Running a successful franchise business involves more than just offering a great product or service. Delicious meal options, a clearly defined brand, and excellent locations are an important place to start for an emerging QSR franchise, but those aspects are just the beginning.
We recently sat down with Dave Hood, President of iFranchise Group, to discuss how franchisors can support their new franchisees by taking an active role in setting them up for financial success. There are numerous ways that franchisors can support franchisee profitability and ensure brand success in the process.
Make Accounting Standards a Priority From the Beginning
When launching a new franchise, emerging brands often focus on essential operational aspects like onboarding, real estate, construction, and training. It makes sense to place a lot of energy and attention on the really practical, tangible aspects of the business, especially for franchisors without previous franchise experience. There’s a tremendous amount of decision-making that goes into getting independent operators set up with a franchise brand.
However, setting up accounting standards is a critical process that many franchisors overlook (emerging and established brands alike). The initial stages of franchising are busy, but establishing solid accounting processes and implementing them with all new franchisees will really help to set the franchisees up for success.
Hood encourages franchisors to put themselves in a position to be a good business coach to their franchisees – which starts with solid accounting standards and a means for the franchisor to access franchisees’ P&Ls.
He explains, “a lot of times, franchisees are first-time business owners. So they may know how to use accounting software, or they may have a spouse that’s an accountant or a bookkeeper. Or, they might have no idea where to go for accounting. If they don’t have good guidance from the franchisor, then they’re going to be spending more time learning Quickbooks than they are doing the marketing and hiring the great people that are going to generate customers for their business.”
Help Franchisees Plan and Budget – Especially the First Year
Again, franchisors can benefit from recognizing that many of their new franchisees will likely be first-time business owners. Hood notes that oftentimes this results in franchisees not realizing when they’re struggling in the first six months.
As he explains, “it’s usually the franchisor that recognizes underperformance before the franchisees. That’s why it’s important for the franchisor to be actively involved in defining a budget for the franchisees location and tracking performance. Franchisors can help franchisees identify what metrics they should be hitting in terms of cost of goods – especially labor costs in the first year.”
“Usually a new business is going to be high on labor for the first six months,” Hood notes. “Especially if you’re a consumer-facing business like a restaurant, you don’t want to disappoint your guests. Especially for first-time business owners, there will likely be a lot of turnover in the first six months, so it’s okay for franchisees to overstaff their location when just getting started.”
Providing historical financial data around labor costs and turnover can help franchisees understand the start-up costs and keep an eye on the benchmarks they should be hitting in the first several months to a year.
Provide an Item 19 and Ongoing Financial Benchmarking
In the competitive environment of franchising today, it can be quite difficult to sell a franchise without providing potential franchisees the Item 19 in the FDD (Franchise Disclosure Document). This crucial part of the FDD helps many prospective independent operators make decisions about ROI and whether a franchise location is a good investment.
While sometimes there are reasons not to disclose financial data about existing franchise locations, Hood generally recommends that franchisors do include data on financial performance. Being able to discuss the historical financial performance is important for franchise sales to remain competitive. Including aspects like historical cost of goods and labor costs in the Item 19 can really help to give potential franchisees a clear sense of the profitability of the business.
Hood points out, “most franchise owners will just put down revenue-based information in an Item 19 – like here’s gross sales by region. But they often don’t disclose expense information. And the reason they don’t is because they don’t feel like they’re getting accurate and timely financials from all their franchisees.”
This is where having a shared chart of accounts becomes incredibly valuable to both the franchisor and the franchisees. With standardized reporting, it’s much easier to be able to compare data across locations and market segments. Once new franchisees have signed the agreement, then Hood encourages ongoing comparison of financial data between franchise locations.
Streamline Reporting and Data Collection by Working with an Outsourced Accounting Firm
Another excellent way to support new franchisees is by working with an outsourced accounting firm to set up financials and run reports for at least the first year. This helps to establish good accounting habits early, ensure consistency in reporting and, in turn, helps the franchisor maintain accurate financial data over time and across markets.
Working with the same accounting partner can provide excellent oversight for both the franchisors and franchisees. Hood explains, “the outsourced accounting partner can then take all the accounting data, pull it in, make sure everything’s in the right place, and then create dashboards that both the franchisor team can use and franchisees can use to compare their P&Ls to peer groups that the franchise or establishes.” This benefits franchisors by ensuring accurate data for Item 19, and it benefits franchisees through accurate benchmarking data.
By mandating an accounting partner for the first year, franchisors can leverage the economy of scale and negotiate advantageous rates for their franchisees. They can also then easily provide franchisees with the financial reporting systems they need. Every location will be able to use the same chart of accounts, same P&L format, same balance sheet. This streamlines the process both for the new franchisees and ensures consistent reporting data for the franchisors – a win-win for everyone.
Better Financials Mean Better Business
Careful attention to financial management plays a crucial role in ensuring both franchisors and franchisees thrive in the competitive landscape of franchising. If franchisees aren’t profitable, it jeopardizes the success of the brand as a whole. That’s why playing an active role in supporting franchisee profitability benefits everyone.
To ensure franchisee profitability and brand longevity, franchisors have a key role to play in providing franchisees with standardized accounting structures, reporting practices and timely data for comparisons. Working together, and with the support of a specialized accounting partner, franchisors and franchisees can have the data they need to make effective and profitable business decisions.
October 2023
