FDD Item 21: Financial Statements
By Scott Engler · Averan Advisors · Updated 3 October 2026
Item 21 of the Franchise Disclosure Document holds the franchisor's own financial statements. They show whether the company you are signing with has the money to support its franchisees.
What Item 21 must show
The Franchise Disclosure Document (FDD) is the document a franchisor must give a buyer at least 14 calendar days before the buyer signs or pays anything. The Federal Trade Commission's Franchise Rule sets its 23 sections, which are called Items.
The franchisor must include audited financial statements prepared under US accounting standards. They cover balance sheets for the last two fiscal year-ends and statements of operations, stockholders' equity and cash flows for the last three fiscal years. A new franchisor may phase in the audit requirement.
What to check
- Whether the auditor's opinion has any qualification or a note about the company's ability to continue operating.
- How much of the franchisor's revenue comes from royalties compared with initial franchise fees. A company that earns mostly from selling new franchises depends on continued sales.
- The cash balance and debt at year end.
- Whether the brand fund is reported separately, and how it was spent.
- Whether a parent company guarantees the franchisor's obligations, and if so, the parent's statements.
Why it matters to an owner
The franchisor provides the training, the marketing fund and the systems your location runs on. Item 21 shows whether it can keep paying for them.
Common questions
Are franchisor financial statements audited?
Item 21 requires audited statements prepared under US accounting standards, with a phase-in allowed for new franchisors.
What should I look for in Item 21?
Check the auditor's opinion, the share of revenue from royalties compared with initial fees, cash and debt, and any parent company guarantee.
Sources
This page is an educational summary and is not legal advice. Read the FDD itself, and have a franchise attorney review it before you sign.