The ability to understand franchise accounts is arguably the most important skill that a franchisee can possess. While some franchisors will offer to take over this responsibility, franchisees need to have a comprehensive knowledge of franchise accounting practices for their own protection and control.
Accounting for a franchise is very similar to that for any other business, and the same principles apply both before and after purchase. Due diligence is king!
Before getting too involved, a franchisee should always run a full credit check on the franchisor and their accounts, and ask to see any necessary supporting documentation to verify the legitimacy of the operation and the franchisor’s claims. Any refusal or prevarication should set the alarm bells ringing. Talking to current franchisees is also a good way to glean extra information.
When examining the accounts, look for the following vital signs:
Go back a few years to assess whether the trend is up or down.
Gross profit percentage
This should be comparable to other similar businesses.
These are often the major expense. Again, compare them to other similar businesses.
Look at these closely, excluding depreciation and any other personal costs, and verify that they are in line with what would be expected from a well-run franchise.
This is the true yardstick of the business’s profitability.
Business accounting is obviously complicated to the uninitiated, so hire an expert if necessary. A solicitor who has experience with franchises is a good starting point, as they can check through the agreement and color in the financial picture.
Assuming everything is okay and the purchase goes ahead, there are a number of points to bear in mind to ensure that the accounts remain under control.
The key is simplicity. Don’t use a complicated system or one that is new. Also, avoid bespoke options. Stick with the known and trusted.
Advice on the matter should be given by the franchisor, but whether or not that is the case, remember that the franchisee has to report to the franchisor as well as the tax authorities, so make sure everything is clear.
Finances can become very messy very quickly if attention is not paid to them on a regular basis, so timetable a monthly checking session to verify that all figures are as they should be and that everything adds up.
Sales tax should be taken into account along with other statutory deductions, so ensure they are being worked at the correct rates.
Also, pay attention to expenses to make sure they are not excessive and they are backed up with sufficient documentation.
Whether part of the franchise agreement or not, be sure to create payment terms for clients and adhere strictly to them. The same applies when paying suppliers.
Running a business as a franchisee means that a number of tax breaks and benefits are available. To take full advantage, claim for all legitimate expenses and whatever tax relief is allowed on business assets.
The franchisor may already have made provision to deal with many or all of the accounting hurdles a franchisee has to jump, but if not, they should be able to advise accordingly. However, at the end of the day, the accounts are the legal responsibility of the franchisee, so ask about anything that is unclear and employ a specialist to help if required.
This article was contributed by FranchiseSales.com, the market-leading directory of franchise opportunities from online media group Dynamis.
Published: January 27, 2014