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The large franchises business in Australia is a lucrative market for accounting firms. Two experienced practitioners discuss the opportunities and challenges of working in the franchise industry and what differentiates franchisees from other small business clients.
In Australia, the franchise business is a big business. In 2016, 79,000 franchise units were operating in 1,120 franchised brands, generating $ 146 billion in business and directly employing nearly 500,000 people. The most common industries for franchises are retail, food and lodging services, and administration and support services.
Peter Knight, the former president of CPA Australia's NSW branch, who created Franchise Accounting & Tax in 2017, is a legal relationship between franchisee and franchisor, which sets him apart from other SMEs.
A franchisee pays the franchisor a license to operate a business under the franchisee's trademark.
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"It gives them the right to use the intellectual property of the franchise – brand, knowledge, know-how, systems and processes," he said.
Each month, the franchisee generally pays the franchisor a fee or fixed fee and contributes to a marketing fund or advertising fee. Together, both can account for up to 12% of revenue.
"These costs represent a significant cost for small business owners. They need to make sure that the benefits of being in this group outweigh the extra costs, "says Knight.
This benefit can be increased sales resulting from brand awareness, lower costs through competitive purchasing and support from other franchisees in the group.
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At Franchise Accounting & Tax, Knight offers services focused on financial performance and franchise governance, including bookkeeping, accounting and tax, strategic planning and business planning.
"It's about helping franchisees achieve their overall goals," he says.
Budget and performance are discussed in quarterly working meetings. "We are not too involved in marketing or operations – areas that are generally well maintained," says Knight.
"We found that the knowledge base was a bit sketchy … In franchisee training, the focus is not on the financial side of the business."
Tanya Titman is Managing Director of Consolid8, a Brisbane-based company with franchise clients such as Jets, Cash Converters and Donut King.
"In some cases, we work with the franchisor and sit in the middle … and in other cases, we work directly with the franchisee," she says.
"In my business, we work with multi-unit franchisees. This means that a customer can own multiple stores within a group of franchisees. We call them our "Multi Mikes" – we built a whole character around them. "
Working with multi-unit franchisees means that Consoli8 customers benefit from economies of scale.
"One of our multi-unit owners could have 25 franchises within their group. It's like a mini-franchise group, "said Titman.
Consistency of data is an important issue for franchisees who operate multiple businesses. "It's very difficult to make all accounts look the same," she says.
"We're building a model for a particular franchise group and deploying it multiple times. We have put a lot of effort into developing the right model and ensuring consistency across the group. "
It is important to note that the Consolid8 templates provide franchisees with up-to-date information and benchmarking on their group.
"They can see very easily what are the best-performing stores in their group, the stores that have problems and how can they learn from each other."
Due diligence in the franchise sector
A series of non-compliance scandals over the last 18 months has shone a spotlight on the franchise industry, highlighting the importance of rigorous financial diligence and the issues that arise when it is neglected.
Establishing a franchise business can be a high-stakes business. According to the 2016 Franchising Australia report, the median start up cost of a non-retail franchise unit is $ 59,750, and $ 287,500 for a retail franchise unit. The initial franchise fee, charged by 87% of franchisors, is $ 28,000 for retail units and $ 31,500 for retail franchise units.
Greenfield companies – where a company is based at a brand new site – can incur even higher installation costs.
"We have a couple [of clients] who spent $ 800,000 to start a business, "says Knight. This is not an incredible sum for the purchase of an established business, but a significant investment for an untested business.
To help potential new franchisees badess whether a franchise will help them achieve their financial goals, Knight developed a product called a pre-purchase review, a report covering the financial aspects of buying and managing a business. a company.
The document covers a significant territory, including the level of sales needed to cover costs and generate revenue, the estimated operating costs in the first year of the business and the questions to be asked in the context of the pre-financial control. .
The problem for the sector, notes Knight, is the lack of an agreed set of standards defining financial diligence.
"There are 10,000 accountants in Australia, there will be 10,000 different views on what it is, what it looks like, what it covers," he says.
Challenges in the service of the franchise sector
The franchise sector offers many opportunities for accounting firms, but also presents challenges. Many franchisees are under financial pressure in the current economic climate, particularly in the declining retail sector.
"Some are on really lean margins," says Knight. "Financial services can not be provided for free … there is a cost, and sometimes there is resistance to that."
The pressure to reduce costs has led some franchisees to resort to underpayment of staff, which has led to fair work targeting the sector in the event of non-compliance.
"We want to make sure people are compliant. If someone does not pay a fair salary, it gives them an unfair advantage in the market, "he said.
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