Accounting Needs of Start-Up Franchising Companies

by Noel Bagwell
for Executive Legal Professionals, PLLC

August 27, 2014

Typical Accounting Needs at Start-up

Our ongoing series on considering franchising your successful business must necessarily include a discussion of franchise companies’ accounting needs during the start-up phase of their business. I am not an accountant. This article does not contain a reference or referral to any particular accountant or accounting firm. Please take everything you read, below, with a grain of salt and consult a licensed accountant to confirm the accuracy and propriety of the advice contained herein.

Franchise companies must have an accountant prepare for them audited financial statements. One of the legal disclosure requirements is to have prepared and to include in the FDD these audited financial statements. The franchise company will not be able to meet all the legal disclosure requirements until it has prepared audited financial statements.

Deciding whether to set up a separate franchise company to franchise your business concept or, instead, deciding to use the currently operating existing business entity as your franchise company is an important decision—one you need to make under the guidance of both a business attorney and an accountant. Make sure you are getting an accountant experienced in the franchise industry; check their references prior to deciding on which accountant to use.

You Are Responsible, Too

As a franchisor, you are implicitly sending the message to prospective franchisees: “I know how to do engage in this business in a way that is unique and special and particularly effective; therefore, you should pay me to do it my way, because you’ll earn more that way than by doing it on your own, your way.” It’s difficult to send that message if your record-keeping sucks. Good record-keeping is one of the hallmarks of good business. Without good record-keeping, you cannot be adequately transparent. Without good record-keeping, you cannot even really know what you’re doing.

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Franchisors, therefore, are responsible for keeping good records; among other things, that means using a reliable accounting system. Keeping good records will help you in your interactions with consultants and other professional experts, including accountants and lawyers, because they will have to spend less time (and, therefore, less of your money) trying to decipher your records.

What’s Good for the Goose

Goose-GanderThere is an idiom, “What’s good for the goose is good for the gander,” which essentially means, what is good for one type of person or thing is equally good for another type of person or thing, despite any irrelevant differences between the types. With respect to adopting good accounting practices, what is good for the franchisor is good for the franchisee, and vice versa.

As a franchisor, you will want franchisees in your franchise to maintain clear, accurate records–especially accounting records! One might say it would be unreasonable to require that of franchisees if the franchisor is unable or unwilling to meet the same requirement. Furthermore, no franchisor should expect a prospective franchisee to buy a franchise unit if the franchisor’s accounting records are indecipherable, confusing, or otherwise unclear.

Having a qualified, knowledgeable accountant to prepare, or at least audit, your franchise company’s financial statements to ensure they are consonant with generally accepted accounting principles, therefore, is a must for any credible franchise company.


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