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It often gets harped on that when buying into a franchise, the business has less risk than independent start-ups. This is due to the presence of proven methods for the business system that have worked well in the past.
Make no mistake, though. Franchisees are entrepreneurs—with the moxie and determination to strike out into business ownership. The franchisor establishes systems, training, marketing, vendor contracts to ensure consistency and contribute to success, but the franchisee still has to make it work.
On a more specific level, every successful franchisee must plan, budget, and service financial demands. However, his or her accounting skills may not necessarily be the strongest.
Some of these demands can be mitigated by the employ of a franchise accountant. A franchise accountant will be well-versed in ledger items specific to franchising—and the specific financial needs franchisees have. A good franchise accountant can help the franchisee successfully manage the processes required to comply with franchising’s unique set of revenue and fee tracking, including but not limited to the following.
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Net Worth Preparation. Before you even get started, any new business owner needs some additional funds available to sustain a business during its infancy. If a lender or investor is involved with starting the business, net worth will be part of the qualification. With franchise buying, however, the franchisor will often set the minimum level of net worth needed to be approved. Loans and other assets brought into the business are best handled early by a franchise accountant who can assist prospective buyers prepare for qualification by a franchisor and who can maximize the tax treatment of the new business’s structure.
Initial Start-Up Fee. Franchise purchasers pay an initial franchise fee for licensing and start-up aid provided by the franchisor. The paid fee also grants certain rights and has asset value for the franchisor. Franchise accountants can report these appropriately on balance sheets that more truly reflect the value of the franchise (even on day one). And then, the start-up fee must be amortized over the projected life of the entity. A franchise accountant will establish this financial treatment and follow it through the life of the franchise.
Ongoing Fees Management. Typically, each franchise pays a variety of fees. Royalty fees are collected at regular intervals (most commonly) based on a month’s worth of revenues. It's usually a percentage of revenues and helps support ongoing training and operational guidance from the franchisor. Also, advertising fees are often collected for company-wide campaigns. This outflow must be tracked and reported (and paid) as required by the franchisor. Sometimes, a special discount might apply, too, that can lower gross sales (and thereby lower that period’s royalty fee). These exceptions need proper reporting for compliance with the franchisor and with the IRS.
Revenue Treatments. Profit is the goal of a business and its greatest measurement of success. Profit starts with revenue. Sometimes, revenue is earned as soon a franchisee sells an item or provides a service and is immediately paid. Other times, the revenue is not yet received because the service (or product) has not been fully delivered to a customer. This anticipated income is unearned but must still be accurately reported until it becomes earned revenue.
Operating Cash. A franchise accountant will also be ready to counsel franchisees on the availability of operating cash. Even if there is good net worth available, having backup sources to cover inventory purchases or cover unpaid invoices is important to keep an operation running smoothly. A good accountant will design and develop the financial safety nets that a franchise needs.
Franchises are a little different from other businesses and have modified accounting needs. A reputable franchise accountant will ease your mind while managing the business books and preempting problems so that the franchise succeeds.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.