What Do I Need to Know about Financial Statements?

Financial statements are the track record of the franchise. They are provided for you in the FDD and contain important information about the franchisor’s financial status and strength.  

The two most important financial statements you need to review are the Balance Sheet and Income Statement. 

 

The Balance Sheet

A balance sheet is a snapshot summary of how much a company is worth on any given day. It reports the financial condition (solvency) of the franchisor.

Balance sheet categories include: 

• Assets - what a company owns: current, fixed, and intangible assets.  

• Liabilities - what a company owes: current and long-term debt.  

• Stockholders' equity - the company's net worth; it is the money the company has taken in from the sale of stock plus any accumulated profits:

Stockholder’s Equity = Assets – Liabilities = Net Worth 

Things you want to see on a franchisor's balance sheet: 

• Increasing assets

• Increasing stockholders' equity

• More cash than debt

• Amount of current debt < (less than) 1/2 of the total assets  

• Amount of current debt < 1/3 of the stockholders' equity

 

The Income Statement

An income statement reports a company’s profit or loss. It shows a company’s income, expense and net income – also known as the “bottom line” or earnings. 

Other names for an income statement include: 

• Profit and loss statements

• Statement of income

• Statement of operation

• Statement of earnings

• Results of operations

• Statement of consolidated income 

 

Income statement categories include: 

• Revenues 

• Costs and expenses: cost of sales, selling, general administrative, interest expenses 

• Income before taxes

• Provision before taxes

• Net income (earnings)

• Net income (earnings) per share  

Things you want to see on a franchisor's statement: 

increasing profit

more revenue derived from royalties and system income than from selling franchises 

increasing revenue trends, usually > 15%

increasing net income trends, usually > 15%

a profitable franchisor!  

What you should know about these financial statements: 

• The financial statements should be audited financial statements.  

• The statements should contain three years of financial data (unless the franchisor has less than 3 years of operating history).

• You should take these to an accountant experienced in franchising for evaluation.