Ask the Expert
Rick Chittley-Young, Partner
BDO Dunwoody
"What are my financial and accounting responsibilities for my franchise and what are those of the franchisor?"
Owning and operating a franchise can cost franchisees from several thousand to hundreds of thousands of dollars. So before you invest in a franchise, you want to be as sure as you possibly can that it will be profitable.
Generating profitable returns from that investment is a shared responsibility between franchisee and franchisor, thus it’s important to know the obligations of both parties for the financial health of the franchise.
Start by determining the total financial investment to which you are committing. What is the franchise fee? What does it include? Exclude? This fee may or may not cover a range of services provided by the franchisor before you open your franchise, such as site selection, licenses, training, and opening assistance.
Carefully review the disclosure documents and franchise agreement for information about this fee as well as all of the other expenses involved in setting up and operating your franchise. For example, what are pre-opening expenses? These may include real estate, construction, lease deposit, leasehold improvements, fixtures, equipment, license and permit fees, inventory, insurance, signs, furnishings, office supplies, legal and financial consulting fees, and deposits for utilities.
You will also need capital to cover monthly overhead for three months to one year, until your franchise generates sufficient profits. These expenses may include royalty and consulting fees, advertising and marketing expenses, rent, insurance, inventory, utilities, wages, administrative expenses, principal and interest on loans, leases and legal and accounting fees.
Some franchises may require an additional investment for training. For example, if you have to participate in out-of-town training that may last weeks, travel and living expenses can be significant.
The franchisor is required to outline all of these expected investment expenses in the disclosure documents. As well, the documents will lay out payment schedules and options related to refunds and financing support. Be sure to thoroughly review this information so you know exactly what your financial commitment will be.
When it comes to ongoing accounting and financial management, obligations vary widely among franchise systems. Some franchisors, for example, prepare monthly financial statements. Some require franchisees to submit weekly sales reports and monthly bank statements. Other franchisors submit GST, PST and payroll source deductions on behalf of their franchisees. While it may be helpful to have a franchisor assume accounting responsibilities like these, your franchise will have to pay for them. Clarify responsibilities and costs by reviewing the provisions in the franchise agreement related to books, records and reporting.
You also need to be comfortable assuming ongoing responsibility for the financial and accounting management of your franchise. While you may have a reliable accounting software package, the support of your franchisor, and maybe the assistance of a knowledgeable business accountant, you also need to understand financial statements and what they portray about the performance of your enterprise. And you must be prepared to regularly monitor these statements, as well as key financial ratios, in order to strengthen the performance of your franchise.
The bottom line? Before signing a franchise agreement, it pays to know exactly what your investment will cost and how you will turn that investment into a profit. The right financial groundwork and franchisee-franchisor teamwork will provide your franchise with a solid foundation for success.
Rick Chittley-Young is a principal of BDO Dunwoody LLP (www.bdo.ca). BDO is one of Canada’s leading accounting and advisory firms, which helps entrepreneurs, family businesses, franchisors and franchisees succeed. You can reach Rick in the Oakville office at (905) 844-3206 or rchittley@bdo.ca.
