Managing Accounting Challenges When Expanding Your Franchise Operations

Operating a franchise is a rollercoaster ride. You are doing good, happy customers, growing revenue, great team, and your vision to scale more – to a new city, to a different state. 

Too good to be true, isn’t it? You feel it in your gut; the road to success could not be so smooth. Then it hits you. Your accountant said something about the (in)famous case of McDonald’s in 2018. They recognized $42 million less in revenue in 2018 due to new accounting standards. They didn’t make less money; they just counted it differently. 

Now that’s just how fast the night changes! 

Do you immerse yourself in the sea of rules, regulations, and compliance requirements across states, or focus on your strategic vision? 

Welcome to a world where the rules change before you can decide your next grand opening, where franchise accounting challenges might hinder your operations. 

Revenue Recognition: The Most Common Franchise Accounting Issue 

The ASC 606 altered revenue recognition for franchises. Before 2018, when a new franchisee paid $50,000 as an initial fee, you could recognize the entire amount. However, now, you must recognize it over the entire franchise term, which is typically 15 to 20 years. 

This is now one of the most common franchise accounting issues. Suppose you collect $50,000 upfront and spend $45,000 helping the franchise open. But your books only show $2,500 in year one revenue. Basically, your profit and loss statement will not reflect the economic reality of your business. 

This paints a bleak picture. Your financials look weak when your revenue is growing, and franchises are expanding. You incur real costs such as legal fees, training expenses, site selection support, and marketing fees. However, the revenue now has stretched to two decades. 

What are investors looking at? Slim margins and losses that do not account for the cash you have. The FASB issued a practical solution in 2021 through ASU 2021-02. This helps franchisors to bundle pre-opening services into one obligation. But there are intricacies to this that require diligent attention to detail.  

Would you rather spend your time buried in such tedious tasks, or conduct meetings with prospective franchisees? This is a dilemma. You need to be in the know-how, just so that you can make informed business decisions while staying compliant. 

You are in dire need of an expert accountant, aren’t you? Well, there’s a solution to this. Franchise accounting issues seem to be menial to a team that works out of your office. An outsourced accounting team that stays out of your hair, yet in your operations. 

They don’t require office space, neither do they demand over-the-top salary. Just pure business, data driven insights, and reports that you can understand easily. This outsourced accounting team takes care of your franchise’s compliance and tax management efficiently. 

How Long Does Your Monthly Close Take? 

If your answer is 14-15 days, you already know there’s a problem. Manual processing poses an accounting challenge that hinders your franchise’s operations. You are supposed to make decisions based on your financial situation. 

Ordering inventory, approving marketing budgets, comparing franchise performances across locations, and new strategic decisions – everything is based on incomplete data and your gut feeling. 

Is it fair to you? When you are investing your time and dreams, you need something tangible. A report on time that guides you towards optimization, fewer losses, better decisions.  

Your team is not at fault as well. They are manually consolidating your franchise data for accounting. There are numerous data points from multiple POS systems. Each location will have a different set of vendors, and their schedules won’t match yours. Your accountant now has to create one master file from 5 different files and recheck for errors. 

More than an inconvenience, this is an expense for you. Gauging profitability and performance of each franchise location becomes difficult.  

This complexity will only increase. Gen Z consumers now control $360 billion in spending and represent 44% of your social media purchases. What does Gen Z want? Digital payments, loyalty programs, subscription-based services, and AI features. These add to your data points. Now your accountant needs to collect more data from far more varied systems. This is a recipe for a certified accounting mess. 

You don’t want to be caught in the middle of it all while celebrating the opening of your newest franchise, do you? 

A team who excels at franchise accounting, streamlining data sets, keeping up with the changing regulations – this should be your next strategic decision. 

Outsourcing won’t cost you more. In fact, it will cost you less than an in-house accounting team. Subtract the training costs, software upgrades, hiring, retention, re-hiring, and payroll costs, and you have your ideal team who becomes your strategic partner. 

Royalty Calculation Can Go Wrong Often 

So, your franchise agreement says franchisees pay 6% royalties on gross sales. Pretty simple, right? 

The term “gross sales” is complex. Suppose you own a restaurant franchise using third-party delivery platforms. They face calculation issues with every transaction through delivery platforms. DoorDash and Uber Eats charge 25-30% commission. So, when a customer orders $40 through DoorDash, the franchisee receives roughly $28 after commission. But some POS systems calculate royalties on the full $40. 

Hotel franchises pay royalties on room revenue, food and beverage revenue, and spa revenue. But which fees are excluded? Cleaning fees? Third-party booking commissions from Expedia or Booking.com? 

Retail franchises selling through multiple channels face similar questions. Do marketplace fees get excluded from gross sales? What about shipping charges customers pay? 

Over 18 months across multiple locations, small miscalculations represent tens of thousands of dollars. Either you've overpaid royalties—money that should have funded expansion—or you've underpaid and face penalties when discovered. 

Inventory Management is Complex 

Inventory is the lifeblood of your franchise system. Whether you are a retail owner or a restaurant owner, inventory shrinkage is a big issue.  

There are a lot of things that cause this shrinkage – shoplifting, employee theft, vendor fraud, damaged goods, and accounting mistakes. 

The National Retail Federation concluded that a typical retail franchise loses 1.6% of inventory against total sales. Now, if you own a retail franchise doing $1 million in sales, you lose $16,000 annually to shrinkage. Suppose you have 5 locations, which means you lose $80,000 across all locations. This amount is enough for a grand opening of your new location. 

Healthcare franchises manage medical supplies with expiration dates and strict regulatory tracking requirements. Property management franchises track maintenance supplies, appliances, and equipment across dozens or hundreds of properties. 

