Which States Require an Audited Opening Balance Sheet to Register a Franchise

Franchising is a complex business model governed by various regulations and requirements, including franchise registration laws enforced at the state level. One crucial aspect of franchise registration is the submission of financial documentation, including audited opening balance sheet statements, to regulatory authorities. While franchise registration requirements vary from state to state, some states impose stricter regulations, necessitating audited financial statements for franchise applicants. In this comprehensive guide, we’ll explore the states that require audited opening balance sheet statements for franchise registration, the rationale behind these requirements, and the implications for franchisors seeking to expand their businesses.

Understanding Franchise Registration:

1. Franchise Disclosure Laws:

· Franchise disclosure laws mandate franchisors to provide prospective franchisees with comprehensive and accurate information about the franchise opportunity, typically in the form of a Franchise Disclosure Document (FDD).

· State franchise registration laws require franchisors to register their FDDs with state regulatory agencies and adhere to specific disclosure requirements to ensure transparency and consumer protection.

2. Financial Disclosure Requirements:

· Financial disclosure is a critical component of franchise registration, as it provides prospective franchisees with insights into the franchisor’s financial health, stability, and performance.

· Franchisors are often required to submit audited financial statements, including opening balance sheet statements, to state regulators as part of the franchise registration process.

States Requiring Audited Opening Balance Sheet Statements:

1. California:

· California’s Franchise Investment Law (CFIL) requires franchisors to file audited financial statements, including an audited opening balance sheet, with the California Department of Financial Protection and Innovation (DFPI) as part of the franchise registration process.

· The DFPI scrutinizes the financial statements to assess the franchisor’s financial viability and ensure compliance with state regulations.

2. Illinois:

· The Illinois Franchise Disclosure Act (IFDA) mandates franchisors to submit audited financial statements, including an opening balance sheet audited by an independent certified public accountant (CPA), to the Illinois Attorney General’s Office for franchise registration.

· Audited financial statements provide transparency and credibility to prospective franchisees, helping them make informed investment decisions.

3. Maryland:

· Maryland’s Franchise Registration and Disclosure Law (FRDL) requires franchisors to file audited financial statements, including an opening balance sheet audited by an independent CPA, with the Maryland Securities Division for franchise registration.

· The Securities Division reviews the financial statements to assess the franchisor’s financial strength and ensure compliance with state registration requirements.

4. Virginia:

· Virginia’s Retail Franchising Act (VRFA) mandates franchisors to submit audited financial statements, including an opening balance sheet audited by an independent CPA, to the Virginia State Corporation Commission (SCC) for franchise registration.

· Audited financial statements provide assurance to prospective franchisees and regulatory authorities regarding the franchisor’s financial stability and integrity.

5. North Dakota

· The North Dakota Securities Department requires an opening audited balance sheet statement.

6. Michigan

· Franchisors with unaudited financial statements and a net worth below $100,000 also must post a surety bond or escrow the initial fees upon the franchisee’s request.

7. Indiana

· The Indiana Securities Division requires audited financial statements.

8. Rhode Island

· The Rhode Island Department of Business Regulation requires audited financial statements even in the first year of franchising.

9. New York

· New York State Attorney General requires an opening audited balance sheet. For franchise registration.

10. Washington

· The Washington Department of Financial Institutions requires an opening audited balance sheet statement.

11. Wisconsin

· The Wisconsin Department of Financial Institutions requires an audited opening balance sheet for franchise approval.

Rationale Behind Audited Financial Statements:

1. Investor Protection:

· Audited financial statements serve as a safeguard for investors, including prospective franchisees, by providing an independent assessment of the franchisor’s financial position, performance, and risk exposure.

· Investors rely on audited financial statements to make informed investment decisions and assess the franchisor’s ability to fulfill its obligations under the franchise agreement.

2. Transparency and Accountability:

· Audited financial statements promote transparency and accountability in the franchising industry by ensuring that franchisors accurately disclose their financial condition and adhere to regulatory standards.

· Regulatory authorities use audited financial statements to verify compliance with state franchise laws and protect investors from fraudulent or deceptive practices.

Implications for Franchisors:

1. Cost Considerations:

· Obtaining audited financial statements can be a costly and time-consuming process for franchisors, as it involves hiring an independent CPA to conduct the audit and prepare the required financial documentation.

· Franchisors must budget for audit expenses and allocate resources accordingly to comply with state registration requirements.

2. Enhanced Credibility:

· Despite the challenges, audited financial statements enhance the credibility and reputation of franchisors in the eyes of prospective franchisees, lenders, and regulatory authorities.

· Franchisors with audited financial statements may attract more qualified franchise candidates and enjoy greater confidence from stakeholders.

 

Franchise registration requirements vary from state to state, with some states imposing stricter regulations, such as the submission of audited opening balance sheet statements, to ensure transparency and investor protection. Franchisors operating in states with such requirements must understand and comply with the financial disclosure obligations to facilitate the franchise registration process and build trust with prospective franchisees. While obtaining audited financial statements may involve additional costs and administrative burdens, the benefits of enhanced credibility and regulatory compliance outweigh the challenges, ultimately contributing to the long-term success and sustainability of franchising operations.

 

For more information on how to manage franchise registration states and to connect with CPA’s who can provide an opening audited financial statement for a new Franchisor, Contact FMS:

https://www.fmsfranchise.com/about-us/contact/