Many retail businesses which have a franchise channel are faced with a complex array of risks which stem from the relationship with their franchisees. Lets firstly, understand the risks that are applicable to a retail franchisor and then we will be making some operational recommendations.
A quick note, it is important to ensure that all your contractual relationships are based on solid foundations and the agreements are up to date and legally compliant.
- Lease – many franchisors hold the head lease and then sub lease the premises to the franchisee. Should the franchisee default on their payment or cease trading, then it becomes a liability to the franchisor.
- Credit risk – the major creditor for many franchisees within a retail business will be the franchisor, consequently the franchise network will be the largest collective debtor for the franchisor. This will relate to the stock purchase and management fees, the deployed credit policies have cash flow implications on both parties.
- Business failure – should the franchisee fail or be unable to maintain the corporate standards, will this damage the corporate brand.
Many of the above risks can be managed through understanding the financial performance of the franchisees. This is vital for a franchisor where you have licensed your IP and brand to a third party. The individual franchisee’s ability to execute the business model and deliver the brand values is intrinsically linked with the franchisee’s financial health.
Ideally the open book accounting approach should be used at least during the startup phase of each new franchise as this is the period in which many franchisees fail. For example, open book accounting was introduced by Green King to their tenanted pubs in the early 2000s and reduced failures in the first year from around 70% to 10%. Where possible the franchise agreement should be constructed to allow for open book accounting, mandatory accountant and standardised retail accounting system offering standardised reporting across the franchise operation.
These are what we consider the three cornerstones to effective financial and risk control within a franchise retail business.
This will help to minimise franchisee churn and maximise network profits. A typical franchise retail accounting service would include:
- Bookkeeping including VAT and PAYE
- Monthly Management accounts
- Year-end accounts including profit and loss plus balance sheet reports to meet statutory requirements.
- Taxation computation
Once a standardised accountancy system has been adapted, the franchisor can begin to benefit from standardised performance monitoring. The use of an on-line retail accounting package is the preferred option as this will help with data consolidation and can provide real time reporting across the network. Many inexperienced franchisors, believe providing a standardised chart of accounts within the operation manual will result in standardised management accounts. Due to various accounting systems which can be used by franchisees, the format will vary from one system to another, therefore making it very difficult to compare ‘franchisee to franchisee’ without additional consolidation, formatting or secondary inputting. It is critical to enforce the use of one accounting system network wide.