Franchise Your Business

The federal franchise law and most states grant you an exemption from having audited financials during the first full or partial fiscal year of franchising.  So, if a franchisor is ok with not selling franchises in California, Illinois,  Minnesota, New York, and Virginia,  they will only need an unaudited opening balance sheet of the franchisor legal entity for the first fiscal year (this will save a franchisor $1,000 to $3,000 in audit fees).   Any unaudited financial statements must be prepared “in a form that conforms as closely as possible to audited statements,” which most states have interpreted to mean compliance with U.S. GAAP.

If a franchisor wants to offer and sell franchises in California, Illinois,  Minnesota, New York, and Virginia during its first fiscal year, they will need the following financial statements (and will have to hire an independent CPA):

* A review of financial statements examines and verifies records with less detail than an audit, which offers higher assurance.  Unlike a compilation, a review provides some assurance but does not compile records for management or third parties.

** Compiled financial statements are financial statements that have been prepared by an CPA but have not been audited or certified. They are not thoroughly audited and there is no guarantee that they are correct.

California and Illinois will also accept an audited balance sheet, so if a franchisor is going to apply to any of these states during the first fiscal year, itmakes more sense to get an audit of the opening balance sheet.