Franchise Accounting in Australia – The Basics

If you're thinking of buying a franchise in Australia, it's important to understand how accounting and financial reporting work. This blog post will give you a basic overview of how franchise accounting works in Australia. We'll look at the different types of franchises and how they're taxed. We'll also look at the key financial statements that franchisors are required to produce.

When you're thinking of starting a business, one option is to buy a franchise. This can be a great way to get started, as the franchisor will have already worked out many of the details for you.

However, it's important to understand how franchise accounting works in Australia to make the best choices for your business. In this article, we'll look at some of the basics of franchise accounting. So if you're considering buying a franchise in Australia, make sure to read on!

If you've ever thought of starting your own business, or if you're already in the process of doing so, you're likely aware of the term 'franchising.' In Australia, as in other countries around the world, franchising is a popular way to do business.

It can be a great option for entrepreneurs who want to start their own company without going through all of the trouble and risk associated with starting from scratch. But it's important to understand what franchising entails before making any decisions - after all; it's a big commitment. This article provides an overview of franchise accounting in Australia, including what it is and some things you should keep in mind if you're thinking about becoming a franchisee.

Let's get started!

The Accounting for Franchises Is Done Differently - Here's How

Suppose you already own a franchise or are interested in purchasing one in the near future. If this is the case, you have probably pondered the differences between a business accountant and a franchise accountant, as well as the question of whether or not you should hire a franchise accountant to manage your financial affairs.

The primary distinction between company accountants and franchise accountants lies in the fact that franchise accountants focus specifically on the needs of franchise businesses. As a result, they are familiar with the unique franchise duties that must be satisfied while establishing financial goals, managing your firm, and preparing your taxes.

Franchise accountants are familiar with the characteristics that distinguish a franchise business from other types of businesses, as well as the important benchmarks for the many types of franchise models.

Therefore, if you want your franchise to be successful over the long term, you need to hire an accountant that specialises in franchises. This will improve the company's financial health. If you establish an ongoing relationship with your franchise accountant, they will be able to assist you in understanding the fundamentals of franchise accounting and will be able to assist you in reducing the amount of legal red tape that is connected with franchise agreements.

The Fundamentals Of Franchise Accounting

It is essential to think about the ins and outs of operating your franchise before choosing an accountant to work for you in that capacity.

Every franchisee is required to pay certain fees in order to acquire ownership of the rights to a business's name, products, and services. This indicates that you may have greater debt to start up and additional overhead costs to endure right from the beginning of your business.

In order for franchisees to maintain control of their financial situations, it is imperative for them to be aware of the following costs:

• Payable in advance. The price of franchise fees can vary widely based on the brand, the franchise model, and the prerequisites for signing up for the franchise. You can also be expected to pay recurring fees for the support of the franchise.

• Staffing. As the size of your franchise increases, you will need to hire additional staff members and increase your payroll to accommodate them. Unfortunately, a large number of franchisees make the error of forgetting that they will need to cover any costs involved with recruitment in addition to paying wages to staff members while they are being taught.

• Additional operating costs. In most cases, you will be required to pay monthly franchise fees in addition to staff compensation. If you do not carefully manage your cash flow, this might make it significantly more challenging to achieve profitability.

You might have been given a comprehensive owner's manual in order to assist you with the initial setup, ongoing training and planning, as well as the day-to-day operations of your franchise, but this will depend on the size and type of your business.

This manual will often include a concise list of key performance indicators (also known as KPIs, which will be covered in greater detail later in this piece). However, it is essential to keep in mind that despite the fact that it is convenient to have a built-in framework for systems and processes, this alone will not shield you from financial danger if it is not applied in the appropriate manner.

A franchise accountant can help you get aware with the difficulties that are specific to franchise accounting and ensure that you have the appropriate systems, processes, and paperwork in place to keep your franchise operating profitably.

They are able to shield you from financial hazards that standard business accountants may not be educated about and guide you through the reporting, compliance, paperwork, and costs that are associated with owning a franchise.

To summarise, franchise accountants have the ability to:

• Assist you in managing the debt incurred during startup.
• Help you lodge all compliance papers (BASs, tax returns, financials, payment summaries, and ASIC documentation)
• Carry out benchmark comparisons across the industry.
• Help you manage your staff
• Make sure that the accounting software programme you choose is appropriate for your company.
• Examine different ways for reducing your tax burden on a yearly basis.
• Ensure that all payments to the ATO are coordinated with cash flow.
• Assist clients with boosting their gross profit and net profit margins by providing sound business advice.
• Help you reach sales targets (KPIs)
• Streamline your admin processes
• Investigate potential future cash flows to assist in ensuring that the company will be able to continue to fulfil its commitments to its personnel, suppliers, and the ATO.

