Financial Disclosure: Gotta Love Your Accountant!

I knew that Enron had had a serious impact on small business when a couple years ago a well-established real estate client of mine formed a new franchisor entity for its new expansion program and approached a small local accounting firm for an audited opening balance sheet we needed for the FDD. Traditionally this is a fairly standard and even simple process: the new entity makes a bank deposit of $X for the initial capitalization of the franchisor and the accountant takes a picture of this sole asset as of a particular day and produces and certifies a simple balance sheet showing the $X asset and no liabilities. The audited opening balance sheet is inserted in the just-drafted FDD and the document is complete and ready for offering franchises. The price estimate of $10K for the accounting work absolutely stunned the client (and its attorney). The accountant explained that under the post-Enron rules they would have to audit virtually the entire related real estate organization, not just the new entity.

The new nervousness of the accounting profession has complicated the already complex task of financial disclosure for new or relatively new franchise programs. I advise new franchisors that financial disclosure is the lifeblood of their franchise program. If there is a delay in the annual audit or a difficulty generating a mid-year unaudited statement, or other accounting difficulty it will bring their franchise program to its knees. Franchising lives or dies on its financial disclosure. This one item is integral to the FDD, but it’s completely out of the attorney’s control, and the control of the franchisor’s management. 

If you are a franchisor you had better have a good CPA firm and it had better come through for you. 

The first challenge for the franchisor is selecting the right CPA for the work. I have found that it is a rare accounting firm that has any experience working with franchisors, and I’ve met only a couple CPAs that are truly well versed in the particular needs of franchisors (Need a CPA referral? Drop me a note at acaffey@gmail.com). If your CPA has no experience working with a franchisor, that’s OK. We can bring the firm up the learning curve. What is most important is that the franchisor be high-enough on the CPA firm’s priority list that its annual audit is reliably ready within 90 days of the fiscal year end. If it is received more than 120 days after FYE, all franchising comes to a halt.

Timing of the annual audit is only one urgent matter for franchisors. The FDD requires that the three years of audited financial information be presented in a comparative, columnar format showing at least two years of balance sheets and three years of operating figures. This presentation formatting is vital to the franchisor, it’s required in the FDD, but it is frequently lost and forgotten in the annual rush to push the audit out the door.

Franchisors that are filing state registrations applications will also need a consent letter from the auditors on the auditing firm’s letterhead that meets the exacting form published by the FDD. Even with carefully written instructions from franchise counsel it is amazing how often these letters are forgotten or poorly prepared or copied from last year’s consent form (yes, the form of the consent letter changed with the 2008 NASAA Guidelines) and create some sort of headache in the registration process.

I love accountants. They do amazing and thankless work and have a professional world view that is well worth the fees they charge. I am re-doubling my efforts this year to get through to my clients’ accountants early in the season with planning instructions.