Franchising Trends

Understand the Financial Statements From Your Franchisor

When you are in the market to buy a franchise, investigating the franchisor thoroughly is quite essential. An important part will be to investigate the financial aspect of the company. If you don’t want to lose your money in a franchise business that’s uncertain, look at the financial statements that the company provides in the UFOC (or the new FDD). The new FDD has a major change in this section. Before, financial statements were to be made only according to US GAAP (Generally Accepted Accounting Principal) and by any licensed and certified independent auditor. But now, non-United States GAAP is accepted, but only those done by Securities and Exchange Commission. Only they include “the inclusion of a reconciliation of the foreign statements to U.S. GAAP”.

The FTC rule requires the franchisor to update their financial statement on an annual basis. Hence, when you get the financial statement, make sure it’s of the current year. The changes are generally made after the end of the fiscal year and the franchisors are given a time-period of 90 days to provide an updated and audited version of the statement. The franchisor can give unaudited financial statement for quarterly update, but a message that it’s an unaudited financial statement should accompany the report. If the franchisor has a parent company and is only a subsidiary under it, then it can give out the financial statement of the parent company (audited and under limited circumstances). But it can only be given, if the parent company is obligated to fulfill the promises that the franchisor made in the franchise agreement.

So, you see the financial statement can be very a daunting piece of paper for the people looking to buy a franchise. Hence, you must take the help of a competent accountant, especially one who is used to franchisors’ financial statements, to decipher the document. One point must be mentioned here; if the franchisor has a U.S. parent company, which is again a subsidiary of a foreign company, then the franchisor may opt for financial statement of any one of them. As for the figures given in the financial statement, you must tally them with other information you received from the FDD and your own due diligence. A combined reading of these facts will present a clear picture of the financial condition of the company. You must also look at the notes made by the independent auditor and take a keen look at the balance sheet. The net worth and liquid capital of the company must be sufficient.

Another important aspect to look at is the source of income of the company. Note how much money is coming through franchise business for sale offers and through royalty fees. If you see that the income through royalty fee has not increased in the recent years, then it means the product/service is not generating enough money. Royalty fees are usually based on a percentage of the franchisee’s sales. Such a franchise opportunity may not be good in the long run. Remember, even top franchises in the business may have gone through financial difficulties, but look at the overall picture before starting a franchise.