Accounting and the Potential Franchisor

What do you see as a key benefit to franchising?

Across any industry, many business owners are interested in franchising their concept. One of the key benefits is the ability to expand a business from one to 50 stores in a faster time than it would take to build those stores under a single owner. By the time a potential franchisor begins to meet with an accountant, chances are the candidate has an existing operating business, has a good idea and has already investigated growing this concept through franchising.

What are your thoughts on the entity formation process?

First, potential franchisors need to take the time to consider their type of legal entity. To determine the form of corporation or partnership you want to put in place, it’s important to first outline the number and type of people investing. Funding sources can include family and friends, personal savings, leveraging retirement assets, bank loans and SBA loans. But no matter where you get your funding from, the most important goal is to make sure that your concept has the potential to be financially beneficial. Another factor that influences this decision is financing through equity or debt. In the end, getting all of these elements will help the potential franchisor balance his or her strategic goals and objectives with the tax implications of the entity structure chosen.

When it comes to accounting, how would you describe potential franchisors?

When planning their financials, franchisors break down into three categories. First, there are the franchisors that do accounting well. These people know how to find and use the best tools Secondly, there are the franchisors that have no concept of finances or accounting, and chances are, they’ll get further into the franchising process before the right structure is even in place. These are the “shoe box” folks—they throw their receipts in a box and know accounting is not their expertise, but they value the services accountants can provide. And lastly, there are the middle guys who do mid-level planning but not enough to get maximum value out of their efforts. People in this category at least know how to organize receipts, but they could use a little bit of help to get them to the right place. At this stage, it is important to meet with qualified financial planners to form the right entity type and set the company up correctly from the beginning.

What do you think is important to managing and operating a franchise well from the beginning?

The goal is to be able to operate and manage the business well. To do so, franchisors need to make sure their financial data is clean and up to date. Typically, it’s the shoebox accounting franchisors that struggle in this area. They show up once a year with a shoe box of receipts from two locations, asking the accountant to put the information into a program and analyze how the business is doing. This behavior is clearly not a best practice. The best practice would be to get help deciding on the best software to help keep the franchisor organized. Hopefully that software is cloud-based.

What are some tips you would give potential franchisors about working successfully with an accountant?

1. Find a CPA or a qualified, degree-holding accountant with an understanding of cloud-based tools

2. Work with the accountant to get the right tools in place for your business

3. Engage the accountant to provide setup and training

4. Do the work yourself with guidance from the accountant

5. Hire a bookkeeper with some insight from a CPA

6. Engage the accountant to prepare and provide the information you need