Does your accountant understand the franchise numbers?
If you’re buying a franchise, the message from the Franchise Council of Australia and the ACCC is clear. Get the right advice, including from an accountant with franchise experience. But why do they mention ‘franchise experience’?
Two things can happen if your accountant doesn’t have the right franchise experience. You might miss out on a great opportunity because they don’t like franchises. Or, you might buy a business that doesn’t stack up financially because the accountant couldn’t help you assess the numbers.
Recently, we spoke with a franchise buyer whose accountant poured cold water on the idea of buying a franchise. “You don’t need a franchise. Why not start your own business?”, he said. What he’d failed to do was look at the numbers or think about what’s involved in starting a business - including the costs.
After looking at the numbers, Jenny (the franchise buyer) decided that the franchise was right for her. She felt confident she could reach the sales target needed to support her financial goals. She’s just completed training and is excited to be in business for herself.
On the other hand, some franchises don’t stack up financially and a general accountant might not pick that up. For instance, an accountant may be expert in personal tax but inexperienced at helping franchise buyers look at the numbers. This accountant can help you set up a structure for the business to operate through but never offer to check the financials before you buy.
Take the case of Benny who bought an underperforming franchise. The sales were low and the rent high but he thought it would work out. He set up a company but didn’t get advice from his accountant on the numbers and now he is struggling financially.
What are some of the numbers a franchise accountant should understand and be able to discuss with you? Here are a few to consider.
6 things your franchise accountant should understand
Rent: One trap here is that the accountant thinks that high rent translates to high sales. A good question to ask is “What weekly sales are needed to cover the rent, and how much will this increase each year?” This leads to the next question: “Is there evidence that these sales can be achieved?”
Staff wages: People in franchising tend to talk about wages as a percentage of sales. You might hear them say “Wages should be X% of sales.” I expect an accountant to push back on this. They should ask what a typical roster actually costs for different sales levels and build that into the projections.
Your wages: If you’re working in the business, you need to be paid and your wages included in the projections. Don’t be mesmerised by talk of tax deductions; you need to make an income first.
Loan repayments: Loan repayments are a real business cost and must be taken into account. The same applies with money you have put into the business. Your accountant should alert you to these costs and take account of them in breakeven calculations.
Royalty, advertising and other fees: Royalties and fees are almost always part of being in a franchise. That’s just the way it is. We see lots of people question them, but for me the key point is “what is the franchisor delivering?”
Cost of Goods Sold: Your accountant should be asking questions about Cost of Goods Sold (assuming you’re in a retail business). These costs have a massive impact on the profit of the business and you can’t afford to be guessing the number.
If you’re buying a franchise, you don’t just need an accountant who does tax and general advice. The accountant’s team should include franchise specialists who are familiar with the opportunities, risks, and the unique issues franchisees face. This way, the team can help you make your decision informed by relevant advice.