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:
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!
What you should know about these 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).
You should take these to an accountant experienced in franchising for evaluation.