Starting a franchise is an exciting opportunity. However, there are many elements in the franchise process, including a franchise accounting audit. Financial Disclosure Documents (FDDs) are critical to ensure your franchise accounting audit is complete and best reflects the financial condition of your franchise.
What Is an FDD?
A Franchise Disclosure Document, also known as an FDD, is one of the most important documents a franchisor has to provide to prospective franchisees. An FDD is a legal document that provides prospective franchisees with financial information about the franchisor to make an informed decision before buying a franchise.
What Is Included in an FDD?
There are several requirements for an FDD, which are governed by the Federal Trade Commission (FTC) and state regulations. Federal and state franchise laws require an FDD to include 23 disclosure sections. Each section is referred to as an “Item.” The Items are as follows:
- The Franchisor, and Any Parents, Predecessors, and Affiliates
- Business Experience
- Litigation
- Bankruptcy
- Initial Fees
- Other Fees
- Estimated Initial Investment
- Restrictions on Sources of Products and Services
- Franchisee’s Obligations
- Financing
- Assistance, Advertising, Computer Systems, and Training
- Territory
- Trademarks
- Patents, Copyrights, and Proprietary Information
- Obligation to Participate in the Actual Operation of the Franchise Business
- Restrictions on What the Franchisee May Sell
- Renewal, Termination, Transfer, and Dispute Resolution
- Public Figures
- Financial Performance Representations
- Outlets and Franchisee Information
- Financial Statements
- Contracts
- Receipts
Prepare For Your Franchise Accounting Audit
Often, franchisors overlook the financial statement reporting obligations, which puts them out of compliance with state and federal laws and can delay the renewal of their FDD. A franchise accounting audit includes a review of financial statements, such as balance sheets, multi-year statements of operations, equity of shareholders, and cash flow.
Does a New Franchise Need a Franchise Accounting Audit?
Typically, franchisors are required to disclose their franchise FDD audited statements for the past 3 years. However, there are exemptions for new franchise owners. A new franchisor may be subject to a limited “phase-in” exemption to Item 21. Review your specific state requirements to see if your franchising entity qualifies for an exemption.
Make Sure Your Audited Financial Statements Comply With GAAP
Audited financial statements must be presented according to generally accepted accounting principles (GAAP). GAAP departures can result in a limited audit opinion, leading to issues with registering and seeding your franchise. It’s essential to work with a trusted and experienced franchise accounting firm to help your franchise provide clear and transparent financial statements.
Assurance Dimensions has grown from a regional firm to a leading national provider of audit and assurance services. We offer assurance, tax, and advisory services to private, public, and nonprofit clients throughout North America and internationally. Need help with your audit? Contact us today or request an audit quote.
