What do you Have to Know about Financial Statements?
WHAT DO YOU HAVE 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:
Balance Sheet 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:
Income statement categories include:
Things you want to see on a franchisor's statement:
What you should know about these financial statements:
You should take these to an accountant experienced in franchising for evaluation.
For more information on the franchising business model, click here