Offering Circular and Financial Statement Requirements
The California offering circular must be prepared in the DFPI-prescribed format and must include audited financial statements of the franchisor. Candidates must know what "audited" means (independent CPA, GAAP, opinion) and when unaudited or reviewed statements may be acceptable, such as start-up franchisors meeting specified net worth or experience conditions, or where the DFPI grants relief.
Key concepts: balance sheet, statements of operations, stockholders' equity, and cash flows for the required periods; the auditor's report; the requirement that statements be current (generally within 90 days of the offering circular date, with a longer window for fiscal year-end statements); and the treatment of guarantors-if a parent guarantees obligations, the parent's financials may be required.
Traps: using tax-basis statements as if GAAP; presenting a compilation as an audit; omitting the accountant's opinion; using stale financials beyond the permitted age; and failing to disclose material changes after the balance sheet date (a subsequent-events problem). Another trap is assuming a personal financial statement of the principal substitutes for entity financials-it does not, absent specific relief.
Rule of thumb: audited, GAAP, current, and consistent with the FDD's Item 21 narrative.
Worked example: A franchisor's fiscal year ends December 31. It files an offering circular in July with December 31 audited statements and no interim data. Because more than 90 days have passed, the DFPI may require interim financial statements. The fix is to include reviewed or audited interim statements through a recent quarter.