The Franchisee is permitted the ability to use logos, menus, processes, uniforms, and a whole bunch of other business items to help them promote the company. The originator of the company, or the Franchisor, is then paid a royalty from the Franchisee for the ability to use these items.
This should be clearly laid out in the financial statements. Each Franchise has different rules for payment and operations, but it is up to the Franchisee and accountant to make sure the statements properly recognize this expense.
Like royalty fees, advertising fees are due to the Franchisor. The Franchisor has likely spent years promoting their business. Something the Franchisee will benefit from.
For this reason, a portion of advertising expenses is due to the Franchisor. This can extend to include things like marketing materials provided to the Franchisee to help them get started and continue to promote their new location.
A Franchise can offer some security in terms of starting with a reliable brand that is recognized by many, but there are initial costs the Franchisee will have to cover along with liquidity requirements. Some smaller Franchises required only $10k – $20k to open doors, with larger brands like McDonald’s requiring you to have liquid assets and net worth in the millions.
A franchise accountant will understand these costs and know how to properly categorize them on your financial statements. It is important to separate these expenses from royalty fees and from other liabilities you may have. The Franchisor will likely request financial statements on a regular basis and if the startup costs look like a loan you took out in the business’s name, they will likely have questions.
Starting a franchise business can be a confident way to give yourself a bit of freedom and security, all while owning your own business. So while you take on the brand and processes that have already been built, take care of them with an accountant that is experienced with the unique needs of Franchise owners.
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