Wendys Master Franchisor

In July 2015 there was media coverage of Wendy's in connection with a company that previously owned the master franchise in Australia being placed into Voluntary Administration. Following is an article which sheds some light on the situation. It has been written by Shabnam Amirbeaggi who is a liquidator and insolvency expert. Shabnam is  a member of the Franchise Accountants Network and a Managing Partner at Crouch Amirbeaggi.

For those who may have heard a rumour about Wendys being in trouble, it’s not quite as dramatic as it may first sound. Yes it’s true, the company that originally owned the master franchise has been placed into voluntary administration, but Wendys as a brand will live on to see another day.

Wendys master franchisor, established in 1979 in South Australia, sold its brand about 12 months ago to a Singapore based company, Supatreats Australia. Since then franchisees have been negotiating a new agreement with the new franchisor.

Franchise agreements are not usually drafted to cater for the franchisors’ insolvency; and are more often than not drafted with clauses to deal with the franchisees’ possible financial demise. Consequently, it is likely that the franchisees who haven’t reached an agreement with Supatreats Australia are facing possible closure of their stores as they will no longer be able to trade under the Wendys brand. If they fail to sign up with the new master franchisor, the franchisees livelihood will be determined by their ability to cover the costs associated with de-identifying the business and continuing to operate independently, or if possible converting to a like-minded franchise – all of which are subject to the landlord’s consent and ability to negotiate new lease terms where applicable.

FAN members with a franchisee clients should bear in mind that even whilst the franchisee’s business might be going strong, the franchisee needs to be comfortable with the financial strength of the franchisor.

Year end tax deductions for franchises

With the financial year nearly over it's time to make sure you’ve made the most of your tax deductions.   In this article, Peter Knight, founder of the Franchise Accountants Network, highlights 7 year end tax deductions for franchises. 

Peter also has a reminder about the importance of financial record keeping. If your records could benefit from better housekeeping, this is a good time of year to turn over a new leaf!

1. Royalties. The royalties you pay are tax deductible, so make sure you’re fully paid up and up to date.  Your franchisor will love you and you get the benefit of the tax deduction..!
2. Marketing  fund contribution. Your contribution to the franchise marketing fund is also tax deductible so make sure this if fully paid up to date as well.
3. Local Area Marketing. The money you spend on advertising and marketing is not only vital to building your business but it’s tax deductible as well. So, if you’re planning on some local area marketing in the next few months, pay for it now and get the tax deduction.
4. Employee Superannuation. You’ll already know you’re required to make superannuation contributions for your employees but to get the tax deduction this year you need to make sure the payment is received by their fund by the 30^th June. Don’t get caught out, make sure it’s in their fund before the deadline.
5. Owner's Superannuation Contributions. Make the most of the tax benefits available for superannuation by contributing up to your limit. The general cap on contributions is $30,000, unless you’re 50 or over, in which case it’s $35,000 for this financial year. (Note, this is a temporary measure and will phase out over time)
6. Invest in new assets. As a result of the 2015 budget changes, all small businesses will get an immediate tax deduction for every asset they buy costing less than $20,000. This $20,000 limit applies to each individual item. Small businesses can apply this $20,000 rule to as many individual items as they like.
7. Suppliers invoices. If your business reports on the ‘cash basis’, you can only claim a tax deduction for what you actually spend. If you receive an invoice from a supplier, but don’t pay it, then it’s not tax deductible. To maximise your tax deductions, pay your supplier invoices before the 30^th June.

So there you have it, 7 tax deductions for franchises.

A word of advice though ...To make the most of your tax situation, please contact your nearest Franchise Accountant to obtain relevant advice for your specific situation. Please also note that the information contained in this article is provided for general information only should not be considered as specific advice as each person’s situation is different.

One final point. Make sure you keep all your receipts! In order to substantiate your tax deductions, you must be able to show evidence of the expenditure. This means receipts of the actual purchase. Your credit card statements will only suffice as evidence in very limited circumstances.

The start of the new financial year is a good time to start new habits for record keeping. For instance, keep all your receipts and records in a large envelope, or box, and make the most of your accounting software and services like Shoeboxed. This good business practice will save you hours in time if ever you are called on to find the receipts.

