believe they necessarily require that these financial statements be audited.
What Other Parts Of This Item Are Important?
There's not really much you can do with this section. You're not going to go play accountant and say, well, I want to know why this line item says this. Doing so is not going to kind of present you in a positive light to the franchisor, but it's just to help you understand, is the franchise that you're about to sign a franchise agreement in good financial health. Unfortunately, it does happen once in a while that they are not. Franchises grow too fast or they're undercapitalized and they can run out of money. So you just want to make sure that the numbers on those financial statements just make sense, and are there any blaring red flags.
This was one of our favorite items because it was short and sweet, the financial statements of the franchisor.
If you have questions about this Item or any other items of the Franchise Disclosure Document please feel to reach out to us. Of course, the advice of a Franchise Attorney is always highly suggested.
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I’m Stacey Riska aka “Small Business Stacey”, your franchise placement specialist. I help aspiring business owners find the PERFECT franchise so they can get to the next level in life and business.