Servicing franchises is a savvy business opportunity for accountants

What sets franchises apart from other SMEs is the legal relationship between franchisee and franchisor.

Australia’s large franchise sector is a lucrative market for accounting firms. Two experienced practitioners discuss the opportunities and challenges that come with working in the franchise sector, and what makes franchisees different to other small business clients.

In Australia, the franchise sector is big business. In 2016, 79,000 franchise units operated within 1120 franchise brands, turning over $146 billion and directly employing nearly 500,000 people. The most common industries for franchises are retail, food services and accommodation, and administration and support services.

What sets franchises apart from other SMEs is the legal relationship between franchisee and franchisor, says Peter Knight FCPA, the former president of CPA Australia’s NSW branch who established Franchise Accounting & Tax in 2017, a spin-off from his general accounting practice.

A franchisee pays the franchisor for a licence to operate a business under the franchisor’s brand.

Related CPA Australia resource: Taking a client service approach

“That gives them the right to use the franchise intellectual property – the brand, the knowledge, the know-how, the systems and processes,” he says.

Each month, the franchisee typically pays the franchisor either a royalty or a fixed fee and contributes to a marketing fund or advertising levy. Combined, the two can amount to as much as 12 per cent of revenue.

“These become a significant cost to a small business owner, so they need to make sure that the benefit of being in that group compensates the extra the cost,” says Knight.

That benefit may be a boost in sales from brand awareness, reduced costs via competitive purchasing deals, and support from fellow franchisees within the group.

Tailoring accounting services for franchises

At Franchise Accounting & Tax, Knight offers services that focus on a franchise’s financial performance and governance, including bookkeeping, accounting and tax, strategic planning and business planning.

“It’s about helping franchisees achieve their overall goals,” he says.

Budget and performance are reviewed at quarterly business meetings. “We don’t get too involved in marketing or operations – areas that are usually well cared for,” says Knight.

“We’ve found that there’s a bit of a gap in knowledge base… In franchisee training, there’s not a big emphasis on the financial side of the business.”

Tanya Titman FCPA is the managing director of Consolid8, a Brisbane-based practice that counts franchises such as Jets, Cash Converters and Donut King among its clients.

“In some cases, we work with the franchisor and sit in the middle… and in other cases we work with the franchisee directly,” she says.

“In my business, we’re quite specific about working with multi-unit franchisees. What that means is a client who might own multiple stores within a franchise group. We call them our ‘Multi Mikes’ – we built a whole persona around them.”

Working with multi-unit franchisees means that Consoli8’s clients benefit from efficiencies of scale.

“One of our multi-unit owners might have 25 franchises within their group. It’s like a mini-franchise group of their own,” says Titman.

Consistency of data is a significant issue for franchisees that operate multiple businesses. “It’s very hard to get all accounts looking the same,” she says.

“We build a template for a particular franchise group and roll that template out multiple times. We put a lot of effort into getting the model right and ensuring that consistency flows across the entire group.”

Importantly, Consolid8’s templates provide franchisees with timely information and benchmarking across their group.

“They can see very easily what the top performing stores within their group are, the stores that are experiencing problems and how can they all learn from each other.”

Due diligence in the franchise sector

A series of non-compliance scandals in the last 18 months has shone a spotlight on the franchise sector, highlighting the importance of rigorous financial due diligence and the problems that arise when it is neglected.

Establishing a franchise business can be a high stakes endeavour. According to the 2016 Franchising Australia report, the median start-up cost for a non-retail franchise unit is $59,750, rising to $287,500 for retail franchise units. Initial franchise fees, required by 87 per cent of franchisors, amount to $28,000 for non-retail and $31,500 for retail franchise units.

“Greenfield” businesses – where a business is established on a brand-new site – can incur even steeper set-up costs.

“We’ve got a couple [of clients] that have spent $800,000 to get a business up and running,” says Knight, not an unheard-of sum for the purchase of an established operation but a significant investment for an untested business.

To help potential new franchisees evaluate whether a franchise will help them achieve their financial goals, Knight has developed a product called a Pre-Purchase Review, a report covering the financial aspects of buying and running a business.

The document covers important territory including the level of sales needed to cover costs and provide income, estimated operating costs in the business’s first year, and questions to ask as part of financial due diligence.

An issue for the sector, notes Knight, is the lack of an agreed set of standards defining financial due diligence.

“If there are 10,000 accountants in Australia, there would be 10,000 different views of what it is, what it looks like, what it covers,” he says.

Challenges serving the franchise sector

The franchise sector provides many opportunities for accounting firms, but also comes with challenges. Many franchisees are experiencing financial pressure in the current economic climate, particularly in the weak retail sector.

“Some are on really skinny margins,” Knight says. “Financial services can’t be provided for free… there’s a cost, and sometimes there’s resistance to that.”

Pressure to cut costs has seen some franchisees resort to the underpayment of staff, which has led to Fair Work targeting the sector for non-compliance.

“We want to make sure that people are compliant. If someone’s not paying correct wages, it gives them an unfair advantage in the marketplace,” he says.

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