Did you know that nearly one in seven small businesses in the United States is franchised1
, and that the growth rate of franchised business output is nearly three times that of the general economy?
Franchising can be an exciting place to be for small-business clients or entrepreneurs, but how well your clients understand the franchised business model and deploy good management techniques will impact the outcomes they hope to achieve. Here are a few guideposts for CPAs helping their clients journey into franchising.
Most aspiring franchisees understand the basics. Things like start-up costs, ongoing royalty fees, and average revenue per unit are well known. Many, however, do not probe the deeper strategic issues that may influence the choice of one franchise opportunity over another. Issues such as which unique and proprietary aspects of the franchise model, product, and service will help ensure long-term viability are critically important to assess. Franchisors create standardized business practices that can be replicated easily, but they do not guarantee long-term success. With so many franchising options to choose from, it will pay to get the strategy right from the onset.
Clients often need more transparency around core economic/financial issues, such as how long it will take to break even or the level of deficit funding that will be required. Detailed cash flow analysis is a requisite skill that many potential franchisees don’t possess. Will your client be able to make a competitive return on investment beyond the “salary draw” needed for basic living expenses? Are there better options to deploy capital? On a personal level, are clients leaving behind needed occupational benefits that might be difficult (and expensive) to replace? Help your clients do their homework.
As with many business ventures, critical mass and scale may be essential to driving future success. The path to riches may likely be through multiple-unit franchise ownership. Assess and understand the potential benefits of scale in terms of expense leveraging, market exclusivity, and the like. Rather than just creating a job for themselves, help your client envision a business opportunity that they can work on instead of in.
Tackle Tax Issues
As a professional financial adviser, tax issues are your sweet spot. What form of business organization is optimal for your client? What are the tax trade-offs of different options? For flow-through organizations, what is “reasonable compensation” for W-2 salary purposes? How might these decisions evolve as a business grows? These sorts of decisions are critical to get correct from the start.
Protect Your Client with a Plan
The personal and business finances of an entrepreneur are often dangerously intertwined. A personal financial plan that corresponds with your client’s business plan is a best practice to which few franchisees adhere. The personal financial plan should be thoroughly “stress-tested” against alternative business outcomes and unforeseen events. What if the business achieves only 50 percent of projected revenues or net cash flows? What are the specific terms and conditions of any buy-sell agreements in the event of disabling illness or premature death? Franchise agreements are not uniform (or even fair) when issues like these arise. Help your client develop a robust plan before they invest.
Talent Acquisition and Development
Great business vision and strategies don’t matter much without great execution. And great execution is dependent upon having the right mix of talent and minimizing turnover. Health and wellness benefits, 401(k) plans, executive benefits, and leadership development programs are essential to attracting and retaining talent to maximize a business’s potential. Franchisor-provided (or accessible) benefit programs and resources may be available, but often they are not. Get clarity on how to secure these benefit programs and what resource commitment will be required.
Owners will eventually transition out of their businesses. Whether the business is sold or transitioned to a family member, business partner, or key employee, developing a solid transition plan is key to achieving exit objectives. Too often, small-business owners don’t focus on this critical area. Franchisees, in particular, may have special terms and conditions to consider. Does the franchisor have the right of first refusal on a business sale or transition? If so, how will value be determined?
There are a host of other issues to consider in a business transition, including valuation, funding and financing of the transition, transition-to-retirement impact, potential tax consequences, and estate equalization and stakeholder management issues, to name a few. Don’t wait for a transition that is forced upon your client. Help them plan ahead.
Assemble the Team
For your clients who own a franchise, it will be the thrill ride of a lifetime, with all the ups and downs of entrepreneurship. But rarely does a franchise owner have all of the required skills (or the time) to devote to the tasks needed for the journey. Help your client put together a winning team of advisers – tax, financial, and legal – to smooth the journey.
1 Small-business estimates based on analysis of data from the International Franchise Association (IFA) and the Small Business Association. Small businesses are defined as those with less than 500 employees. Output data sourced from
The Economic Impact of Franchised Businesses (Vol. IV), prepared for the IFA Education and Research Foundation.
Michael J. Briglia, CFP, is a financial consultant and investment advisory representative with Pillar Wealth Advisors LLC in Wilmington, Del. He can be reached at email@example.com.