Even though your franchisor will provide assistance in many different aspects of running a business, you will still be solely responsible for ensuring that your franchise is successful. As a result, you should maintain consistent communication with your franchise accountant regarding payroll concerns, the reduction of tax liability, and gross and net profit margins.

1. Franchises

Each location of a franchise is owned by a different person. However, a larger corporation oversees the operation of the entire franchise. As an illustration, a resident of your community might own and run a quick-service restaurant in the area. However, a single powerful organisation is the proprietor of the entire restaurant brand.

The process of franchising assists in the marketing of a brand to a substantial number of clients. The customer base for this brand is well-established at this point. When someone purchases a firm that is already established as a franchise, they do so with the knowledge that there is a significant demand for the goods or services being offered.

Franchisors and franchisees are the two parties that make up a franchise. Both of the parties are responsible for distinct aspects of running the business. For this reason, before to beginning a commercial venture jointly, they had to first sign a franchise agreement.

2. Franchisors

All of the franchised businesses are owned by the franchisor. They are in charge of the overall direction of the brand. The franchisor is responsible for making decisions on the goods and services that are offered for sale. In addition to this, they contribute to the formation of an operating system and continuing support for the brand.

To successfully run each franchise site, the franchisor requires dedicated individuals. Because of this, the franchisor will sell the rights to the franchise to different individuals in each location.

3. Franchisees

The franchisee is considered the owner of an individual franchise location in franchise accounting. They run the franchise according to the rules that were established by the franchisor. Because of the established reputation of the franchise's brand, purchasing a franchise can facilitate the rapid expansion of your company. However, you are not allowed to participate in the decision-making process about the company.

4. Fees and franchise accounting

The franchisee is required to pay specific fees to the franchisor in order to possess a franchise. The payment of the fees grants the franchisee ownership rights to the company's brand, as well as its products and services. The franchisee has a right to be informed of any and all fees charged by the franchisor.

The startup fee, which functions similarly to an admission fee into the franchise, is paid by the franchisee. The recurring royalty charge is what the franchisee must pay to remain a part of the franchise system. There are situations when the franchisee is responsible for additional costs.

1. Initial fees

The franchisee is granted the right to use the company's name, trademark, and operating systems once the first price has been paid in full. This price not only covers the cost of opening a franchise, but it also pays for any necessary training, equipment, or renovations.

The franchisee is responsible for making an up-front and one-time payment of the charge. Before making the payment for the fee, the franchisee is required to make a projection regarding the amount of business capital they would require.

Amortising initial fees

The first charge paid by the franchisee can be deducted from their overall business tax bill. The fee needs to be amortised by the franchisee. Amortization works similarly to depreciation, with the exception that it applies to intangible assets (e.g., a trademark). The expense of the fee is often amortised over a number of years during the period of time that an intangible asset is utilised effectively.

The initial charge can be amortised over a period of 15 years by a franchisee. However, as it is required that the exact same sum be deducted each year, the fee must be distributed fairly. To accomplish this, divide the total amount of the original price by 15. Your amortisation schedule for the charge will continue throughout the duration of the contract if the agreement is for a term shorter than 15 years.

2. Royalty fees

When the business is up and running, the franchisee is required to make royalty payments on a monthly, quarterly, or annual basis. The fee is typically expressed as a percentage of the total gross sales. Sometimes the fee is a set dollar figure, and other times it is a percentage of the total sales.

The payment of royalty fees is the primary source of revenue for franchisors. In addition, the fees contribute to the payment of the franchise's fixed expenditures. Unless the franchise agreement specifies something different, the royalty fee is always due from the franchisee, regardless of how much revenue the franchisee brings in.

3. Marketing fees

A marketing fee is something that is charged by some franchisors. Each franchisee is required to make a payment into a marketing fund. The charge is typically expressed as a modest percentage of the total revenue. The marketing fund is used by the franchisor to purchase promotional materials that are used to promote the brand of the entire franchise.

Accounting For Franchises

Both franchisors and franchisees have a responsibility to have a fundamental understanding of franchise accounting. It is possible for the franchisee or the franchisor to receive the erroneous amount of payment if the transaction records contain an error.

The use of online accounting software for small enterprises can facilitate communication between franchise owners and franchisors regarding the financial state of the franchise. They are able to access the software programme from any location as long as they have access to the Internet, which provides both parties with rapid access to the financial records.

Utilising a single software provider for accounting and payroll for franchises may also result in a bulk discount for these services being made available to the franchises. Even if you opt to hire an accountant to handle your accounts, reducing the financial burden of your overhead by paying accountants less could significantly reduce the amount of money you spend.