FAN Conference 2015 Wrap-up

The inaugural Franchise Leaders & Accountants Conference took place on June 16th, 2015. It was held in Sydney, at ANZ Tower, and attended by 70 franchise accountants and leaders from public practice accounting and franchise systems.

We had a full and diverse agenda, which covered many topics of interest to franchise accountants. Feedback and comments about the FAN Conference included:

• Good day, glad I came
• Worthwhile training, very relevant to the industry
• Enjoyable, good quality speakers and good vibe in the room

Here are highlights that we captured from the main sessions at the conference.

Benchmarking Tips & Traps

Benchmarking can yield many benefits for franchises and is a key topic of interest to franchise accountants. However, there are several traps that can undermine its success and it’s important to be aware of these.

Doug Hutchinson mentioned that some franchisees don’t embrace benchmarking at first. This highlights the need for a deliberate strategy to overcome any resistance to their participation.

Key points of Doug’s talk included:

• Benefits of benchmarking include providing feedback on the effect of the activities of the business. It also tends to create friendly competitiveness amongst the network.
• In a franchise, benchmarking can also support franchise development by providing financial information a prospect can use to assess the business they are considering.
• Common traps of benchmarking include failing to look outside your own business, too many measures and misuse of metrics to ‘paint a picture’.
• It’s important to consider the needs of your network and the complexity of the franchise system before deciding on a software solution to support your implementation of benchmarking.

Economic Update

Katie Hill, economist from the ANZ Bank, highlighted several economic factors that will affect franchises in the months and possibly years ahead. These include:

• Cooling of the mining sector will mean job losses in mining and related sectors.
• Fragile consumer confidence, coupled with a fall in average wages over the last 2 quarters. Linked with this is an increase in precautionary cash savings as the ‘feel good’ factor from growth in house prices is overwhelmed by concern about the economy.
• Household spending growing at around 2% per annum, which is half the rate experienced pre-GFC.
• Business is holding back on investment, as leaders await evidence of a pick up in consumer sentiment and spending.

ACCC

Dr Michael Schaper, one of the two Deputy Chairs of the ACCC provided information about the ACCC and its role in the franchise sector. Amongst the points he highlighted were:

• Financial penalties are now in place for breaches of the Franchising Code of Conduct.
• The ACCC carefully considers whether to take enforcement action and they don’t take it lightly. He also flagged a focus on the franchise sector.
• “I wasn’t told” or “I was promised” - Many of the complaints made to the ACCC in connection with franchising arise from earnings claims, or perceived earnings claims, and issues around training and support.
• Although prospective franchisees must be advised they should seek independent advice before entering into a franchise agreement, fewer than 50% actually obtain this advice.

Dr Schaper also pointed out that while franchisees often look to their adviser for answers, it is important they think through business decisions for themselves as they are the ones ultimately responsible.

Financial Distress

Even a franchise business can get into financial difficulty. In fact, in any system there will always be some business who are struggle financially.

Peter Knight & Kate Groom from Smart Franchise highlighted some of the causes of financial distress and warning signs to watch for. They also pointed out key areas for franchise accountants to consider when dealing with franchisees in financial distress. Causes of financial distress include:

• Lack of sales, which can be a result of poor sales skills or poor sales management
• Operational factors, such as staffing decisions, and buying practices
• Inadequate financial information and lack of financial acumen
• Tax planning: failing to take into account specific franchise factors such as refurbishment requirements or end of term arrangements when making year end arrangements.

It can be difficult for all involved when the ‘moment of truth’ occurs and financial problems come to the surface. At this point it’s important to carefully consider your response so that it’s helpful to the business owner.

The Modern CFO

As a franchisor business grows, the role of the finance person tends to broaden from transaction based to encompass other areas. This leads to questions about the role of the CFO, and the skills required.

Sean Mura is CFO at Anytime Fitness Australia. He highlighted the many aspects of the business in which he is involved. While overseeing the accounting function is a big part of his role, it involves a lot more than accounting and compliance.

