Financial advice
Your finances
Carl Reader on providing financial records to prospective franchisees
Many franchisors have agreements in place that allow them to obtain copies of their franchisees' annual accounts. Often, these rights are extended to allow access to monthly or quarterly management accounts, and other financial data. However, many franchisors do not request these, and when they are requested the information is not used optimally.
Part of the reason for this is due to the way the information arrives. Traditionally this information has been received as hard copy reports. These can often range from being prepared manually, on spreadsheets, or from computerised systems such as Sage and Quickbooks.
This leads to three problems. Firstly the information arrives in different formats. A report from a spreadsheet will appear very different from a report from a computerised accounting package, and even accounting packages produce different reports. Secondly, the information may be inconsistent. As a franchisee is free to set up their own accounting routine, the level of analysis may differ between franchisees. Finally, the information is received as individual reports from each franchisee. As the information is prepared on separate systems, there are no cost effective ways of implementing a consolidated report, and therefore franchisors tend to review these reports individually.
These issues can be resolved through the use of online accounting packages, which ensure that the franchisor has access to the latest financial information. Some packages also allow for benchmarking and exception reporting, so that franchisors can minimise the administration time in monitoring franchisees financial affairs. By using a network accountant, the franchisor can also ensure some level of consistency across the franchise network.
Once a routine has been implemented, it is then important that the franchisor reviews the full financial statements. All too often, franchisors focus on turnover, as this is the figure from which the management service fee is calculated. Although this is a useful cross-check, if a franchisee is prepared to understate their income to you they are often just as likely to understate their income throughout their records.
What I believe is of more importance is to monitor the overall financial situation of a franchisee. A set of management accounts should provide the franchisor with enough information to establish the likely financial risks approaching the business, if the balance sheet is showing a poor financial position. They will also be able to show the level of overheads within the business, which the franchisor might be able to assist the franchisee with. Finally there are leading factors, such as advertising spend, which might indicate that the franchisee is not investing enough in their business.
The financial information should also allow the franchisor to ensure that the network is compliant with any relevant tax legislation, to prevent any network-wide issues from an HMRC inspection. This is increasingly relevant given HMRC's current stance on tax disclosure campaigns, and their stated intention of ensuring that the correct level of tax is paid by businesses.
Author: Carl Reader is the head of franchising for Dennis & Turnbull