The Purpose Of KPIs

The key performance indicators, also known as KPIs, are essential since they show you where your efforts should be focused in order to meet the monetary objectives set for your franchise. It's possible that your franchisor will tell you which KPIs to employ, but if they don't, you can ask your franchise accountant to assist you in selecting KPIs and putting together measurement systems for them.

A franchise accountant may assist you in formulating strategies for achieving your key performance indicators (KPIs) and developing a system for routinely assessing your metrics to ensure that you do not veer off course during the first year of your company's existence.

They will be aware that:

• What information is required of you to submit to your franchisor
• The manner in which it need to be reported
• What parts of this are plausible and what parts aren't?
• Where most franchisees in your sector get it wrong and how to avoid it
• How to measure key performance indicators while maintaining compliance

An accountant who has previous experience working in the franchise accounting industry is in the best position to provide you with insightful financial management guidance on all elements of operating your franchise. They will be able to swiftly assess and advise the actions required to maintain your franchise running well, whether it is through the preparation of business reports or tax filings.

What Is A Franchise Agreement?

Franchising is not a business in and of itself; rather, it is a method of conducting business. A person or company is considered to be a franchisor if they have, via their business model and branding, established a system that is successful on a consistent basis and have chosen to replicate that system through the sale of franchises.

A person who has witnessed the success of the franchise and who desires to run a business according to the branding, methods, and procedures specified by the franchisor is referred to as a franchisee. The parties enter into a contract known as a Franchise Agreement in order to define their working relationship in detail and to agree upon its terms and parameters.

The Franchising Code of Conduct is the governing document that governs the franchising business in Australia (Code). The legal definition of what is known as a "Franchise Agreement" can be found in the Code. To be considered a "Franchise Agreement," a contract needs to include the following four components:

• There is a contract in some kind, either written, verbal, or implicit; and

• One person gives another person the right to run a business in Australia that offers, supplies, or distributes goods or services using a system or marketing plan that is mainly determined, controlled, or advised by the franchisor; and

• Terms and conditions, under which the operation of the business will be substantially or meaningfully linked with a trademark, advertising or a commercial symbol owned, utilised or licenced by the franchisor or specified by the franchisor; and

• According to the terms of the agreement, the franchisee is required to pay or agree to pay the franchisor a fee either before beginning or continuing the operation. This price may, for instance, include an initial capital investment, payment for goods or services, or a royalty fee; however, it may not include repayment of a loan or payments for goods or services provided on a genuine wholesale basis.

It does not matter what the parties call it or what name appears on the agreement; in order to be considered a Franchise Agreement, the document must satisfy all four of the aforementioned conditions. According to an old proverb, one may safely assume that something is a duck if it behaves like a duck, walks like a duck, and quacks like a duck. When determining whether or not a business agreement constitutes a Franchise Agreement, one might use the same line of reasoning, which is to prioritise substance over form.

How Franchisees Are Affected by the Franchising Code of Conduct

Both franchisors and franchisees are held accountable for their interactions with one another by the Code. You can access the Code at the website maintained by the Australian Competition and Consumer Commission (ACCC).

The Australian Competition and Consumer Commission will actively monitor and enforce compliance with the Code.

The Code prescribes a wide variety of duties and processes that are obligatory and cannot be avoided in any circumstance. Among these are the following, to name just a few:

• The franchisor is obligated to keep a Disclosure Document on file, which should contain information about the franchise system they operate.

It is required to be in the prescribed format and updated annually (with some exceptions). It must include information about current and former franchisees, all costs that a franchisee can expect to incur during the duration of the franchise, and certain litigation that the franchisor and its officers have been involved in.

• At least fourteen days prior to the prospective franchisee entering into a Franchise Agreement, a current Disclosure Document as well as a copy of the proposed Franchise Agreement and the Code are required to be sent to the prospective franchisee. During this time, potential franchisees have the opportunity to conduct their own research to determine whether or not the investment in the franchise is the best course of action.

• After entering into a Franchise Agreement or making a non-refundable payment to the franchisor, franchisees are allowed a seven-day cooling-off period to reconsider their decision to become a franchisee. The only exceptions to this rule are renewals, changes, and transfers of existing businesses.

During the cooling-off period, franchisees who have a sudden change of heart have the option to withdraw from the franchise agreement; nevertheless, they will be required to pay the franchisor for certain fair revealed costs.

