Accountant Shopping for Franchisors: What to Look For When Getting Started
Hiring a Franchise Company Accountant
by Kerri L. Kutlenios, CPA
for Executive Legal Professionals
September 3, 2014
So, you’ve been running a successful business and are thinking of franchising your concept and sharing the love. Or maybe you have a brilliant idea and would like to franchise right off the bat. Regardless of your business, there are some accounting distinctions in the franchise world that are different from a stand-alone company.
As you shop around for an accountant to assist with your new franchise (and it is important to shop around, trust me), there are a few topics you may want to discuss to make sure your accountant will be able to accommodate your needs, and also grow with your business.
Probably the most important requirement of a franchisor is the annual filing of your Federal Disclosure Document, or FDD. This document not only will provide franchisees with information regarding site selection and build-out costs, but will also disclose a copy of your annual audited financial statements. In addition, you will only be able to sell franchises with a current FDD filing, which is due 90 days from the end of your fiscal year. If, for some reason (like a delayed audit), you miss your FDD filing, you will be prevented from selling franchises, which could be a major setback.
This requirement presents a two-fold discussion for your accounting needs. First, you may want to discuss your FDD filing with your external CPA firm to make sure that primarily, they can prepare an independent audit of your financial statements, and also, they understand and are comfortable working with your franchise attorney to discuss FDD disclosure requirements. Depending on the state you want to sell franchises, there may be specific financial ratio requirements that your auditor and attorney will review. In addition to your external CPA firm, you will want an internal accountant who can prepare timely monthly and year-end internal financial statements, and who can communicate with your auditors to coordinate the audit within your filing deadline. Your internal accountant doesn’t necessarily need to be a CPA, but should have a strong accounting background and be familiar with what your auditors will need to efficiently audit your books.
Another topic you may want to discuss internally is your collection of franchise royalty, once your franchise locations are up and running. Your internal accountant should be knowledgeable of your royalty collection policy that is stated in your franchise agreement, and should be communicating with you regarding any late payments and the appropriate communication with franchisees regarding late fees. The collection and accounting of these payments should be applied consistently across your franchisees, which will most likely be an auto debit from their bank account. Management should constantly be aware of any late royalty payments, which may be an indication of a franchise in trouble.
A third opportunity for helpful accounting assistance with your franchise is in the area of potential franchise selection. Most likely, you will require potential franchisees to provide financial information to confirm net worth and liquidity. Your accountant can assist with both the most reliable information to request (hint: documents provided to or verified by a third party like the government or a financial institution), and also to interpret the information received to ensure they meet your franchise requirements. This may seem obvious, but in many ways you are selecting a business partner for the next 20-30 years, and this process shouldn’t be rushed, no matter how tempting it may be to cash those checks.
Hopefully the points above illustrate the importance and the benefit from a strong financial ally in your franchise venture. Your financial team can be much more than a necessary evil, and ideally will provide you with peace of mind and remove one responsibility from your increasingly crowded plate. Congratulations on your venture and best of luck!
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