Franchising has become a common path in a variety of industries. It can be a tremendous growth engine for the originators of a concept and in turn provides a platform for someone to launch a business. It is not uncommon for a life-long employee to become consumed with the desire to “be their own boss” and a franchise is often the answer to: “But, what?”
Franchisors spend significant time and dollars road testing and documenting their concept, formulas and processes. A qualified and experienced franchisor does an excellent job of eliminating many of the pain points so the process of launching a business is seemingly automated.
However, there is a critical “Must” for all prospective franchisees in considering a business. The most important thing a prospective franchisee MUST acknowledge is that they are participating in a sales process of the franchisor and its representatives.
Franchisors genuinely believe they have THE best concept and they need partners to help grow it. In exchange for the right to use their concept a franchisor is typically compensated by a large upfront fee and a royalty off the top line revenue (generally 5%-8%). Their objective is to open as many “units” as possible. The prospective franchisee’s objective is to launch a profitable business. These are two very different objectives.
Let’s look at a restaurant franchise as an example. The restaurant business is built on strict margins. It is becoming increasingly more difficult to keep food costs at or below 30%. There are also increasing challenges in the labor market with the introduction of the Affordable Care Act and the vigorous debate on raising the minimum wage. If we conservatively assume food and labor costs will consume 65% of the sales while occupancy and overhead will consume 20%, you’re left with 15% of sales. Is this concept worth splitting the 15% operating profit with the franchisor? Well, maybe……..but wait, you haven’t paid the bank yet which will come from your half and the franchisor’s half is guaranteed because it comes off the top – immediately. Oh yeah, you also personally guaranteed the bank debt and the lease. So you have a 50/50 partnership with all the risk exposure and operating challenges on your half. Also if sales dip, the fixed costs will dip into your percentage points. To be fair – if sales excel, additional percentage points will tip your way. In the end the franchisor must have a strong value proposition.
I’ve seen both good and bad franchisors. I’ve also see good and bad franchisees. It takes both. However, the onus is on you – the franchisee – to thoroughly vet the concept and franchisor. From there it is wise to have advisors outside of the franchisor to help you evaluate the projected numbers and the terms of the various legal agreements especially on real estate matters. Frankly, you need an outside advisor that’s going to question the whole idea in the first place. There are so many intangibles to discuss about business ownership that go beyond cost, risk or strength of concept. It is far better to spend some consulting dollars on the front end than being locked into a lofty sales goal with an expensive lease in an industry you know very little about. Maybe a vacation is all you really need.
Selecting your accountant can feel like a big decision. It is such an important relationship because one’s livelihood is such a personal matter. It is hard to know who to trust. As with anything, glitter and salesmanship can take over the courtship making it a challenge to really understand what will be the true experience. However I believe there are certain indicators that can help you in assessing your options.
- A Lot of Chatter and Little Listening – Larger firms tend to have a lot of pressure to “sell” new business. This pressure often manifests itself in the accountant going on and on about themselves and why they are so wonderful or why everyone else is so horrible. If your meetings with an accountant consist of them pontificating without end then you can rest assured you won’t get an astute adviser focusing on you and your experiences. An adviser’s job is not only to help an advisee in making decisions but also to help them gain enlightenment and perspective for their situation. It has to be about YOU, the client.
- Know Who’s on First and What’s on Second – You have to know who will be on your team. Firms that are growing very quickly are faced with major challenges in staffing enough of the right people and getting them trained/experienced. If a firm is bragging about their growth then there is a reasonably good chance that they have instability with client service teams. If you are a small client for that firm you’ll have minimal stability and it will show in the service. You also need to know who is the primary relationship person and then you must be comfortable with both the title and level of involvement of that person. If you are a restaurant and your work is primarily tax-based but your relationship is with an audit manufacturing partner then you need to have a clear understanding of how that equates to your services.
