Owning a franchise is a great way to own and operate your own business without having to start from the ground up with a new company. While a lot of the components of a franchise are streamlined due to the nature of the business, there are ways you can optimize the financial components. Before moving forward with owning a franchise, it’s helpful to understand the financial aspects of the business. Below you will find the basics of franchise accounting.
The Basics of Franchise Accounting
Franchises and the Franchisor and Franchisee Relationship
Franchises are businesses that are owned and operated by individuals. Each franchise location is owned by an individual, while the entire franchise is a part of a larger company. Franchises are helpful as the brand often has name recognition that comes with an existing customer base. The primary benefit is that there is generally already a strong demand for the product or service.
Franchises include both franchisors and franchisees. Franchisors own all of the franchise locations and manage the larger business components. For example, they form the overall operating system and provide support to the franchisees. They make big-picture decisions about which products and services are sold. Franchisors need franchisees to run the individual locations so they can focus on the bigger picture when it comes to the overall business. The relationship is formalized in a franchise contract where the franchisor sells the rights to the franchise to the franchisee to operate the business’s day-to-day operations. The franchisee owns the individual location under the guidelines set forth by the franchisor in the contract.
Franchise Accounting Fees
The franchisor and franchisee relationship is formalized in a franchise contract. Just like with any business, a franchise comes with start-up costs. These are different from a regular business and include initial, royalty, and marketing fees. Below you will find a helpful explanation of the initial and continuing franchise costs.
Each franchisee pays an initial fee to get started. Initial fees are usually paid in a lump sum. This is essentially an entry fee that gives the franchisee the right to operate under the franchise name, trademark, operating systems, equipment, training, renovations, and any other start-up costs. These can differ from franchise to franchise so it is imperative to have legal counsel and read the entire contract.
In addition to legal counsel, you should have a skilled accountant providing support on the financial aspect. The initial fees are often paid at once, but calculating the business capital projections is integral to amortizing your initial fees. Amortization is the gradual write-off of the initial cost of an asset over a period of time. This means that you can reduce your debt with regular payments. In the case of a franchisee, the initial fee can generally be deducted over a 15-year period.
For the relationship to make financial sense, franchisors need to collect a royalty fee. Depending on your franchise contract, the royalty fees can be payable monthly, quarterly, or annually. It is often a percentage of your franchise’s gross sales, but it can also be a flat fee or a percentage of the net sales.
Depending on the franchise, a franchisee may need to pay a marketing fee. This goes into a marketing fund to promote the franchise on a large scale. This fee is often a small percentage of your gross sales. Be sure to understand how much and how often you need to pay this fee before signing your franchise contract.
There is some crossover between regular business accounting and franchise accounting. However, it’s helpful to utilize an accounting service to ensure all of the franchise financials are in good shape. Even small mistakes can result in tax or contractual issues. Indevia Accounting can provide you with a number of services to meet your franchise business needs. From payroll processing and accounting solutions to invoice management and bill payment. We are skilled in process improvement and automation to ensure your franchise is financially efficient. Contact our team today if you are considering opening a franchise!