If you want to start a franchise, familiarizing yourself with the FTC rule is essential. The Federal Trade Commission (FTC) requires franchisors to provide financial statements as part of the item 21 Franchise disclosure document at least 14 days before a franchisee signs any agreement. Failure to provide the proper documents attracts strict sanctions as it’s a direct violation of federal laws.
Financial Statement Requirements for Franchise
Depending on your current fiscal year, a franchise falls under two categories with different financial statement requirements for item 21 FDD.
Financial Statement Requirements for Start-up Franchise
Startup franchises are franchises operating within their first fiscal year. Although the FTC rule mandates all franchises to provide audited financial statements, startup franchises are exempt from this rule. Instead, they enjoy a phase in exception rule that allows provision of unaudited, initial opening franchise balance sheet and account consent document.
The phase-in rule only applies to start-up franchises that aren’t a spin-off, affiliates, subsidiaries, or entities related to an established franchise. Also, all documents must comply with the Generally accepted accounting principles (GAAP) of the United States of America.
Audited Financial statement requirements for Established Franchise
In the context of the FTC rule, an established franchise is a franchise operating in its second fiscal year and above.
Unlike a start-up franchise, an established franchise operating in its second year must provide an audited balance sheet that complies with the USA’s generally accepted auditing standards (GAAS).
However, established franchises operating in their third fiscal year and above must provide the following documents:
- Three years of an audited balance sheet for FY1 & FY2 ending
- A statement of operations for the three most recent fiscal year
- A statement of stockholders’ equity in the company and cash flows.
Note: Asides from the general financial statement requirements, there are state-specific requirements too. It’s essential to check for your state requirements and comply accordingly.
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Contact us for a financial statement audit or audited statement review so that you can remain compliant and free from litigation.
Mohamed founded Metwally CPA PLLC in 2020 in the Dallas-Fort Worth metropolitan area. He holds active CPA license in the state of Texas and California. Mohamed is the firm’s Executive Director. Mohamed has a Master of Science (M.S.) degree in Accounting from University of Dallas. He has extensive assurance experience in a wide variety of industries, and he also devotes considerable time consulting and working with organizations and CPA firms on internal controls, audit quality, automation, and accounting best practices. He has over 15 years of audit experience.
Prior to founding the firm, Mohamed worked for big 4 and national firms for over than 10 years in the assurance practice. Mohamed worked on private clients as well as public clients and specialized in financial services sector.
He is a member of the Texas CPA Practice Issues, Diversity and Inclusion, and Governmental Accounting and Single Audits Conference Committees of Texas Society of CPAs.
Mohamed is a member of the American Institute of Certified Public Accountants, member of the AICPA small business group, member of the American institute of Certified Management Accountants, and Texas Society of Certified Public Accountants.
