If your company plans to become a franchisor, it is important to review all franchise rules and regulations governed by the Federal Trade Commission (FTC). One of the most important requirements is that, as a franchisor, you will have to provide prospective franchisees a Franchise Disclosure Document (FDD) at least 14 days before you sign any agreements or accept any payments from them.
The FDD contains various details about your franchising business, its financial performance, and other key information that provides a prospective franchisee enough data to make an educated decision of whether to invest in your franchise or not.
A specific item required in all FDDs is a set of audited financial statements. These financial statements must be prepared in accordance with United States generally accepted accounting principles (US GAAP) for all domestic companies. Certain foreign companies have some flexibility in preparation but require a reconciliation to US GAAP. The audit of the financial statements must be conducted in accordance with generally accepted auditing standards in the United States, without exception.
In general, three years of audited financial statements are required. However, in line with the FTC Franchise Rule, it should be noted that there are additional FDD financial statement requirements, as well as other options surrounding the necessary financial statements in the following situations:
A franchisor’s FDD is not required to be federally registered but several states will require you to either register (with varying strict regulations and requirements) or file (with more flexible requirements) your FDDs with certain state bureaus or agencies within a certain time period from the end of their fiscal years.
Additional state requirements surrounding the FDD, and the financial statements included in the FDD, can vary, so if you’re looking to start franchising, you should investigate what the compliance requirements are in the states where you operate.
You should refer to the FTC Franchise Rule Compliance Guide to ensure your company remains in compliance with regards to the FDD and its filing. This guide provides direction on complying with FTC Franchise Rule, full details on franchisor requirements, and full examples of an FDD’s exhibits and disclosures.
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