A franchise is a contract where a distributor, or franchisee, gains the right to sell a well-known trademarked product from a franchisor. Common examples of franchises include fast food chains and clothing chain stores. These exclusive grants allow the franchisees to capitalize on the national or regional reputation of the product they sell, which presumably allows them to tap into an already developed customer base. This ability to tap into a pre-cultivated customer base is an intangible asset.
An intangible asset is something that is not material, but still has economic value. List the franchise rights on your balance sheet under long-term assets grouped with any other intangible assets you may have. List the value of the franchise rights at its fair value. The fair value of the franchise rights is equal to how much the franchisee paid in the initial contract to acquire the rights. The issue with defining this value is that generally the contract that generates the rights for the franchisee also transfers tangible assets as well.
Assets are arranged into three categories: current assets, fixed assets property and equipment and other assets. Assets are further presented on the balance sheet from the most-liquid to the least-liquid assets. Cash: Cash is cash, but do not forget the cash in the drawer in the individual stores and petty cash. Receivables: Credit-card receivables are a growing factor and can be significantly higher than cash.
Inventory: A restaurant franchise can have a significant amount of inventory if wine and liquor are involved, and auto aftermarket concepts usually have large inventories. The key is inventory control. Franchise businesses historically have not been the best at maximizing inventory turns because, in many cases, the level of inventory is dictated by the franchisor. We are seeing more and more opportunities to reduce inventories with "just in time" deliveries and a focus on increasing turns.
Prepaid expenses: Prepaid expenses can be overstated. These expenses should be reviewed every year, to determine the economic value. Deposits: Deposits have some liquidity value, but may be held by someone else. Deposits should be analyzed in terms of present value. We normally divide current assets into two types: quick assets which are cash and cash equivalents, or assets that can be readily converted into cash, such as credit-card receivables and the non-quick assets.
We even do a ratio of quick assets to current liabilities to see how much liquidity we have versus what we currently owe. The ratio most commonly used is the ratio of current assets to current liabilities. Most franchise businesses are, by and large, cash businesses, and the current ratio is not necessarily an effective measurement.
The ratio is normally less than 1-to-1, and in many cases the ratio is. Many franchise businesses do not accumulate much cash. Except for working capital needs, any accumulated cash is usually distributed out to the owners or used to pay down debt. Fixed assets: Sometimes fixed assets are called "property and equipment. Some balance sheets show depreciation as a separate line item; other balance sheets show assets as a net number after accumulated depreciation.
An accountant or accounting consultant who has experience with franchise systems and contracts can also assist in avoiding costly mistakes, as well as helping to obtain necessary financing for start-ups or to purchase a resale a term franchisors use to describe an existing location.
These can be an excellent alternative to staring your own for many reasons, and although typically priced higher than a startup, an accounting firm familiar with franchise business acquisition and resale can show you how this option can actually be much the more affordable alternative.
Once a franchisee begins doing business, he or she must pay the franchisor a portion of the revenue. Royalty payments are usually made on a weekly basis, although depending upon the franchisor, payment intervals may vary to monthly or some other scheduled payment.
Regular franchise fees can also cover services, such as training or legal advice needed throughout the year. Being a franchisee requires an individual to control the risks, while making the most of the advantages of the business. A franchisee needs strategies for hiring, then managing employees, staying on top of cash flow, dealing with debt, and reviewing and understanding the Key Performance Indicators for that business regularly, and making the proper adjustments to keep the business performing efficiently.
Franchise debt can start as soon as a franchisee pays the startup fee for joining the franchise network. Bank or SBA loans to purchase the business, Lines of Credit to provide Operating Capital or Inventory, or Owner Financing, if the new franchisee has purchased an existing location, are all sources of funds that need to be managed and considered when doing Cash Flow projections.
Uses for these funds are many; Staff has to be paid while they are training, often, before the business is even open. Inventory may need to be purchased if it is a component of the business and was not included in the initial franchise opening package.
Leasehold improvements, Furniture and equipment, uniforms….. They also help determine necessary cash flow to service the debt, as well as when to take on or eliminate certain debt to more efficiently utilize the tools for success that you have at your disposal. Another aspect of a good franchise accounting firm is helping with managing employees and their training, motivation, schedule, wages, and tax requirements. An accounting firm with business experience can often help an owner craft a compensation plan that will attract better employees, reduce turnover, increase job satisfaction, and best of all, increase productivity without increasing cost of labor.
Franchisees are encouraged to use professional payroll services to help calculate wages and tax for employees. Most services will automatically file Monthly or Quarterly and Year-End employment tax documents and payments as part of their payroll service to keep franchisees i n compliance with State and Federal law.
This, more than any other aspect of business ownership, is the least forgiving, most complex, and requires attention to detail, accuracy and timeliness, as penalties can be severe, and both State and Federal agencies target this area to insure business owners are filing and paying on-time.
There may be unexpected facility repairs, or an employees may occasionally work overtime, exponentially increasing payroll costs. Knowing which of these expenses is predictable, and which will fluctuate with sales volume is important. A franchise accountant can not only help you understand and thus control these things, but do a financial projection to anticipate future Cash Flow requirements to cover such events and avoid Working Capital shortfalls down the road the number one reason businesses fail.
It is also helpful to have someone who is knowledgeable about the ins and outs of franchise fees, franchisor discounts, uncollected revenue write-offs and so forth from a tax perspective.
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