A franchisor client recently asked me for clarification on the revised FTC Franchise Rule, specifically, whether audited financials are mandated by the FTC Rule in non-registration states, or whether less restrictive and less costly “reviewed” or “compiled” financials will suffice. The answer is clear that the revised FTC Rule does indeed require audited financials, with an exception for start-up franchisors:
Item 21: Financial Statements.
(1) Include the following financial statements prepared according to United States generally accepted accounting principles, as revised by any future United States government mandated accounting principles, or as permitted by the Securities and Exchange Commission. Except as provided in paragraph (u)(2) of this section, these financial statements must be audited by an independent certified public accountant using generally accepted United States auditing standards. Present the required financial statements in a tabular form that compares at least two fiscal years.
Raymond McKenzie is a corporate and franchise attorney in the Washington, D.C. metropolitan area.
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Raymond, a number of the financials I have seen in an FDD are so skimpy on the details even of revenue to be worthless, whether audited or not.
Mike you are correct, especially with new or small franchisors. The key is not to rely solely on the franchisor’s audited financials, but to view the FPR contained in Item 19, and if the franchisor hasnt included the FPR, then the prospect should go about contacting franchisees to determine revenue and profit numbers.