Franchisee Overview, How Franchises Work, Requirements

Franchisee Overview, How Franchises Work, Requirements

Do franchisees do their own accounting?

A franchisor can end your franchise agreement for a variety of reasons, including your failure to pay royalties or abide by performance standards and sales restrictions. Many franchise contracts will give you a chance to “cure” an occasional failure to comply (like making one late payment) but keep the right to terminate your franchise for other failures. If your franchise is terminated, you’re likely to lose your entire investment. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your outlet. Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable.

The restrictions may also prevent you from operating a new business within a specified distance of any other outlets of the franchise. Find out whether the broker earns a commission based on the cost of the franchise. If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission.

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Other factors that impact all businesses, such as poor location or management, are also possibilities. In the U.S., franchises are regulated at the state level; however, the Federal Trade Commission (FTC) established one federal regulation in 1979. The Franchise Rule is a legal disclosure a franchisor must give to prospective buyers. The franchisor must fully disclose any risks, benefits, or limits to a franchise investment.

Do franchisees do their own accounting?

Lastly, it states whether you have the right to go to court if you have a dispute with the franchisor, or must use arbitration instead. You’ll need to investigate other initial and ongoing costs that aren’t described in Items 5-7, such as the cost of accounting and legal help. Many franchisors retain the right to approve sites for their outlets, and may not approve a site you select. Some franchisors conduct extensive site studies as part of the approval process and a site they approve may be more likely to attract customers.

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An outlet with high gross sales on paper might be losing money because of high overhead, rent and other expenses. Item 4 discloses whether the franchisor or its predecessor, bookkeeping for franchisees affiliates or any of its executives have been involved in a recent bankruptcy. Consider having an accountant review the required financial statements too.

Do franchisees do their own accounting?

Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry. Cash flow is crucial to all types of businesses, and most will have trouble at some stage. There will be times when it’s tough to buy inventory or make a debt repayment. It can be especially challenging in franchise accounting because payroll and franchise fees are constantly flowing out of your account.

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