The FDD is a document containing 23 items mandated by the Federal Trade Council (FTC) for all franchise owners to provide during the franchise evaluation process. Franchisors must provide a franchise disclosure agreement (FDD) to assist a franchisee in making an investment decision on a franchise business,
As part of the requirements, the franchise owners must provide information about their financial health under item 21.
What documents do I need to include in item 21 FDD
Item 21 of FDD contains disclosure of a financial statement for a franchise of interest that details its financial health for the fiscal year.
Its purpose is to aid the franchisee in getting a snapshot of the investment, profit opportunity, and cost of running the franchise business.
Generally, the documents required depend on the franchise business’s fiscal year.
For example, a startup franchise – a franchise operating in its first fiscal year can include an unaudited balance sheet. However, an established franchise – operating within its second or third year and beyond – must provide an audited balance sheet, financial statement, statement of operations, stockholders equity, and cash flow documents.
Item 21 FDD for affiliates, Spin-Off, and Subsidiaries
In addition, franchise businesses with parents, affiliates, or subsidiaries must provide supporting financial documents from the parents or subsidiaries.
Per the FTC rules, all financial disclosure documents must comply with the generally accepted accounting principles (GAAP). Also, audits must be done by a seasoned franchise business certified private accountant in compliance with the generally accepted auditing standards (GAAS).
Item 21 of FDD plays a crucial role in the decision-making process of a franchisee and should be filed with professional precision.
How can we help with Article 21 of the Franchise Disclosure Document?
MetwallyCPA offers financial statement audit services to franchises, brokers, and small business owners following a structured and streamlined process. Contact us to audit your franchise account to help you stay compliant, identify issues and boost your business profitability.
