Assurance of Financial Ability to Fulfill Obligations

Section 200 Section 200.500  Assurance of Financial Ability to Fulfill Obligations a)         If, after examination of the financial statements of the franchisor and the duties and obligations of the franchisor contained in the franchise or other agreement to furnish goods and/or services to assist its franchisees in establishing and opening their business, the Administrator determines that adequate financial resources are not available to the franchisor for the performance of said obligations or that the franchisor will depend primarily on the initial franchise fees paid by franchisees as such financial resources (the franchisor has no other apparent source of income or assets), the Administrator will require the franchisor at the franchisor's option to assure financial capability by one of the following means:  an escrow of funds, guaranty of performance, the posting of a surety bond, the issuance of a Certificate of Deposit, or the deferral of the initial franchise fees until the franchisor has met its obligations to the franchisee and the franchisee has commenced doing business. b)         When determining whether adequate financial resources are available, the Administrator shall give consideration to the applicant's recent financial statements.  The following criteria shall be considered in making the determination:  the auditor's opinion letter or review report, notes to the financial statements, the current ratio, the quick ratio, the amount of working capital, the proportion of tangible and intangible assets, the amount and maturities of debts, the debt/equity ratio, the amount of equity, the earnings history, the proportion of receivables compared to other assets, and the quality of receivables (e.g., financial statements reflect receivables that will not be collected, including bad debts, a debt discharged in bankruptcy, or the failure to allow for aged receivables). c)         Registration under the provisions of this Section shall be limited to the sale of the number of franchises authorized by the Administrator.  The Administrator will make that decision based upon the franchisor's demonstrated willingness to fulfill its obligations to a specific number of franchises.