• Before signing into a Franchise Agreement, a franchisee is required to provide a statement to the franchisor indicating whether or not they have gotten independent assistance in the areas of business, accounting, and legal matters. A franchisee is under no need to seek out this guidance; nonetheless, they are required to disclose to the franchisor whether or not they did so.

• The administration of a marketing or advertising fund for the franchise system, to which contributions are made by franchisees, is subject to certain guidelines established by the franchisor. If there is such a fund, franchisors are obligated to be open and honest with their franchisees about the expenses that are covered by this fund, and they must also furnish franchisees with annual accounts.

• When it comes to compelling franchisees to make substantial investments in their businesses during the course of the franchise agreement, franchisors are subject to certain constraints (such as store and equipment upgrades). Generally speaking, the expense needs to be mentioned in the Disclosure Document, and it also needs to be an item that the vast majority of franchisees within the franchise system are required to pay.

• Consider the scenario in which the franchisor imposes limitations not just on the types of goods and services that can be purchased but also on the suppliers that a franchisee is allowed to work with. In this scenario, the franchisor's Disclosure Document needs to contain specific information that is easy to understand. This declaration includes any limitations that may be placed on the franchisee's ability to advertise the goods and services offered by the franchised firm via the internet.

• There are procedures that must be followed in order to resolve disputes between a franchisee and a franchisor. These procedures include open communication between the parties regarding the nature of the issues at hand, collaborative efforts to resolve the dispute, and attendance at mediation if a resolution cannot be reached.

• When it comes to ending a Franchise Agreement, there are a lot of procedures to follow. Take, for instance, the scenario in which a franchisee violates the terms of a Franchise Agreement and the franchisor intends to use this violation as grounds for terminating the Franchise Agreement. In such a scenario, franchisors are required to provide franchisees with written notices that detail the steps that must be taken to rectify the violation as well as a time frame within which those steps must be completed (not longer than thirty days).

In the event that the violation is not corrected in the appropriate manner, a franchisor has the right to terminate the Franchise Agreement due to the violation in question. However, there are some limited circumstances in which this does not apply, and the franchisor can immediately terminate a Franchise Agreement. One of these circumstances is if the franchisee commits fraud in connection with the franchised business, becomes bankrupt or insolvent, or endangers public health and safety.

• When conducting business with one another, franchisors and franchisees are under an overarching obligation to do so in a trustworthy manner at all times. Unfortunately, "good faith" is not defined anywhere in the Code; as a result, its application is assessed on a case-by-case basis.

It will involve acting honestly in all contacts with one another, not acting arbitrarily, and working together to accomplish the goals of the Franchise Agreement in a manner that is cooperative. Despite this, neither the franchisee nor the franchisor are prevented from acting in their own true best interests from a business perspective by this.

Why Is There Something Called The Code?

The Code was created with the intention of redressing the power dynamic that exists between the parties in a franchise agreement. Because franchisors typically hold a larger portion of the power in the partnership, the Code establishes constraints on that power while simultaneously ensuring that both franchisors and franchisees behave in an equitable manner.

The Code also works to ensure that franchisees are aware that purchasing a franchise is a significant commitment and that they are provided with some of the key information required to assist in making an informed decision as to whether or not the franchise model is an appropriate investment. Both of these goals are intended to help franchisees make an educated choice about whether or not the franchise model is a good investment.

The Australian Competition and Consumer Commission (ACCC) is in charge of ensuring that the Code is followed. On the other hand, any violation of the Code also constitutes a violation of the Competition and Consumer Act of 2010. (Cth).

Infractions of certain provisions will result in the imposition of penalties. In each individual case, these can currently cost up to $63,000. In addition, if there are many violations of the Code, there may be multiple punishments. Infraction notifications may also be issued by the ACCC in the event of a breach of the law. At the moment, the fines for businesses are $10,500 per infraction, and the fines for individuals engaging in the conduct are $2,100. (such as a company director).

Given that the ACCC is responsible for actively monitoring and enforcing compliance with the Code, all parties involved in the franchise arrangement are obligated to treat the Code with the seriousness it deserves.

The Value Of Long-Range Planning

Accounting for franchises is an essential component of successfully operating a franchise; hence, developing a sustainable working partnership with a franchise accountant is one of the most astute business choices that can be made.

The purchase of a franchise does not ensure financial success; but, having a professional specialist on board to manage the financial side of things will save you time and protect your investment from both a practical and legal viewpoint.

Franchise accountants are not an exception to the rule that when you work with somebody for an extended period of time, you will earn some kind of return on that connection. This is a widely held belief. The longer you collaborate with a franchise accountant, the more they will be able to anticipate where your franchise is heading rather than merely reacting to the challenges it has in the short term. This is because they will have more time to gather data and information.