Armanino Blog

Building a Solid Foundation

March 23, 2014

They’ve totally changed what they are. The ones who are successful know what they don’t know. Baby boomers are a big reason why the franchise industry is bouncing back, but their vast experience in the working world does not guarantee profitability.

The franchise model allows frustrated baby boomers — not yet ready to retire — the chance for a fresh start. But as they take on this new opportunity, it’s easy to lose sight of the financial details that are the lifeblood of any solid organization.

The franchisee may not know how to manage the financial end or may use the excuse, ‘I don’t have the time to do that report. I have to go out and sell.” It’s a disconnect that can lead to trouble.

Why are so many baby boomers looking at franchise opportunities?
Baby boomers have lost confidence in the real estate and securities markets. They look at them as being volatile in terms of investment and have become cynical about the motives of corporate employers. They are being driven to look at business opportunities that present a solid investment vehicle for their interests and allow them to control their own destiny.

There is also the availability of capital. It really dried up during the economic downturn and paralyzed the franchising industry, both on the franchisor and franchisee side. Franchisors were no longer selling franchises because people didn’t have the capital or risk tolerance to invest in a franchise opportunity. And existing franchisees were hit very hard at the unit level, especially in the retail sector.

But confidence is growing in this area. A good sign of this confidence is the number of financing options now available specifically for individual franchisees. The U.S. Small Business Administration has a lot of money that it’s trying to deploy. Beyond that, there are a number of private banking institutions that are increasingly interested in funding the franchise sector.

What can franchising companies do to better support their new franchisees?
The No. 1 thing they can do is to have the right team of professionals in place to both operate the franchising company and guide their franchisees. Franchisors also need to make sure their franchisees are adequately capitalized. All too often, franchisees use their last dollar just to get launched, leaving little contingency or working capital in the event things don’t go exactly as planned. Having adequate capital to handle the ‘unknowns,’ gives them more time and a better chance to succeed.

Of key importance for organizations that have made the decision to expand through franchising, is to surround themselves with professionals who understand how to build the proper corporate infrastructure and manage the franchise system. Too many early stage franchisors assume that the success of their ‘pre-franchise’ business will translate to a successful franchise system. Without the proper guidance and advice, these systems can collapse because the foundation was never set up properly in the first place.

How important is a good accounting system when it comes to franchising?
It is not uncommon to have a new franchisee, who hasn’t owned a business before, feel overwhelmed when he or she suddenly has a daily accounting responsibility for which he or she has had no prior guidance.

A good accounting or consulting firm will heighten awareness as to the importance of proper accounting processes and procedures, for both the franchisee and the franchisor. It’s the firm’s responsibility to demonstrate that accounting is as important as legal, sales, marketing and operations to the health of their business.

Teaching proper accounting procedures is integral to any franchise training and onboarding process, and illustrates the importance of working with professionals that can help newer franchisors deliver the message.

Tax Reform Update: Corporate

  • Self-employment tax would be calculated in the same manner as LLCs and S-Corporations.
  • Corporate tax rates would be reduced from 35% to 25% beginning in 2015.
  • Corporate AMT would be repealed.
  • The current system of depreciation and special accelerated depreciation would be repealed and replaced by a straight-line system.
  • Section 179 expensing would continue, and would increase to an immediate deduction up to $250,000/year.
  • Corporations could only offset 90% of their taxable income with net operating losses from prior years.
  • The manufacturing Section 199 deduction would be phased out beginning in 2015. However, the R&D tax credit would be made permanent and simplified.

March 23, 2014

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