Franchise FDD Item 21: Financial Statements

Item 21 of the FDD provides the financial statements of the franchisor. This item is crucial for potential franchisees as it offers insights into the financial health and stability of the franchisor.

Here are the key components typically found in Item 21:

21.1 Audited Financial Statements:

• Audited Financial Statements: The franchisor’s audited financial statements for the most recent fiscal year. Audited financial statements have been examined by an independent third-party auditor for accuracy and compliance with accounting standards.

21.2 Balance Sheets:

• Balance Sheets: The balance sheets provide a snapshot of the franchisor’s financial position at a specific point in time, showing its assets, liabilities, and equity.

21.3 Income Statements:

• Income Statements: The income statements, also known as profit and loss statements, detail the revenues, costs, and expenses incurred by the franchisor during a specific period, usually the fiscal year.

21.4 Cash Flow Statements:

• Cash Flow Statements: These statements provide information about the cash inflows and outflows over a specific period, helping assess the franchisor’s ability to generate and manage cash.

21.5 Notes to Financial Statements:

• Notes to Financial Statements: Additional explanatory notes accompany the financial statements, providing details and context for various line items.

21.6 Comparative Information:

• Comparative Information: In some cases, the FDD may include a table comparing the franchisor’s financial statements with those of other franchise systems within the same industry.

21.7 Purpose:

The purpose of Item 21 is to provide potential franchisees with essential financial information about the franchisor. This transparency helps franchisees evaluate the financial stability and strength of the franchisor, which is crucial for assessing the overall health of the franchise system.

Tips for Potential Franchisees:

• Review Audited Financial Statements: Thoroughly review the audited financial statements to understand the franchisor’s financial health and stability.
• Analyze Balance Sheets: Analyze the balance sheets to assess the franchisor’s assets, liabilities, and equity.
• Examine Income Statements: Examine the income statements to understand the franchisor’s revenue, costs, and profitability.
• Consider Cash Flow: Consider the cash flow statements to assess the franchisor’s ability to generate and manage cash.

By thoroughly examining Item 21, potential franchisees can gain critical insights into the financial health of the franchisor. This information is essential for making informed decisions about entering into a franchise agreement, as it helps assess the franchisor’s ability to support and sustain the franchise system. Additionally, franchisees may consult with financial advisors or accountants to ensure a comprehensive understanding of the financial statements.

LINK TO FRANCHISE DISCLOSURE DOCUMENT (FDD) ITEMS WITH BRIEF EXPLANATIONS ON FranchiseFDD.com

1. Item 1: The Franchisor and Its Predecessors, Affiliates, and Certain Employees
2. Item 2: Business Experience
3. Item 3: Litigation
4. Item 4: Bankruptcy
5. Item 5: Initial Franchise Fee
6. Item 6: Other Fees
7. Item 7: Estimated Initial Investment
8. Item 8: Restrictions on Sources of Products and Services
9. Item 9: Franchisee’s Obligations
10. Item 10: Financing
11. Item 11: Franchisor’s Assistance, Advertising, Computer Systems, and Training
12. Item 12: Territory
13. Item 13: Trademarks
14. Item 14: Patents, Copyrights, and Proprietary Information
15. Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
16. Item 16: Restrictions on What the Franchisee May Sell
17. Item 17: Renewal, Termination, Transfer, and Dispute Resolution
18. Item 18: Public Figures
19. Item 19: Financial Performance Representations
20. Item 20: Outlets and Franchisee Information
21. Item 21: Financial Statements
22. Item 22: Contracts
23. Item 23: Receipts

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