Wednesday, February 16, 2011

Finance and Accounting Support in Franchise Systems

Finance and Accounting Support in Franchise Systems

There has always been somewhat of a love/hate relationship between franchise operators and their franchisees.  While many entrepreneurs elect to leverage a known brand, documented operating procedures, and combined purchasing power that is often a benefit of a franchise operation, the reluctance to “open the books” to the franchisor is largely based upon a fear that “big brother” will use the information to take advantage of the business owner.  

Logic would indicate that both parties would recognize the validity of sharing financial and business performance data for the benefit of the entire system, where benchmark data and performance comparisons can become the basis of tremendous business intelligence.  But some franchisors, as their networks expand in size, find that their success in selling units begins to outweigh their concern for individual unit performance, and the brand value creates sufficient momentum to overcome a few bad business experiences.  Especially in larger systems, the franchisors don’t often consider the benefits of providing back-office and accounting support for their franchisees, because they simply don’t feel they have to. Reliance on quality accounting and financial data, however, may begin to take on an entirely new meaning, given the nature of the economy right now. 

High unemployment and low consumer confidence have caused spending decreases which have impacted even the strongest of established businesses.  With credit markets being as tight as they are, business owners are unable to obtain the financing required to expand their businesses when required, to new locations or with additional personnel.   The 2010 Franchise Business Outlook[1]  suggests that, even as the economy starts to recover, franchised small businesses will continue to face these financing struggles.  The forecast is for “a slow recovery with marginal increases in the number of establishments, jobs and output.”

Looking to Washington for help, a number of small business organizations, along with The International Franchise Association, are “calling upon Senators to include more provisions in new job creation legislation to help small businesses access credit.” [2] The fear is that if credit access for small business isn’t made available now, the best opportunity to create sustainable business and subsequent job growth will be lost.  Reliance by small businesses upon credit is unquestionable.  

According to the IFA, “the depletion of [SBA loan] funds last fall is proof that the SBA programs were, and continue to be, critically important for our nation’s credit-worthy entrepreneurs”.  However, without sound business accounting and provable data, even the most business savvy entrepreneur may find their business “unbankable” and must therefore rely upon personal credit guarantees to support business growth.

Possibly the strongest point in the argument for franchisors facilitating accounting and financial management assistance to the franchisee centers on Item 19 of the FTC and state Franchise Disclosure Documents (FDD)/Uniform Franchise Offering Circular (UFOC).  Item 19 is the Earnings Claim, which are estimates or historical figures detailing sales, expenses, and income a prospective franchisee might realize as the owner of a particular franchise.

The Earnings Claim is often considered to be the single most important factor in buying a franchise.  As with purchasing any business, it is critical to have a realistic and supportable projection of sales, expenses, and profits earned.  Particularly in a case where a potential new franchisee has no experience running a business, or no applied experience in that particular type of business, the earnings claim becomes the only guidance available.  Unfortunately, the only source for this information is the franchisor itself, which often introduces doubt as to the veracity of the data.  It is difficult to determine which could raise more doubt about the sincerity of the franchisor: using unverifiable data, or not providing an earnings claim at all.

When a franchisor elects to provide services to their franchisees, such as back-office accounting support or financial management oversight, then the opportunity to obtain data for the earnings claim, performance benchmarking, and royalties verification become realistic goals.  Further, the ability to verify and substantiate the data can prove invaluable in a tough franchise market where buyers want good, verifiable information, and Item 19 helps sell units.

Offering accounting support to small business owners isn’t a new concept, but the technology to facilitate a truly seamless relationship has only become available in recent years.  As Internet and Web-based application services emerged on the market, businesses flocked to them in order to gain the benefits of anytime, anywhere access to applications and data.  However, the poor performance and lack of features left some business users without the tools they needed to handle all their requirements efficiently, so many returned to manual or local PC-based systems. 

Application hosting approaches offer a technology model which adapts trusted and proven software and systems to a cloud-based, collaborative online working model.   This technology model allows the businesses to continue use of applications with the functionality required to support the business, but improves the IT environment by managing and securing the systems within a secure facility, and utilizes the resources of the service provider to facilitate the ongoing management and support of the systems.  

Owners are able to retain their investments in software applications and processes, while introducing new efficiencies and flexibility in their working model.  The evident benefits are the ability to access information from any location, to have multiple locations work seamlessly together, and to allow outside accountants or other service providers to work seamlessly in the organization.  

Application hosting services also offer centralized management and administration, professionally-secured systems, and deliver reduced costs of IT management, predictability in ongoing IT costs, and an improved ability for the business owner to focus on the business.  Further, the solutions delivered allow for the integration of data with reporting systems designed to assist in the translation, analysis, and comparison of data from a single business to an entire franchise system.

In summary, the franchisor market must look more closely at the fiscal management and reporting systems of their franchisees, and provide avenues to better-address accounting and bookkeeping responsibilities in order to gain credible performance data and useful benchmark metrics.   Only through the ongoing participation of accredited accounting and financial personnel can the business financial data provide the information – and the insight – required to support aggressive business growth in this difficult economy.   

The key is seamless integration, and the technology solution is the cloud-enabled model.


[1] Report that measures the economic impact of franchising in the United States, prepared by PricewaterhouseCoopers (PwC), and commissioned by the International Franchise Association Educational Foundation.