Amongst other areas, Sean is involved with the risk management committee which has identified several areas of risk that could undermine the business. These include including risks common to many franchises, such as litigation, franchise closures and safety. As CFO he is implementing systems to help mitigate key risks, including financial reporting systems.

Sean also highlighted the range of skills needed to undertake the role of CFO, including communication and leadership skills. He considers it is also important to have IT skills and the ability to work with other departments within the business. He pointed out that a diverse career background is the best way to acquire the the skills and knowledge a modern CFO needs.

Mark Bilton: Get Real Boss!

Mark Bilton is a highly experienced leader with particular experience in business turnarounds. In the franchise sector he was Group Managing Director of Gloria Jean’s Coffees at a particularly challenging time. Attendees were particularly interested in his personal take on leadership.

Mark highlighted his view that the 20^th century ‘command and control’ approach to leadership is not appropriate in dealing with today’s business environment.

In his talk, Mark reflected on 8 characteristics of leaders, based on his own experience. These include being collaborative, visionary and grounded, as well as understanding that ‘control is an illusion’.

Mark’s personal examples, drawn from years working in challenging business environments, provided an engaging and inspiring end to the day.

Beware the Federal budget bounty

Just to be clear, in this week's Federal Budget, Treasurer Joe Hockey did not hand out $20,000 in cash to every small business like some sort of generous uncle. But you might think that if you read some of the comments being made on the "Have a go" Federal Budget. Here's a collection of comments I read, made by financial advisers e-newsletters, in online discussions and the inevitable flurry of self-promotion by electronics retailers.

"For the small business person there is an incentive to go and buy that piece of machinery or a car or even a coffee machine, as long as the purchase price is under $20,000." 

Or a question posed to franchisors which was something like "What would you want your franchisees to spend the $20,000 on?"

And this one, by celebrity seller of electronics, Ruslan Kogan, quoted here ...  "Tech isn’t an expense. It provides a huge productivity boost that quickly pays for itself."

(Well, okay, accountants categorise the things Kogan mentioned as assets rather than expenses. But you still need to pay for them up front, and they show up in your Profit and Loss Statement as an expense over a few years. So I reckon they are an expense to your business.)

Anyway, back to Minister Hockey. What he did was allow an immediate tax write-off of capital expenditure rather than a business receiving a tax deduction over a few years. To get that tax deduction you will need to spend cash you have in you bank account - or borrow money - and then spend it on a car, coffee machine, computer or whatever.  

Think before you splash out

There are always alternative uses for money so it always pays to think through spending decisions.

As some food for thought, here are some possible alternative uses for money you're being tempted to spend on nice to have 'stuff', but which might not the most effective use of profit to improve your business or secure your future.

• Pay off suppliers or other business debts
• Repay business loans. This reduces risk and potentially gives you flexibility in case of a downturn, or decision to expand in future.
• Allocate money for marketing or sales activity, or extra staff to help grow sales
• Invest in coaching or business advice to improve the financial performance of your business
• Leave the cash in your business to provide a buffer for quiet months
• Put money aside for a future refurbishment
• Contribute to Superannuation, which provides security for when you can no longer work
• Pay yourself a little more salary, a bonus or dividend

Which is the one for you? Well it depends on your circumstances and on what's coming up in the future of your business. Which is why we say to get advice for your particular circumstances from a qualified accountant.

Do a plan and cashflow forecast

And it will be much easier for your franchise accountant to advise if you have a plan, a budget and a cashflow forecast.

This is a good time of year to make a plan for your business covering the next year or so, and taking into account your future personal plans. The appropriate spending decisions will become clearer when you have an idea where you're heading and what your priorities are.

It's also very wise to prepare a budget and cashflow forecast, or have your accountant prepare one if you're not experienced in that. Looking ahead at your cashflow will give you an idea of whether the money you were thinking of spending on a car, coffee machine or computer would better be used in another way.

No longer flying solo

Why would you give up the freedom of 'flying solo' to join a franchise network? Despite its popularity, some people find the solo business life means long hours and a constant struggle to generate business and stay up to date. For them, a franchise in a related business business could be a good step. In recent years the business soloist sector has boomed. It includes casual soloists making something to supplement their day job, freelancers, and a large number of people working on their own as consultants of some variety.

