Navigate the Paper Trail

The Financial Statements

One of the FDD's strengths is that it delivers three years of audited financial information about the franchisor. Item 21 of the disclosure document should include the balance sheet for the most recent fiscal year and an income statement, as well as changes in financial position for the most recent three years. These financial statements are audited reports prepared by a certified public accountant. Subsidiaries are allowed to use a parent's financial information, but only if the parent corporation will guarantee the obligations of the subsidiary franchisor.

The sample pro forma operating statement provides a forecast of projected sales and expenses that might be incurred by a franchisee in the geographical zone where the unit might be located. Very few franchisors provide this information or make any earnings claim. In part this is because such claims must be substantiated by backup data, according to the FTC.

Earnings claims must represent what the average franchisee can achieve, not what one unit made in the program. They can never guarantee that any franchise will achieve a stated level of performance. Data from nearby franchisees can be used, or data from franchisees in an area similar to yours from a demographic, socioeconomic or location standpoint.

The sample pro forma will be accompanied by a caution label required by the FTC. It contains the following caution: "These figures are only estimates of what we think you may earn. There is no assurance you'll do as well. If you rely on our figures, you must accept the risk of not doing as well."

Although many franchisors are reluctant to provide earnings projections, insist on seeing one. You'll need a realistic forecast that states what your income and expenses might be. Take caution to heart also. Don't simply rely on these figures as an accurate basis for projected income and expenses. Cross-check the data as much as possible. When interviewing other franchisees, ask them what their income and expenses are. In addition, talk to industry associations and independents involved in the type of business you will be purchasing.

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