When does a franchisor need audited financial statements?

Under the FTC Franchise Rule, a start-up franchisor that has not had audited financial statements in the normal course of business in the past has a phase-in period before being required to disclose audited financial statements in its FDD. In its first FDD, the franchisor may include an unaudited interim balance sheet only. In the FDD for the next fiscal year, the franchisor must include an audited balance sheet as of the end of the previous fiscal year. In the FDD for the next fiscal year, the franchisor must include a full set of audited financial statements, including a balance sheet, and statements of operations, stockholders’ equity, and cash flows.


For example, if a franchisor issued its first FDD in September 2018, that FDD would need to include an unaudited interim balance sheet, typically as of the date of capitalization of the new franchisor entity. The franchisor's 2019 FDD would need to include an audited balance sheet as of December 31, 2018. The franchisor's 2020 FDD would need to include a full audit report as of December 31, 2019.


Note: under state law in 5 states, full audit reports are required from the very beginning. In other words, in those 5 states, there is no phase-in period for the audit requirements.


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