Accountancy advice for franchisors and franchisees

Franchise accountants offer significant benefits to both franchisors and franchisees, says Dennis and Turnbull

Franchise accountancy is not a phrase you hear every day - and no doubt many people have never heard of it at all. Take franchising, a business concept that, according to historians, has been around since the Middle Ages, yet only became a recognised form of business with the introduction of the European Common Law.

It’s fair to say that franchise accountancy is a niche sector where ‘everyone knows everyone’, yet it is a sector that is continually growing. The UK is home to over 40,000 franchise businesses and with the number of franchise systems increasing to over 900 the need for qualified accountants offering an excellent service to each franchisee has become evermore important.

All round service
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With so many franchises across the UK, some question the possibility of providing an all round service that caters for both the needs of the franchisor and its franchisees; perhaps the answer can be found in acquiring the network. When deep-seated relationships are built between the franchise network and the accountant, a door to the rest of the business may be opened.

The result? Accountants gain the trust and respect of the franchisor, who may recommend the accountant within the industry and encourage franchisees to use its services. In turn, franchise accountants increase the opportunity of acquiring more target clients but, more importantly, gain a respected reputation within a thriving industry.

By taking the time to discover how franchisees operate and the markets they serve, franchise network accountants can provide tailored advice with an understanding of how financials should look on a grander scale. Though franchising is a tight knit community, there is still internal competition within the industry and not everyone is out to contribute to the development of franchising in the business world.

For franchisees and franchisors, it is vital to ensure their accountant matches specific criteria, the first of which being that they are British Franchise Association affiliates. All chartered accountants have to work to the set standards of the industry. However, association with the bfa reinforces their need to have extensive knowledge of franchising as a concept and their desire to aid in the development of the industry. High standards coupled with extensive understanding of the contractual relationship between franchisor and franchisee ensures franchise accountants deliver a premium service.

Your franchise accountant may be a solid source of advice on issues of concern such as how to appraise a franchise or what to consider when planning on exiting a franchise. Furthermore, a dedicated team that offers franchise networks practical advice on the ins and outs of finance creates a comparison between good accounting and tailored financial support.

Doing the due diligence to find out how many franchise network clients an accountant has had and continues to work with can aid in the assessment of how beneficial it will be to your network. Likewise, establishing whether or not the accounts team complies with the accounting requirements specified in the contract will no doubt be important to the clientaccountant relationship in the future.

Most franchisors want a transparent system of reporting that enables them to clearly see the total earnings of all franchisees. However harsh it may sound, when it comes to calculating profits and tax, franchisors cannot rely solely on the honesty of their franchisees. Franchisors may look for an accountant who can provide an automated report system that enables them to see the total earnings of all their franchisees, without each franchisee reporting it themselves. Not only will this streamline the accounts process, but it gives franchisors an honest indication of how well each franchisee is contributing to the network as a whole, while tax deductions can be made without any legal or ethical disruptions.

Raising funds
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Funding is another factor that franchisors wish to consider with their accountant, as the most beneficial source of funding depends on factors influenced by your own personal situation and will be different for every business.

Loans are one avenue to take and usually the first option that springs to mind. Although a loan is a benefit in that you have access to more money without having to dip into personal resources, it is ‘borrowed’ money. So while a loan may help get the franchise going, you can expect another bill payment every month before taking home any cash profits from the franchise. Be sure to research personally and with a reliable accountant any restrictions from lenders, as these may outweigh the benefits of taking out the loan.

Investors may be another route franchisors can take, as there are usually no obligatory payments in order to set this up. However, the investment in your franchise that they make means you will not see a large proportion of your profits, as they will automatically be directed to your investors as a return on their investments.

A third source of funding a franchise is doing so personally, transferring anything you can into cash. None of the above restrictions from loans or investors apply, as the funding is your own. However, if your personal funds run out it can be difficult to raise a loan or gain an investor’s support. All of this makes it vital to consult with a qualified franchise accountant who may be able to offer the best advice for your financial and personal situation.

For the franchise network as a whole, the stronger the emphasis on accounting matters, the healthier and happier the franchise network can be. Whether the franchise network has appointed an accountant or franchisees have chosen independently, it is essential the accounting system is dependable, easy to use and affordable. For franchisees, problems can occur when accounting programs are difficult to understand and use, so using an accountant with recommended and accessible software such as Xero contributes to maintaining a streamlined franchise.

Financial reports that evidence the recent activities of the franchisee, along with a comparison to the operation results in previous periods, can “proactively assist franchisees in improving their financial performance,” according to Rupert Barkoff, partner at law firm Kilpatrick Stockton LLP.

All information provided by a franchise accountant must meet standard accounting practice GAAP and any deviations will require full explanations of their relevance to the franchise. Financial statements that are prepared on an accrual basis, for example, do not overstate business income, but give franchisees a realistic overview of its performance. This will prove beneficial for franchisees in need of reassurance that they have the available funds for facility modernisation, technology updates and workforce growth. It also reinstates the commitment of the accountant in providing clients with the best and most honest services that are beneficial for franchisees and franchisors.

Performance indicators
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Franchise networks may also ensure their accountant enforces a system that allows the performance of each franchisee to be evaluated in relation to other franchisees. Not only is this a good indication for franchisors of which franchisees are growing their businesses and maintaining financial stability, it may also act as an eye opener for franchisees to consider their situation against fellow franchisees. It can provide an insight into what labour and operation costs should potentially look like, what revenues should be and what they could potentially amount to the future.

For many franchisees, the appeal of opening a franchise is down to the flexibility the concept offers. A franchise structured business allows individuals to choose their own working hours, location, employees, holidays and which business sector they want to be in.

The fact that many franchisees have other personal commitments, such as family, makes franchising such an appealing opportunity that can bring personal benefits, while allowing them to work in the most efficient way producing the most positive outcomes. Franchise accountants that have a well rounded knowledge of the way a franchise is structured and how it operates facilitates franchisee growth and is an essential element in the success of both parties.