Without proper inventory systems tracking items by location, monitoring shrinkage patterns, and automating reorder points, you're losing money you can't even measure accurately.

You Need to Account for Equipment Depreciation 

You are celebrating the inauguration of your second location. You also bought some equipment worth $200,000. Some of them depreciate over seven years; others over five years; some qualify for Section 179, while others don’t. 

Your accountant from 2019 is not tracking this anymore. You handled it yourself in QuickBooks. When you open your fourth location, you might have forgotten which depreciation schedule you used for the second location’s equipment. 

Such inconsistency in depreciation treatment creates accounting challenges during your franchise expansion stage. These accounting issues arise when you eventually sell a location or bring in investors. 

Outsourced accounting firm employ best practices for franchise accounting. They maintain detailed fixed asset registers for each location, apply consistent depreciation policies, track placed-in-service dates, and ensure you maximize tax benefits through proper timing of capital expenditure. 

Your true friend during business expansion is an outsourced accounting team – punctual in their work with a niche in franchise operations. 

AI Solves Only Half of Your Problem 

It is the era of AI – whether you are writing, reading, researching, or tallying your books. AI doing your accounts sounds relieving. Add your bank feeds and let the AI-enabled software categorize transactions and churn out real-time dashboards. 

No doubt, AI is a real game-changer. It scans thousands of transactions, which is not humanely possible at any given hour. It matches invoices automatically, flags unusual patterns, and generates reports instantly. All this is perfect for automation. 

But let’s apply brakes to your perfect dream of accounting automation. Does AI truly understand the nuances of your franchise operations? It may find it difficult to segregate pre-opening services under ASC 606. Also, AI may not know how to catch errors in incorrect royalty calculations when third-party platforms are involved. 

It does generate beautiful reports, though – the colors, type, explanation – everything is just amazing. However, the data is what truly matters. Amazing reports with incorrect data are just garbage in, garbage out. 

You need someone who can leverage AI, an expert who knows what to feed AI to get error-free work. You saw how Starbucks lost $30 billion with one wrong strategy. An outsourced accounting team is savvy with AI and automation. They have an expert with a working knowledge of franchise operations who can analyze AI-driven results. 

Intercompany Transfers Need Proper Treatment 

Your business acumen enables you to give out great strategies. You open a commissary kitchen for your restaurant franchise. Suppose Location A buys $5,000 worth of ingredients from the commissary. What happens now? Is this revenue for commissary or expense for Location A? 

When you get this wrong, you may double count your expenses or artificially inflate revenue. These things become complex accounting issues for your franchise system. Different states have different rules about intercompany transactions and transfer pricing. What California accepts might not work in Texas. 

You need to trust your accounting team for this. A reliable accounting partner does this for you. Your strategies need a trusted partner to handle such common franchise accounting issues. 

The FDD Audit Requirement 

FDD tops the list of requirements for franchise compliance and tax management. Your expansion planning needs audited financial statements for the Franchise Disclosure Document. Item 21 requires three years of audited financials under GAAP. 

When your strategy is to expand or sell your franchise, you first need a great accountant. If your books are a mess, audits become expensive. When a prospective franchise buyer looks at your accounts, they expect clean financials.  

For this, you need to begin early. Don’t go for a reactive approach, where you start getting your numbers in place when you decide to sell. A businessman like you needs an informed growth plan. From strategies to books, keeping your accounts clear right from the start is the best practice for your franchise. 

Partner with an outsourced accounting team from day one and be ready for any kind of audit. It is always good to stay updated on what goes on with your money, how your decisions affect your franchise business, and vice versa. 

Should You Do It All Yourself? 

You pay your bookkeeper $25 per hour. She spends 20 hours per month at each location. Three locations mean $1,500 per month, plus your time reviewing her work and fixing issues. 

Seems fair? But add the cost of undetected errors, or missed deductions? If you operate across various states, you need to factor in the state taxes, track any overpaid taxes when expenses are not allocated appropriately.

This is tangible, but when we talk about your time, the opportunity cost, you see the real difference. You don’t get accurate data, and your strategies misfire. You envision 5 new franchise units, but one of your existing franchise units is struggling with profitability. Your decisions need to be strongly data backed; you need expert level analysis. Doing it in-house seems like an easy option.  

But ask yourself, what does “easy” mean to a business dream? Go with the right strategy. An accountant who updates themselves with every new rule, every amendment in regulations helps you stay on top of your game. 

What Works for Your Franchise? 

You need three things: specialized software configured correctly for multi-location operations, automation that handles repetitive tasks without errors, and experts who understand franchise-specific requirements. 

Your software needs to consolidate multiple entities, handle intercompany transactions, track location-level and consolidated performance, integrate with your POS systems, and generate reports that help you make decisions. 

Automation should handle bank reconciliations, transaction categorization, invoice matching, sales tax calculations across jurisdictions, and routine report generation. 

Expertise is what helps you win. You need accountants who understand ASC 606 revenue recognition for franchise, multi-state nexus and tax obligations, royalty calculations and franchise agreement terms, equipment capitalization and depreciation schedules, and FDD requirements if you are a franchisor. 

Your vision needs proper accounting procedures. 

The Expansion Question 

Ask yourself this: You want to expand to fifteen locations from five locations. Can your accounting setup support that vision? 

Don’t wait until you are in an accounting emergency. Your accounting team should not be firefighting all the time. 

You need a scalable approach. A professional accountant is trained to grow – integrate your systems and scale with your dreams. 

They have the golden mix of technology, constantly updating knowledge of process, and depth to support rapid growth. 

Growth always comes with challenges; you need to make the right decision – where to keep your focus. 

If you are planning to outsource your accounting, choose the ones with extensive experience, the right teams, and a two-way communication channel.