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Finding Value: The Roles of Accountants in Franchising, Study notes of Accounting

Cardiff Metropolitan UniversityAccounting

Lawyers typically view the accountant's role in franchising to be mainly auditing the franchisor's financial statements and consenting.

Typology: Study notes

2021/2022

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Finding Value: The Roles of Accountants in
Franchising
Vol. 17 No. 2
By David Gurnick, Tal Grinblat, Rex Poulsen, Peter Weir
David Gurnick and Tal Grinblat, Lewitt Hackman and Rex Poulsen, CPA, and Peter Weir, CPA,
Hutchinson & Bloodgood, LLP
Lawyers typically view the
accountant’s role in franchising to be
mainly auditing the franchisor’s
financial statements and consenting
to their use in the FDD. But
accountants can play other valuable
roles, from developing franchise
programs, to advising on certain
items of the FDD, to consulting with
franchisors and franchisees on
business issues.
The FTC Rule requires that the FDD
include three years of audited financial statements. A new
franchisor may opt to present unaudited financial statements for its
first year or partial year (although in California, if unaudited
statements are provided, they must be reviewed by an
independent CPA). Either way, every franchisor must have an
independent CPA perform an audit or review of its financial
statements. In addition, the application to register the FDD in
franchise registration states must include the auditor’s consent for
the franchisor to use the financial statements in the FDD.
Before issuing the required consent, the independent CPA is
required by professional auditing standards to read the FDD to
identify and resolve any material inconsistencies between the
audited or reviewed financial statements and the other information
in the disclosure document.
Under the FTC Rule, the Cover Page of the FDD must tell potential
franchisees: “If possible, show your contract and this information
to an advisor, like a lawyer or an accountant.” Thus, an additional
role for accountants is to review the FDD and franchise agreement
The Franchise Lawyer
is published by the ABA
Forum Committee on
Franchising. It is
available to members
online.
•Visit the Forum Committee on
Franchising
•More publications from the Forum
Editor-in-Chief
Corby Anderson
Nexsen Pruet, PLLC
Charlotte, NC
Associate Editors
Kevin Shelley (2014)
Kaufmann Gildin &
Robbins
New York, NY
Himanshu M. Patel
(2015)
Zarco Einhorn
Salkowski & Brito
Miami, FL
Karen Marchiano
(2016)
Home > Publications > Franchise Lawyer > 2014 > Spring 2014: VOL 17, NO. 2
About Franchise
Lawyer
Editorial Board
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Finding Value: The Roles of Accountants in

Franchising

Vol. 17 No. 2 By David Gurnick, Tal Grinblat, Rex Poulsen, Peter Weir David Gurnick and Tal Grinblat, Lewitt Hackman and Rex Poulsen, CPA, and Peter Weir, CPA, Hutchinson & Bloodgood, LLP

Lawyers typically view the accountant’s role in franchising to be mainly auditing the franchisor’s financial statements and consenting to their use in the FDD. But accountants can play other valuable roles, from developing franchise programs, to advising on certain items of the FDD, to consulting with franchisors and franchisees on business issues. The FTC Rule requires that the FDD include three years of audited financial statements. A new franchisor may opt to present unaudited financial statements for its first year or partial year (although in California, if unaudited statements are provided, they must be reviewed by an independent CPA). Either way, every franchisor must have an independent CPA perform an audit or review of its financial statements. In addition, the application to register the FDD in franchise registration states must include the auditor’s consent for the franchisor to use the financial statements in the FDD. Before issuing the required consent, the independent CPA is required by professional auditing standards to read the FDD to identify and resolve any material inconsistencies between the audited or reviewed financial statements and the other information in the disclosure document. Under the FTC Rule, the Cover Page of the FDD must tell potential franchisees: “If possible, show your contract and this information to an advisor, like a lawyer or an accountant.” Thus, an additional role for accountants is to review the FDD and franchise agreement

The Franchise Lawyer is published by the ABA Forum Committee on Franchising. It is available to members online.

  • Visit the Forum Committee on Franchising
  • More publications from the Forum

Editor-in-Chief Corby Anderson Nexsen Pruet, PLLC Charlotte, NC Associate Editors Kevin Shelley (2014) Kaufmann Gildin & Robbins New York, NY Himanshu M. Patel (2015) Zarco Einhorn Salkowski & Brito Miami, FL Karen Marchiano (2016)

Home > Publications > Franchise Lawyer > 2014 > Spring 2014: VOL 17, NO. 2

About Franchise

Lawyer

Editorial Board

and consult with prospective franchisees on the advisability of investing in a franchise system.

A prospective franchisor or franchisee should have a business plan, including projections of revenues and expenses, as well as a narrative concerning the business being developed. Accountants can help franchisors or franchisees prepare these business plans.

Finding an Optimal Formula

Key elements of the franchisor’s business plan are the amount of the initial franchise fee, rates to be charged for royalties, franchisee contributions to the advertising fund, and other fees and charges. Higher rates and fees generate more revenue for the franchisor but reduce the franchisee’s projected results. Lower rates have the opposite effect, generating better franchisee results but reducing the franchisor’s revenues. Accountants can test alternative rate structures and compare them to similar franchised businesses to help the franchisor find an overall rate structure that balances competing objectives and achieves an optimal formula for all constituents of the franchise system.

One of the most important parts of the FDD is Item 7, presenting numerically, in a table, a high-low range for each major category of the investment to be made by a new franchisee and a high-low range for the new franchisee’s total investment. Franchisors want to make sure the Item 7 table describes the full initial investment cost, but they also may want to keep their estimates as low as possible while still remaining accurate and not misleading. Professional accountants, who frequently advise start-up companies, can offer useful insights on start-up expenses, whether for tax or financial-reporting purposes, for developing projections, or for setting up financial controls. Thus, they can assist in making sure the Item 7 table is accurate and complete.

Another important part of the FDD is Item 19, in which the franchisor is allowed, although not required, to provide information about actual or potential financial performance of its franchised or franchisor-owned units. The information must have a reasonable basis, and the franchisor must have written substantiation. This disclosure must state whether the representation is based on historical results for existing outlets or a subset of the outlets, or is a forecast of a prospective franchisee’s future financial performance. Material bases for the representation must be disclosed, as well as the assumptions that underlie any forecast of future performance. Accountants’ training and experience can be valuable in preparing a financial performance representation that satisfies the rigorous requirements of Item 19.

Most franchisors establish an advertising fund to which franchisees contribute. These aggregated advertising funds often have substantial amounts of money flowing in and out. Franchisees want to know how their advertising contributions are used, and the

Dentons, US Palo Alto, CA