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Tighter regulatory measures and greater disclosure requirements could soon hit franchise businesses as part of the fallout of the royal commission, with accountants urged to help scrutinise investments.
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Accountants called on to protect franchise investors
17 December 2018
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Speaking to Accountants Daily, Pitcher Partners principal Simon Johnson said that the recent royal commission should come as a warning that greater regulatory scrutiny is on the horizon for franchisors to prevent franchisee investors from getting taken advantage of.
“The royal commission has gone at lengths to look at the investment community and those sorts of disclosures and certainly there are some parallels with franchising because at the end of the day this is a very significant investment for a potential franchisee,” said Mr Johnson.
“I think there is an onus on people in an influencing position and in this case we’re talking about a franchisor – it is no different to a superannuation fund or wealth adviser – they are in a position of authority and they are influencing the decisions and choices of the potential investor and I see some extra regulation or compliance and best practices being brought into how a franchisor discloses to a franchisee and whether or not it is an investment decision that is going to suit their goals and their aspirations.
“Until now, that onus of responsibility has not rested on the franchisor.”
Mr Johnson believes accountants can play a big role in protecting mum and dad franchise investors by doing a thorough analysis of the franchise business down to the granular details.
According to Mr Johnson, some of the key red flags include high franchise fees, expensive locked-in agreements around supplies, compulsory marketing and administration costs that might not benefit the franchise owner, an unwillingness from the franchisor to be transparent about its earnings, about the turnover of new and old franchisees, and whether the franchisor offers assistance in reselling.
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“From our own experience, it seems to be unfortunately a little common that the potential franchisee doesn't really engage their accountant to give them any advice on the potential investment,” he said.
“We would really encourage the accountant to be involved early to look under the hood to see the cashflow projections and question the numbers being provided as an average performance for a franchisee so they can look at the capital required for the business and what working capital sensitivities might be present, what happens if the market has a little downfall, what difference does that make to their cashflow projections and their ability to meet their franchisor payments.
“We really think the accountant should be taking a ruler over the projected profit and loss and delving deeply into the cost of goods sold, if it’s a store buying goods that are procured from the franchisor, and really understanding if there are any sensitivities around those costs of goods sold.”
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