One of the misconceptions we hear from business owners considering franchising is that they need to have several years of their own business financial statements available so they can franchise.
You may have even been told that you need two or three years of financial history before you can franchise your business.
That’s a franchise myth.
You do not have to disclose the financial information from your current business when franchising. What causes confusion is that financial statements are part of the franchise disclosure process, however, there is an important distinction between financial statements for your current business and the new franchising company we will create for you.
Your Current Business and Your New Franchising Company
When you franchise your business, you don’t suddenly turn your existing business entity (for example if you are an LLC or Scorp) into the franchising company.
As part of the franchise development process, we will create a separate entity specifically for your franchising activities. So your current business continues doing what it has always done: selling products and providing services.
Your new franchising company is in a different business, which is the business of franchising. That’s an important distinction because the financial statements associated with your franchise program are the financial statements for the franchising company, not your current business.
But Doesn’t My Current Business Need to be Financially Successful?
Yes, but that’s an entirely different question.
Whether your current business is financially successful enough to be a good candidate for franchising is not the same question as whether you have to disclose your current business financial statements to prospective franchisees.
Remember, you’re asking other people to invest their money and operate your business in their market. What they are buying into is your business model that has proof of concept and is a road map for them so they do not have to re-create the wheel.
If your current business is struggling financially, franchising isn’t a magic solution to fix those problems (take a look at “Will Franchising Help My Struggling Business”)
To be clear, this doesn’t mean you need to hand prospective franchisees several years of financial statements from your current business. Even if you wanted to show an impressive P&L statement, you legally cannot because it is considered inducement. And this could get you into trouble.
So What Financials Do Prospective Franchisees See?
This is where your franchising company’s financial statements come into the picture.
Your franchising company is the company offering the franchise opportunity and entering into the franchise relationship with your franchisees. These are the financial statements that need to be included as part of your Franchise Disclosure Document (FDD).
Those financial statements help provide an applicant with information about the financial condition of the franchising company behind the franchise program.
We go into this subject in much greater detail in this article “What Financials Do You Show to Prospective Franchisees?”, including why these financial statements are created and what they typically tell someone considering your franchise.
Myth Busted
So let’s put this franchise myth to rest.
You do not need several years of financial statements from your current business before you can franchise it. And you do not have to disclose the financial information from your current operating business when franchising.
Your current business and your franchising company serve two different purposes.
That doesn’t mean the financial health of your current business doesn’t matter. If you are wanting to franchise and duplicate your successful business model, having a business that has proof of concept and makes money is important. This is why you cannot franchise an idea (for more on this topic take a look at this article “Things to do Before Franchising Your Idea”).
If you’ve been thinking about franchising your business and someone told you that you can’t because you don’t have several years of financial statements, don’t let that stop you from exploring your options. Call us directly at 1-877-615-5177 and we’ll be happy to answer your questions and explain what you actually need to get started.
- Funding Your Franchise Company
- Your Responsibilities When Franchising
- The Truth About Why People Buy a Franchise
- Breaking Down What Franchising Really Means
- Financial Performance Representations vs Audited Financial Statements
