While the Trump presidency will likely bring a more franchise-friendly administration to the White House, changes issued by the North American Securities Administrators Association (“NASAA”) and the Financial Accounting Standards Board (“FASB) will impact how new and emerging franchisors in the U.S. structure and present their franchise offer.
First, NASAA has proposed a number of troubling restrictions that limit emerging franchisors’ ability to present relevant financial data to prospective franchisees. Amongst these changes are a prohibition on franchisors from presenting financial performance representations based on a subset of locations if they have fewer than ten operational locations, even if there is a reasonable and objective basis for doing so.
This change penalizes new and emerging franchisors, who may have a very good reason for presenting a subset of data but will be prohibited from doing so due to the fact that they do not have the required ten operational locations.
Additionally, FASB has issued new standards concerning the recognition of initial franchise fees which will go into effect in 2018 for public companies and 2019 for private companies and will alter the way in which franchisors can recognize initial franchise fees in their audited financial statements. Under the proposal, auditors will require franchisors to recognize initial fees over the course of the initial term of the franchise agreement, as opposed to recognizing the full fee at the time of opening.
The consequence of the FASB change for emerging franchisors will be financial statements showing lower assets and greater liabilities, resulting in a lower net worth. Franchisors that show a negative net worth in their audited financials are likely to be subject to an impound condition in certain franchise registration states, requiring the emerging franchisor to either defer payment of initial fees, establish and escrow account or obtain a surety bond as a condition of registration.
This also has the potential to scare off potential franchisees concerned, perhaps wrongly, that the franchisor’s financial standing is on shaky ground. Whether you’re an emerging franchisor or seeking to penetrate the US market an understanding of the new regulatory landscape is critical.
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