When is a franchise fee considered income: franchisors should not rely on their "professionals" to put together the proper documents. A strong franchisor is one that "minds his or her own business.".

Author:Chaitovsky, Aaron

Tough economic times are upon us. No news there. Finding the right franchisees, uncovering financing alternatives, evaluating fixed and variable costs, and reassessing expansion plans are but a few of the concerns plaguing the franchising world. Although these items may be foremost on the minds of franchise executives now, there are still some fundamental issues that must be dealt with regardless of the state of the economy. Over the past eight years, numerous high-profile companies have admitted to accounting problems with regard to the improper recognition of income, such as Enron, Cendant, Computer Associates and many others that made headlines due to the company's' admissions of overstating income during a time when the economy appeared stronger than it is now. The impact of these "misstatements" resulted in litigation, fines and for some, jail time. The consequences of prematurely recognizing income earned or the "overstatement" of sales or income, however, is not reserved just for those well-known public companies. Every franchisor must deal with its own financial statement presentation and really understand what their financial statements represent. Not having a full understanding of your statement can very easily be seen as "misleading" your franchisees and prospects, thus potentially ending up in a litigious situation.

According to Craig Tractenberg, partner at the law firm of Nixon Peabody LLP, "After Enron, regulators now require transparency in financial representations, and litigators scrutinize financial statements for misleading information. A financial statement may not have been materially misleading, but when the franchisee is dissatisfied with franchisor support, improper accounting taints the entire relationship. If the financial statement is opaque or misleading, the franchisee may convincingly argue that other aspects of the franchise relationship were concealed or not properly performed. Relatively minor accounting infractions can take on magnified importance and can support concerted actions by franchisees for redress."

Franchisors who rely on other professionals such as accounting and consulting firms for their accounting and financial needs must understand what their financial statements say about their businesses. This includes financial statements and disclosures. The accounting firm performing the audit of your books and records is doing just that, auditing your books and records. The accountants will also obtain a representation letter...

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