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Franchise financial statements contain a wealth of information that franchisees and prospective franchisees should examine carefully.
Determining the worth of a franchisor's assets
New franchisors often have few assets. As a prospective franchisee, be sure to question any franchisor who does not have substantial assets or shows assets as "value of franchises" or "goodwill." These terms represent no tangible value. For example, a balance sheet with a net worth of a million dollars may only be worth a few hundred dollars if most of the assets are intangible.
Read financial statement notes
Notes to a financial statement may reveal transactions that raise questions. Look for any loans to or from a franchisor and its owners. And beware of franchisors who owe founders substantial amounts of money.
Also, when reading a financial statement pay attention to any franchisor commitments. Notes often reveal contracts with suppliers, long-term leases, and loans. A substantial loan that is coming due may indicate lack of financial stability.
Review profit and loss statements carefully
As a prospective franchisee, you'll want to examine the franchisor's revenue and profits. Be sure to review the expenses, too. If most profits go to officer salaries, the franchisor may be taking substantial amounts of money out of the business. If the franchisor shows a loss—or very little profit—it may indicate that they are not investing enough into the business.
Before you buy a franchise, a franchise lawyer, along with an accountant, can help you carefully review the financial statements.