- Reasonable & Transparent Fees – Imagine going to the grocery store and shopping without price labels on the shelving. You deserve to pay reasonable and transparent fees for your accounting and tax services too. Most routine accounting and tax services can be quoted as a fixed fee or with a fixed fee range. However you should be very wary of an abnormally low bid. It is an age-old tactic to low bid the fixed fee work with the intention to bill extra for EVERYTHING else. This is not to say that out of scope fees are never warranted but being billed for every little phone call is an old and tired way of doing business. Sometimes we can’t always tell what the cost is until we “get in there”. For some things we don’t have a choice but to utilize the hourly rate structure. Communication cures all. Open and regular communication about fees is a critical element of the relationship. I recommend setting fee parameters which will allow your accountant to proceed as needed but also know when they should seek approval in advance.
- How Good is the Promise? – I think you can tell a lot about someone simply based on whether or not they have a tendency to deliver on a commitment. We all know things can and will happen. Schedules and timelines must be adjusted. However if there is an issue every time and everything is always adjusted then you are either a low priority or you don’t have the advocate that you need and deserve. I was once described by a client as “a thorn in my side that I’ve come to rely on”. I wouldn’t let my client’s permanently-busy schedule set us back on our commitments to each other.
Every situation is unique and there are pros and cons to each option in choosing an accountant. These four indicators will cut through some of the noise and allow you to focus on the merits.
We saw some great economic news last week. First, it was reported that unemployment benefit applications dropped to the lowest level in six years and the US economy grew 3.6% from July through September compared with an expected rate of 2.8%. Friday provided some additional positive news when it was reported that the US economy added 203,000 jobs in November compared to 183,000 as projected. This took the official unemployment rate down to 7.0%.
I have seen some very promising results inside the trenches with my clients over the past six months. Within that context these macro-level statistics are very meaningful and frankly, very exciting. More economic activity means more opportunity for growth. However it is important for businesses to not only understand how to grow but to also understand what role growth plays within the business.
As a new small business owner growth is very important to me………to say the least. Growth is my survival. However if it is not approached and handled properly then growth can be devastating to a business. Growth doesn’t always equate with survival. In fact growth can be a killer. I’ve seen many businesses not understand both the good power and the bad power of growth. Frankly, I’ve seen too many accountants not understand the powers of growth. I can’t help but to laugh when someone says “I want to double in size”. Okay. Good. Why? What then? Many people can’t answer those two questions after making that declaration.
Amazon.com’s CEO, Jeff Bezos, was interviewed by CBS’s “60 Minutes”. He was asked to comment on the criticism that Amazon is putting small businesses out of business (book stores as an example). His answer was brilliant: “Amazon isn’t happening to book-selling, the future is happening to book-selling” and he also acknowledges that Amazon will be disrupted one day. Amazon’s growth is really about utilizing innovation to enhance the customer experience. That’s “Why”. Amazon has required the growth in revenue and goods to build more distribution centers which allowed them to reach a wider customer base more quickly. The consumer can now visit a single website for an unimaginable variety of goods and have those goods at the doorstep in two days. With their growth they have redefined the online shopping experience which used to be a long process. The return process is equally as easy. Amazon has a lot of loyal customers because of this strategy which gives it an insane stock value compared to its actual earnings (P/E Ratio of 1,391.59 vs Walmart’s 15.34). Amazon was once a small online retailer surrounded by a lot of online retailers. Growth is a powerful thing.
Growth has to have a higher purpose. Growing to be bigger is not smart business. Growing because you want people to know your name is not smart business. Growing because growth means more profit is just flat out wrong. There can be a lot of great reasons for growing but business leaders must understand how to grow. Growth can be good for the owners, employees, customers and communities. Growth can also kill quality, morale, profits and the business itself. As I consult with my clients I insist on gaining an understanding of why growth is important for their business. I insist on this because it usually takes more than just growth to achieve whatever is their real objective. Growth should never be viewed as the goal but merely a tool within a tool belt. In my experience the most successful businesses are ones that combine a commitment to high quality in everything it does as well as the well-being of their employees and communities. If you can handle growth without compromising that commitment it can be a very powerful thing for the business and all of its stakeholders.