Some of these soloists are the classic 'consultants' - people who make their living moving from one role with a company to another, often experts in a particular area, hired to fill a short term need. Some are the classic kitchen table startup; people with an idea - often for an online business, having a crack at it from home.

But many soloists have skills that could fit within a larger business. They include bookkeepers, accountants, therapists of various types, tradies, designers, communications and marketing people, mortgage brokers and financial planners.

There are a host of reasons people head down the solo track. Many, I suspect, simply to make a buck; having found it hard to find a job in a business that suits them. There's also that 'stuff the boss' idea; the dream of being free to do your own thing, to choose your working hours, benefit from your own hard work without the boss taking a slice.

Some love it, and make a decent living. But sometimes the dream isn't what you want or need.

It's not easy to create a sustainable business when you are the business. Perhaps there will be times of plenty, but almost inevitably there will also be times of scarcity. That's because the solo operator is either 'selling it' or 'making it', and you're limited by the number of hours you personally can work.

There are other challenges for the solo business person. With only you in the business it is hard to generate new ideas, solve problems and innovate. Possible - yes, but often much harder than when you have others working with you.

Perhaps you want the opportunity to grow your business bigger, or to have the company of others in the same business as you. Perhaps you're tired of the marketing slog that's an essential part of business.

If flying solo is losing its shine for you, it might be worth trading some of your apparent freedom and independence in exchange for what a franchise system can bring you.

Franchising isn't for everybody, and not every franchise is a good business to be in. But my interest in the soloist to franchisee journey was spiked when Robert Gerrish, who has made helping soloists his business, contacted me to record a podcast about franchising.

For some soloists, the move to a franchise could be worth considering. Here are some reasons:

• Many franchises have a good stash of marketing resources you can plug into. This will save you time and possibly money.
• Other franchisees can be a source of business tips and help, or simply someone 'like you' to talk to. It can reduce the loneliness factor.
• Franchises may provide the training which you need to stay ahead in your sector.
• Some franchises provide 'career paths' that help you move beyond solo operator to business owner with a team of staff. I'd like to see more franchisors focus on this.
• A franchise business can have a sale value whereas a solo business can be very hard to sell.

Of course, there are arguments on the other side, and you must must must do thorough due diligence before you make the move. But if the solo life isn't all you want or need, a franchise may be worth a look.

You can listen to the Flying Solo podcast here

https://soundcloud.com/flyingsoloau/53-is-buying-a-franchise-a-smart-move

Franchise Territory - Know your Boundaries

This is a guest post from Peter McLaughlin, a franchise lawyer and member of The Franchise Accountants Network.  The nature of territory rights is always a hot topic for prospective franchisees. Many people want an exclusive or protected area to operate their business in return for paying the upfront franchise fee. So the question often asked is - what rights do I have to a territory under my franchise agreement?

Is the territory exclusive or non-exclusive?

You may be granted exclusive rights for a territory or only the right to operate at a specified location (like a shop in a shopping centre). If your rights are exclusive for a territory there will generally be conditions attached – usually in the nature of minimum performance requirements. If the territory rights are to be exclusive the agreement should prevent both the franchisor and other franchisees prevented from operating in your territory.

Some franchise systems have no territory protection, meaning other franchisees can open close by.

Other terminology is sometimes used in franchise agreements such as marketing area or first right of refusal area. These terms can all have different meanings and implications for the franchisee. Even "exclusive territories" are not always exclusive, depending on how the franchise agreement has been drafted.

Seek advice if you're not sure

It is important to understand the nature of any territory rights that are given to you and any conditions or restrictions that apply. This involves understanding not only the franchise agreement but the commercial considerations about how the business operates, and what type of territory rights are appropriate.

How we can help

We regularly work with franchisees before they enter into franchise agreements, and also during the course of the agreement where disputes or uncertainty arise regarding their rights under the franchise agreement. Contact Peter McLaughlin at redchip lawyers on 07 3223 6100 or email PeterM@redchip.com.au  to discuss how we can help you.