Expert Lyn Little, BDO Canada LLP, encourages franchise systems to introduce a bookkeeping mandate in their franchise agreement

The comfort of being a franchisee means you always have the support of a franchise system behind you. As the saying goes, you’re in business for yourself, but not by yourself. There’s a wide variety of obligations that a franchisee must be well equipped for, and many responsibilities the franchisor must maintain to support their franchise partners.

Among the day-to-day work that goes into owning a franchise is the system-wide bookkeeping and compliance as part of the brand’s business model. Both franchisees and franchisors are responsible for upholding this relationship.

Lyn Little, partner at BDO Canada LLP, advises franchisors to, “Welcome the idea of a bookkeeping mandate in your franchise agreement. It’s not over-stepping, it’s the first step to a transparent, beneficial working relationship with franchisees and improved reporting. Your accounting partner will help you avoid missteps and establish a consistent system.”

There are a variety of factors that go into establishing a consistent and successful bookkeeping mandate that you should consider.

Easy access to data is key

Having access to accurate financial data is the responsibility of both the franchisor and franchisees in a system brand. Little explains the individual reasons that each party should play a role in the ongoing bookkeeping documents.

For franchisees, she says that access to financial data allows them to understand their current financial position as a whole, rather than just looking at it from the perspective of money. “This will allow them to make better decisions, understand where their cash will be going over the upcoming period, and to know whether they are actually making money in any given period,” says Little.

As for franchisors, this access enables them to assess their franchisees and determine if there are any risk factors that would indicate they’re not able to operate the franchise on a long-term basis. Franchisors can also evaluate if franchisees are a good fit to purchase additional units, and if the submitted financial statements make sense from the perspective of ensuring completeness of royalties, ad fees, or any other fees.

Additionally, Little adds that franchisors “can assist those franchisees that may be struggling, and gain a better understanding of those franchisees that are doing very well, in order to assist the system as a whole to perform better.” 

Types of financial data to provide

In our fast-paced and ever-changing society, it’s vital that franchise brands can respond quickly and effectively to any market changes. Bookkeeping documents can provide useful financial data for franchisees to deliver to their franchisor which helps them understand and adapt to these persistent fluctuations.

Little explains that the type of documents that franchisees should provide includes monthly financial statements featuring consistent categorization of data, which can further help franchisors access their financial performance. “Franchisors should also have access to more detailed breakdowns of revenue, and potential certain cost of sales, to understand the market for products, in order to utilize this information in pricing, benchmarking franchisees, and guiding franchisees to improved profitability,” says Little.

But franchisors have a robust responsibility too. She recommends that they provide a comprehensive list of financial data either for the whole franchise brand or just franchisees according to a specific size or market type. This allows those franchisees to evaluate their own financial position compared to other franchise partners in the system, in order to get an understanding of what other franchisees in the brand are currently experiencing. Plus, this information helps franchisees identify key areas they need to work on to improve their profitability and overall success.

Little says that having access to this financial data should be mandated within the franchise agreement, where possible, since support from the top down encourages continued success. “There should also be follow-up from the start to ensure that this information is being prepared and received by the franchisor even if the franchisor does not plan to use the detailed information up front, to reduce potential compliance issues down the road,” she says. “By mandating as part of the agreement, the franchisees understand that this is an inherent part of being a franchisee. Then, even if not used regularly, the franchisor has access to the historical franchisee information if a franchisee should run into financial issues, or if there is concern about misstatement of royalties down the road.”

The benefits of a mandated agreement

Franchisors may worry that having a bookkeeping mandate laid out in the franchise agreement, where franchisees are expected to create their own specific reporting processes, may cause “over-stepping” of the lines within the franchisor and franchisee relationship. These concerns can be alleviated by understanding that forming this relationship will help the brand succeed in the long run, especially as the franchise system begins to grow.

According to Little, the easiest time to implement the bookkeeping mandate is at the beginning of a franchise brand’s journey, when their system is still small and franchise partners are beginning to join the team. This makes adopting the mandate part of the process of becoming a franchisee, rather than existing franchisees needing to change their reporting processes and relationships with current providers, which may be difficult to adopt later on.

“Many of the large franchise systems require regular reporting of financial information, with mandating the bookkeeping provider being an area that is not widely adopted,” says Little. “The reason for this appears to relate to change management, as many franchisors do not consider the issues that they would experience with being able to obtain timely, consistent, and accurate financial information from franchisees until their system gets larger.”

Meanwhile, franchisors that introduce an updated bookkeeping mandate later into their franchise journey and after developing many franchisees, need to manage the change in an approachable and easily adoptable way. “Some ways to do so would be to have some friendly franchisees with strong relationships in the system early adopt the bookkeeping provider in question,” explains Little. “Should the adoption be successful, these franchisees can help sell the change to the remainder of the system. The franchisor could support the bookkeeping provider as an approved supplier and/or could provide opportunities for the supplier to speak at franchise conventions or shows along with mandating to any new franchisees, allowing some moderate adoption within the system before mandating system wide.”

She adds that franchisors should also consider providing financial support for a period of time during this transition that would cover a portion of the service cost for franchisees. This would compensate and reward franchisees for making the bookkeeping transition, which they may be reluctant to adopt after they’ve already established their own system and processes for their business.

Examining the moving parts

Little explains that the bookkeeping mandate within the agreement will generally cover the supplier/system and the processes for a franchise.

The supplier/system provides a “Reference to an approved supplier/IT system, though the supplier generally would not be disclosed, to allow for flexibility should changes be required down the road,” says Little.

Meanwhile, the processes deliver a reference to “a standard chart of accounts” that are developed outside of the franchise agreement. Little adds, “Standard timelines would be outlined, including monthly and annual financial information upload.”

Overall, Little welcomes a bookkeeping mandate in all franchise agreements as a key step during the onboarding process for new franchisees. She applauds the mandate for requiring franchisees to use preferred bookkeeping services, and for offering increased ease in getting consistent monthly reports as well as performance representations for franchisor disclosure documents. They also help with franchisee performance coaching.

While franchisors may be reluctant top adopt a bookkeeping mandate into their new or existing franchise system for fear of over-stepping by franchisees, Little advises individuals to consider themselves as a joint employer, offering a supportive and collaborative relationship with franchisees.