The first item that prospective franchisees review in a franchisor’s FDD is Item 19 – Financial Performance Information. This is because all prospective franchisees want to know how much money they will make if they buy your franchise. An experienced franchise attorney will be able to word Item 19 in the best possible light not just for the California Department of Business Oversight (DBO) which will be registering your FDD, but for the review by those looking to purchase your franchise. A good attorney always knows their audience and always keeps this in mind when preparing their client’s Franchise Disclosure Document and exhibits.
In the initial stages when you are trying to get your franchise registered, presenting financials that reflect sufficient capitalization to avoid guarantors, impound accounts, or the deferment of initial franchise fees is critical. However, once that hurdle has been overcome and your franchise is registered and ready to sell, you need to be able to actually sell it. Audited financial statements are a required exhibit to the FDD and these are of course thoroughly reviewed by any potential franchisees performing their due diligence. If you have a successful business you have decided to franchise, then it is likely that you have an accountant with some knowledge of preparing professional financial statements and that those financial statements hopefully reflect a strong income, balance sheet, and cash flow position. But presentation of your financials does not end there. In an FDD, you must provide full and truthful disclosures but how the information is presented is just as important as the information itself when it comes to financial statements. Most entrepreneurs in the market to purchase a franchise have sophisticated and seasoned CPA’s of their own reviewing a franchisor’s FDD and financial statements. If the financial information contained in your FDD is not impressive or compelling enough to pass through the critical eyes of the prospective franchisee’s financial gatekeepers, you will not be selling many franchises. This is why selecting the right accounting professional to prepare your financial statements is key. A seasoned franchise attorney can refer you to accounting professionals who regularly prepare financial statements for franchisors to include in their FDD and which they know will most appeal to persons looking to purchase a franchise.
Once you have impressed them with your financials, prospective franchisees will likely ask for further information to attempt to verify the prospective return on their investment. If you have company-owned stores, they will likely want to see financials for those locations and for any franchises willing to release their financial information. It is a good policy and practice to have recent pro formas at the ready to provide to curious prospective franchisees interested in buying your franchise. Likely, the prospective franchisee’s accountant will want to talk with your accountant so make sure you have a strong accounting professional ready to talk shop and convince the potential franchisee’s accountant about the financial viability and high ROI of your franchise. Large franchisors have this process dialed in but companies new to franchising may not and risk losing critical franchise sales if they are not prepared. Having an experienced franchise attorney on your team will not only make sure you are set up to franchise, but will also position you to sell your franchises like hot cakes.