A Complete Guide to Understanding Franchises

November 30, 2023
Accounting blog: A Complete Guide to Understanding Franchises

What is a franchise?

A franchise is a large company with individual branches/locations owned by an individual. In most cases, a franchise is simply made up of two different entities: a franchisee and a franchisor. A franchise is an established company that allows individuals to own and operate their own branch at a desired location.

Franchising is a license to use an existing business name and logo for a profit.

As part of the licensing agreement, the company has specific requirements that must be met by the individual or company who owns the franchise. To own and operate a franchise, you will be required to pay certain franchise fees.

A franchise, in most cases, is made up of two separate entities: a Franchisee and a Franchisor.

What is a franchisor?

A franchisor is a company that sells or leases its brand, business systems and/or techniques to another person. In other words, it is the parent company for any given franchise.

The franchisor has developed processes for handling day-to-day tasks – thus, this is why they have become a large corporation with multiple locations.

What is a franchisee?

A franchisee is an individual who has purchased (or leased) the rights to a specific location from the franchisor. Each franchise has different rules a Franchisee must follow.

In most cases, a Franchisee is granted permission to use the name, logo, and overall likeness of a company (Franchisor).

What is franchise accounting?

The benefits of opening a franchise

If a company is also a Franchise, chances are, they are a well-established business with a large customer base and a solid business model.

Rather than starting your own company and having to build your brand identity, marketing strategy, and customer relationships, you can use the success of an established company by creating a franchise.

Questions to ask yourself when starting a franchise

Opening a franchise is an exciting decision and, at first glance, can seem like an easy investment opportunity that requires little time. As an experienced franchise accounting firm, we want to stress that starting a franchise comes with a multitude of considerations that can significantly impact your success. 

What type of franchise or industry is the best fit for me?

Franchises come in all shapes and sizes. Just about every industry on the planet offers some for of franchising opportunity. Finding an industry with which you are familiar or have experience working with in the past is a great way to set you and your franchise up for success.

What financial commitments are required and what can I afford?

Before diving into franchise ownership, it’s imperative to craft a comprehensive financial plan. This plan should include not only the initial investment but also a detailed breakdown of ongoing operational costs, royalties, and potential fluctuations in revenue. Working closely with financial experts can provide invaluable insights into potential challenges and opportunities.

Where will I be operating my franchise?

Most industries that offer franchises operate as a brick and mortar businesses. Like all businesses, the success of your franchise is often intertwined with its physical location. Conduct a thorough demographic analysis to identify the target market and choose a location that aligns with your franchise’s offerings. Consider foot traffic, visibility, and local competition to maximize your business’s potential.

How will I market my business before and after it is launched?

Once your franchise is operational, effective marketing becomes the key to attracting customers. Leverage both traditional and digital marketing channels to create a robust online presence. In many cases the parent company will offer some assistance when it comes to marketing your franchise, but we highly recommend creating a plan to increase exposure. Hiring a local marketing or web design company can help you maintain your digital presence in the local market.

Related: A Guide to Opening Your Franchise

Understanding franchise accounting

Franchise accounting is a complex financial process.

For the most part, it has to follow specific guidelines and formulas set forth by the Franchisor.

Even though each franchise business operates differently, there are certain things that need to be recorded in essentially the same way for all franchise businesses.

Getting your franchise started

Embarking on a franchise journey is a significant undertaking that requires careful consideration of various factors. From choosing the right franchise and conducting thorough financial planning to navigating legal complexities and optimizing your location, every decision plays a crucial role in your success. By investing time and effort into these considerations, you position yourself for a thriving franchise venture.

The franchise accountants at Volpe Consulting & Accounting would be happy to answer any questions you may have. We have helped businesses in a wide range of industries set themselves up for financial success with our affordable franchise bookkeeping services and franchise payroll services.

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