Key accounting considerations to help you grow to multiple franchise units
While most entrepreneurs choose to kick off their franchise careers with the purchase of a single franchise unit, there are many owners who further their franchise careers through multi-unit ownership.
This can take different forms, from multiple units within the same system or across different brands, to master franchising and area development. We introduced these different formats in part one of our multiunit franchising series.
While part one of this series explored multi-unit franchising from a legal perspective, this installment examines the accounting side of franchise expansion, with insights provided by Lyn Little, partner at BDO Canada LLP, which provides accounting services and support for the franchise industry. If you think you’re ready to take the plunge into multi-unit franchising, you’ll want to ensure you have the following framework in place to make a smooth transition. Read on to learn more!
What are the benefits of multi-unit franchising?
A major draw of franchise expansion, notes Little, is the ability to scale what you’ve already learned from the first business. “Skills and knowledge from one unit can translate into success in additional units,” she explains. “For example, an owner may be able to identify the underlying causes of success in one unit which can be applied to other locations, to improve overall operations.”
At the same time, if one unit is facing challenges, you’re in a better position to ride out that tough period through the profits of a separate location.
From an investment standpoint, Little explains, “Canada has a multi-layered tax system, where a portion of taxes are paid on income in a corporation, and an additional layer of taxes is paid when the income is ultimately paid out to the shareholder. Thus, multi-unit franchisees can take advantage of the tax deferral by leaving funds in a corporation to invest in new units, rather than investing money where the personal tax has also been paid, leaving less funds available to invest.”
Owners of multiple units can also build stronger relationships with the franchise head office team, which can correspond to more influence with both the franchisor and any suppliers. Strengthening those key relationships can put franchisees at the forefront of any future decisions made within the system.
What are the challenges of expanding to multiple franchise units?
First and foremost, franchise expansion is a costly endeavour, so you need to be prepared for a large cash investment. You can also expect changes to your operations.
For example, once you’ve expanded beyond a single unit, you simply won’t be able to invest the same amount of time into all units. This means you’ll need to hire trusted operators and support staff to run the day-to-day operations. For those who invest in multiple units within the same brand, there’s also an increased risk if an issue arises with the system, whether it be a result of a regulatory change or overall industry downturn.
Little also notes that you’ll need to “consider the available geographies and locations to see if they’re a fit with the current unit.” For example, if the only available territories aren’t in a nearby region, it’s going to be difficult to create an efficient operating path forward.
What makes multi-unit financials unique?
“Timely, consistent reporting is very important when managing multiple units,” says Little. “If reporting isn’t timely, this potentially means operations can go off the rails for a longer period of time, or that there’s more time for the misappropriation of assets.”
It’s also important to review key performance indicators (KPIs), looking for outliers, trends, and opportunities for improvement, and to keep a close eye on cash flow.
“Cash flow forecasting will be key to managing some of the large cash outflows when starting or acquiring new units,” explains Little. “A strong understanding of the current cash situation of the operations as a whole is very important.”
Since a multi-unit owner can’t always be at each location, it’s important to note that there’s an increased risk of theft or fraud that comes with expansion. Keeping proper track of financials and comparing these numbers across units and over time can help to quickly identify any issues before they get out of hand.
It’s important to have consistent information across all units, as issues can arise if there are different bookkeepers for different units, notes Little. It can also become overwhelming for a single bookkeeper to manage multiple units. That’s where outsourced help can be beneficial.
“Franchisees can engage with outsourced bookkeeping providers that can scale up with franchisees, and provide timely, consistent, and comparable financial information,” says Little.
She advises multi-unit franchisees to ensure they have the proper accounting structure in place. When establishing this framework, you should consider both long-term goals and short-term opportunities from a tax perspective. “Structuring can help with renumeration for multiple owners and make reporting to external users like banks, investors, and lenders more straightforward.”
Am I ready for multi-unit expansion?
While some owners may have lofty plans for multiple units before they even get started, Little suggests it’s a good idea to first find success with one franchise unit before embarking on an expansion plan. At the very least, franchisees should have a strong understanding of the industry they’re looking to operate in. It’s also important, explains Little, to recognize the different approach required in shifting from an operation to an oversight role in managing multiple units.
“The franchisee should examine what the change will mean to them and how they interact with their current unit. They should have a solid team around that they can rely on, as their attention will be pulled in various directions.”
If a franchisee is currently experiencing success as a single unit owner, understands the implications of expansion, and is ready to embrace a new challenge, they just might be ready to bring more units into the mix. Above all else, notes Little, “the franchisee should be excited about the brand, the industry, and its future.”
It’s also crucial to consider the following traits that are required in multi-unit owners: According to Little, you should be able to plan ahead, with a vision for the next five years, and should be able to look at things from a high-level perspective. You’ll also need to have strong financial acumen (with a strong understanding of financials and KPIs of your current unit) and strong management skills. You also can’t be a micro-manager, as you’ll need to trust others to operate key aspects of the day-to-day business without you present.
Once you’ve considered the pros and cons, carried out your self-assessment, and are ready to bring your passion to an exciting new endeavour, you may just be ready to embrace franchise expansion!