Thinking of Opening a Franchise? Read This First
Many people are thinking about opening a franchise these days, and it’s easy to see why. Franchises are a smart business model that allows you to open your own business and be your own boss with the benefit and security of an established, successful brand.
As a business owner myself, I always encourage people to start their own business because I know firsthand just how rewarding it can be! However, before you go and sign that franchise agreement, there are certain things you should consider.
I’ve recently worked with clients who opened their own franchises, providing them with both accounting and advisory services to help them run their businesses. Through my observations with these clients, here are a few things that I think other potential franchisees should be aware of before making the commitment.
1. Be Mindful of Hidden Start Up Costs
According to research, the average cost of starting up a franchise can vary widely, being anywhere from about $50,000 or $75,000 to about $200,000. For example, my current clients start-up costs range from $32,000 to $90,000. If you are considering opening a more well-known franchise (think Subway, Jamba Juice, etc.) you can expect your start-up costs to land on the higher end of the spectrum.
And an important thing to remember is that the start-up costs go beyond the initial purchase. For example, sometimes franchisors require you to purchase a work vehicle with the name of the brand on it at your expense. They may also require you to have a physical location like an office space instead of working from home — also at your expense. So, before you sign your contract, be on the lookout for those extra expenses and make sure you have the ability to pay for them.
2. Stay on Top of Your Accounting Needs
Because they calculate their royalty fees based off of their revenue, franchisees have a monthly financial reporting obligation. Some franchises may even require more frequent reporting.
That means you can’t just leave your accounting work until it’s time to do your tax return. You need to stay on top of your accounting, or risk being in violation of your contract. And there are different ways to do accounting; your contract will state if you need to be filing on a cash basis or accrual basis, so be mindful of that as well.
At Wood CPA, we work closely with franchisees to make sure they meet their monthly reporting requirements and stay in compliance with their contracts. Our accounting services include calculating the quarterly estimates, doing sales tax filing, filing business tax returns, filing personal tax returns, handling payroll, and more.
3. Meet Any Specific Legal Needs
When you open a franchise, it’s not just accounting you need to be aware of. You also need to select the appropriate entity for your business, decide whether or not to hire employees or contractors, research your sales tax, and stay on top of business documentation requirements.
That’s why, apart from our accounting services, Wood CPA also offers compliance services which cover any legal needs your franchise might require. We’ve assisted our franchisee clients with entity selection, business operations and documentation, tax planning, research on sales tax, employee vs. contractor analysis, and budgeting.
Another word about legality: Many of these “franchise agreements” (contracts) last 10 years. So if you have to close without terminating the franchise agreement, you are at risk of being liable to the franchisor for “lost future profits” — the money the franchisor would have earned if you’d stayed open for the duration of the contract. At that point, your choices are either to stay open and lose even more money, or face a lawsuit from the franchisor for breaking the contract. This is why making sure you have the necessary capital before opening a franchise is critical.
4. Be Aware of Other Requirements
There are other requirements that franchisees have as well. Many franchises have software requirements. For example, one client’s franchise requires them to use QuickBooks online, which is easy and efficient. Another client’s franchise requires everything to be done with their own company software, which has… subpar accounting features. Each franchise has their own rules for how they want to be able to access their information and reporting, so make sure you’re aware of what kind of software your franchise requires.
Another thing to be cognizant of: Certain franchises require franchisees to spend a certain percentage on advertising, technology, and other aspects of the business. These recurring monthly fees are usually based on your revenue, so be sure to get those exact percentages.
5. Be Cautious
Franchises are becoming more and more popular these days. I’ve even seen “franchise recruiters” out there who claim to be able to “match” you with the franchise that would suit you best. While opening a franchise can be a very rewarding and profitable experience, I would urge people to be cautious of being sold on these.
Franchisors do a good job of making the idea of opening a franchise seem as easy as 1, 2, 3. From what I’ve seen, though, the process is more involved than that.
As I said, I’m a business owner myself, and I encourage everyone to take the leap and start their own business, franchise or otherwise! But if it’s a franchise you’re thinking of owning, you’re going to have to put in a lot of work to get started — just like you would with any other business. You will need to network, market yourself, and pull up your bootstraps for the first couple of years. But if you are willing to invest the necessary time and energy into the process, owning a franchise is an excellent way to become a business owner!
Let Wood CPA Keep You In Compliance
Becoming a franchisee can be complicated, but Wood CPA is here to help! We provide both compliance and advisory services for franchise owners. If you’re in need of a Certified Professional Accountant to help you meet your reporting requirements, or if you have questions about any franchise-related concern, schedule a meeting with us here.
