When Are Parent Company Financial Disclosures Required?

A franchisor selling franchises in the U.S. must disclose its audited financial statements in Item 21 of the franchise disclosure document (FDD).  Sometimes, parent company financials are used instead of the franchisor’s financials.  This is easily done when the parent company is a public company that already has audited financials.  But most franchisors are not public companies.  They are not likely to have parent company audited financials and would prefer not to incur the added expense of auditing a group of companies rather than just the franchisor entity.  Audits are expensive.  The franchisor may also want to shield its parent company from liability to franchisees.

The FTC Rule requires parent company financial disclosures in certain cases.  Specifically, the FTC Rule requires disclosure of the financial statements of “any parent that commits to perform post-sale obligations for the franchisor or guarantees the franchisor’s obligations.”So if the franchisor wants…