WHAT SHOULD FRANCHISEES KNOW ABOUT A FRANCHISOR’S FINANCIALS?

Financial statements represent the financial track record of the franchisor and give you information about how well positioned the company may be for the future. They are provided for you in the Franchise Disclosure Document (FDD) and contain important information about the franchisor’s financial status.

The two most important franchisor financial statements franchisees may want to review are the Balance Sheet and Income Statement.  As with due diligence for any business venture, it’s a good idea to consult with a business or finance advisor to help you ask the right questions and get the full picture of the opportunity.

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!

Important notes about 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).
• It’s a good practice to take franchisor financial statements in the FDD to a business advisor or accountant experienced in franchising, for evaluation.