Whether you’re a franchisee or thinking of entering franchising, it’s essential that you understand franchise accounts.
Some franchisors will take care of accountancy issues for you, but most commonly, franchise accountancy practices are similar to running any other business. The same rules apply before and after you have bought a franchise. Due diligence is vital from the off.
Always perform a full credit check on the franchisor, and look into its latest accounts. Do not be afraid to ask to see any documentation you may need to be secure of the financial stability and viability of the opportunity.
If you are refused access to these details, remember: franchisors may promise you the world before you start, but you have every right to take every measure to verify that promise.
Don’t forget to also talk to existing franchisees, they are a valuable source of information about the franchisor and the franchise as a whole.
Here are a few simple tips for what to look for when verifying accounts.
An experienced franchising solicitor will be able to check out your franchise agreement and let you know exactly what it is you’re getting into financially
Check the turnover and compare it with previous years’ figures to assess the way the business is performing. Then check the gross profit percentage to ensure it is in line with similar businesses. Any anomalies should be investigated.
Wages are often the largest overhead. Find out whether these are higher or lower than you would expect for this type of business.
Examine the rest of the overheads, remove personal costs such as depreciation and finance and adjust the remaining cost to reflect the way you feel a competent franchisee would run the business.
Net profit can then be adjusted to give you a good idea of the business’s true profitability.
An obvious point, but business accounting can be complicated, and if it’s something you don’t feel entirely comfortable with ask an expert. An experienced franchising solicitor will be able to check out your franchise agreement and let you know exactly what it is you’re getting into financially.
Post franchise purchase
After you have bought the franchise, you need to get to grips with the accounts. Here are a few pointers:
Keep it simple: if your accounting system is complicated, start again with a completely new one. Always use a tried and tested system, normally you will be given guidance on this from your franchisor - avoid any “bespoke” options. Remember that the difference between franchising accounting and running your own business is that you’re going to need to report your figures to the franchisor. Clarity is essential.
Remember that there are no shortcuts:
On a strict monthly basis, check that your records of who owes you, who you owe and how much you have in the bank matches the actual figures you are working with. It’s important to catch anomalies quickly. You will be surprised how quickly your finances can become a mess.
Check VAT rates and that you are using the best method for your franchise (e.g., a flat rate)
Look at all your expenses to ensure that they are sensible, effective and sufficiently detailed.
Stay on top of it: If not already part of your original franchise agreement, make sure to create and stick to strict payment terms for clients such as detailing (the timing of when invoices are raised and following these up for settlement). Always pay attention to the payment terms of suppliers.
Explore your options: There are a number of tax breaks that will be available to you. Make sure you log all expenses and that they are claimed for, and that all available tax relief is claimed on the business’ assets (including embedded fixture and fittings).
Again, the franchisor may already have provisions in place to guide you through this process, or carry out most of the tasks for you. If not, any good franchisor will be able to give you as much advice as you need.
However, in both instances, remember that you are responsible for the accounts of your business, so question anything you’re not sure about.