Under the Federal Franchise Rule franchisors are required to disclose their “Financial Statements” in Item 21 of the Franchise Disclosure Document. All financial statements must be prepared in accordance with Generally Accepted Accounting Principals (GAAP) and in all but an extremely limited number of situations involving a start-up franchisor, a franchisor’s financial statements must be “audited.” In the franchise regulations (16 CFR Parts 436 and 437) FTC provides detailed information respecting a franchisor’s Item 21 disclosure requirements, including:
- Financial statements must be audited by an independent certified public accountant and prepared in accordance with GAAP;
- Financial statements must be prepared in a tabular format providing for a comparison between current and prior fiscal years; and
- Financial statements must include: (a) Balance Sheet for the prior two (2) fiscal years and (b) Statement of Operations, Stockholders Equity and Cash Flows for each of the franchisor’s prior three (3) fiscal years.
Other provisions apply for start-up franchisors (a topic that will be discussed in future posts) and the disclosure of the financial statements of a franchisor’s affiliates.