Does your franchise meet the accountant's test?
Like all businesses, franchise businesses need effective financial systems to survive and prosper. Unlike other businesses though, a franchise is often offered to a prospective franchisee as a going concern, with little or no scope to change the established structure, processes or systems already in place.
It’s critical that, as a prospective owner of a franchise business, you clearly understand what systems underpin the franchise’s day to day operations and cash-flow. Here are some things you should be checking for when you ‘take a look under the hood’ of the franchise you might be about to buy.
The right finance management systems
Leading businesses are using cloud-based accounting systems, such as Saasu or Zero, to keep track of their financial performance, including areas such as expenses, turnover and profit. These systems should also provide links back to the business owner’s bank, financial advisors and, in the case of a franchisee, to the master franchisor. The best systems offer a range of features that make it very easy for business people to enter data and see at a glance how their business is performing on a day to day basis, through hard copy reports and online dashboards. These systems are quick, efficient, very effective and generally not expensive – and any franchise should have them at the core of its financial management process.
Ideally, the franchisor should also provide franchisees with templates for business plans, operational processes, sales and marketing strategies and other planning formats. There should also be a clear understanding of what the franchisor expects in terms of activities around these – and how the costs will be shared between the individual operator and the franchisor.
Back up advice and support from ‘head office’
Franchisees should also be able to access advice and support on financial and compliance matters from the team at the master franchisor. In our experience, these levels of support tend to vary from franchise to franchise, but you should at least be getting a clear understanding of expected revenue versus start up costs when you first take over the business, along with support from the franchisor to help you set a revenue budget. They should also be able to help you make projections along the way and readjust these as the realities of running a business become apparent.
Help from external advisors
Does the master franchisor have a list of ‘approved’ advisors – accountants, lawyers, other financial and management experts – who are easy to access, located close by, come with a reputable brand and are easy to deal with? The ideal for any franchisee is to continue using your own trusted advisors, while still having access to these experts if you need them.
Advisory firms that have worked with your peers in the franchise network will have great advice and lessons to pass onto you, and these should not be supplied along with fees higher than you would pay elsewhere.
As a business operator, you will be liable to meet all tax requirements and you should be expected to manage these yourself. But it will still be useful to have access to some advice, systems or support from head office, if only to learn from other franchisees’ experiences and tips in this area. It’s not hard to provide a tax compliance calendar, along with advice on submitting BAS and IAS forms, and arranging payment plans with the ATO if required.
This is often one of the most challenging aspects of business management, especially if you’re new to the experience, and one where we believe more franchisors could be doing better for their franchisees.
Financing for the business
Some franchisors will have finance arrangements with banks and other lenders, to assist franchisees in acquiring the capital required to buy the franchise and get it started. The best of these arrangements will include favourable repayment terms, across a number of years with a competitive interest rate and an interest-only repayment option. They should also include the option to renew, extend or renegotiate the loan, along with some type of ‘business banking’ relationship, with a dedicated bank officer to act as an advisor to the franchisee.
Business structuring assistance
Does your prospective franchise include detailed information about how the business should be structured? Does the franchisor provide advice on owning the franchise through a trust, to ensure your personal assets are protected from any business failures?
This might be expecting a bit too much, but franchisors should at least be clear about ‘best practice’ structures for the franchise ownership, and be flexible when facing a franchisee’s requirements in this area.
Other advice you won’t get from the franchisor
Following on from the last point, it’s also worth consulting your lawyer or accountant to get a better idea of how to manage your business structure so it remains separate from your personal affairs and is run in the most tax-efficient way possible. You will also need advice around owning versus leasing assets, tax minimisation, asset protection and succession planning if you’re aiming to involve your children or other relatives in the business.
Understanding just what you need to know is critical when looking at – and deciding whether to buy into - a franchise business. If you can cover all these bases and your franchisor is helping to provide this information along the way, then you will be off to a great start.
Marin Accountants is a boutique accounting firm that provides personal, proactive and proven taxation and accounting services to business owners, professionals and family offices.
David McKellar is a chartered accountant at Marin Accountants. He has a particular focus on franchising and small business compliance and consulting.
Contact David on:
Important: This is not advice. Readers should not act solely on the basis of the material contained in this article. We therefore recommend that professional advice be sought before acting in any of the areas. Liability limited by a scheme approved under Professional Standards Legislation.
* Source: Franchising Australia 2012, Griffith University 2012