Franchise ownership has become an attractive option for many entrepreneurs. It offers them a chance to own and operate their own business while minimizing the risks associated with starting from scratch. Becoming a franchise owner means helming various business responsibilities, including identifying an accounting solution specific to the needs of a franchise business.
Franchise Accounting Defined
Franchise accounting simply refers to the accounting practices and procedures used by franchisors and franchisees to manage their financial transactions and reporting related to the franchise business. Fundamental areas include:
Franchisor Fees
Costs of starting and managing a franchise business include:
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Franchise Fee – This is the initial fee delivered to the franchisor for the right to use the franchise trademarks, systems, and operations manuals. You also invest in all your business needs with this fee as well – from training and equipment to renovations. Franchise fees depend on the franchise system’s popularity and demand. Franchisees can also amortize their initial fee over a number of years, deducting it from their tax returns.
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Ongoing Royalty Fees – Franchisees must make ongoing payments towards royalty fees either monthly, quarterly, or yearly. Typically, this fee represents a percentage of the gross sales generated. However, there are cases where it may be calculated based on net sales or as a flat dollar amount. The purpose of these royalty fees is two-fold: they provide franchisors with a source of income while also covering fixed costs associated with operating the franchise.
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Marketing Fund Fees – Franchisors usually charge their franchisees a marketing fee, often a small portion of their gross sales, and that money goes into a marketing fund that is universally used to promote the franchise brand and generate more sales for all franchisees .
Initial Investments
Besides franchisor fees, franchise owners must consider several other initial investments, including purchasing commercial real estate, equipment and inventory, legal and accounting fees, and training and support costs. Real estate costs may vary depending on the property’s location, size, and condition, while equipment and inventory costs rely on the franchise’s type and size.
Knowing the details of these franchise-specific costs will enable you to prepare for other elements of franchise accounting, such as bookkeeping, compliance, benchmarking, and tax preparation.
Financial Reporting
As a franchisee, you are required to maintain accurate financial records and prepare financial statements including balance sheets, income statements, and cash flow statements. These tools are used to evaluate the financial health of the franchise and will help make strategic business decisions.
Taxes
Managing the tax obligations like income tax, sales tax and other applicable taxes are an important part of franchise accounting. In order to avoid penalties and maintain financial stability, compliance with tax regulations is critical to a franchise business owner.
Compliance
Finally, franchise accounting involves complying with legal and regulatory requirements, including those related to accounting standards, reporting requirements, and financial disclosures. Franchisors and franchisees must ensure they are meeting all legal obligations and maintaining accurate records to protect the integrity of the franchise system.
Ceterus As Your All-In-One Solution
At Ceterus, we provide clear financial insights, tech-enabled bookkeeping, and tax preparation so that you can build a stronger future as a franchise owner.
With the help of our tech-enabled accounting software, our financial experts can provide the following:
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Brand-compliant financial statements
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Timely transaction updates
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Peer benchmarking
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Ongoing tax advisory services
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Multi-unit reporting
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Cash flow projection
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Dedicated financial consultations
Stop worrying about franchise accounting and gain peace of mind. Talk to an expert at Ceterus today.
