The franchise industry in the US contributes to over $780 billion in economic output annually, with over 780,000 establishments operating across the country. Franchisees pay an initial fee and ongoing royalties to access the branded name, marketing, products, and systems, allowing faster expansion. The US has supported franchising growth through favorable regulatory and financing environments, allowing franchise systems to flourish. Key accounting challenges include revenue recognition, valuing intellectual property assets, consolidation, disclosure requirements, and performance reporting. QMK Consulting can help franchisors address these challenges, providing revenue system setup, disclosure process support, consolidation analysis, intellectual property valuation, and financial reporting.
About the industry
The franchise industry plays a major role in the United States economy. According to recent data, franchise businesses account for over $780 billion of economic output for the U.S. economy per year. Over 780,000 franchise establishments operate across the country, providing nearly 8.5 million jobs. Some major companies that use a franchise model include big names like McDonald's, Subway, 7-Eleven, and Jiffy Lube.
The franchising business structure allows entrepreneurs to operate under the banner of an existing brand rather than having to build name recognition from scratch. Franchisees pay an initial fee and ongoing royalties to the parent company to access the branded name, marketing, products, and systems. This allows faster expansion and leverages the resources and expertise of the franchiser. From the franchiser’s perspective, it provides a way to grow rapidly without having to raise and deploy capital for each individual location.
The United States has supported the growth of franchising over the years through favorable regulatory and financing environments. This has allowed franchise systems to flourish and expand. Well-known franchise brands continue to dominate lists of top global brands originating from America. Looking ahead, many analysts expect U.S. franchises to continue growing both domestically and internationally as the model provides value to both franchisees and franchisers when executed effectively.
Key accounting challenges faced by the industry
Franchisors face some unique accounting challenges, including:
Revenue recognition - Determining when to recognize initial franchise fees as well as ongoing royalty payments can be complex under accounting rules. Fees meant to cover future services may need to be deferred.
Intangible assets - Valuing and accounting for the intellectual property assets of a franchisor, such as trademarks and branding, involves estimates and impairment considerations. These assets must be handled carefully within financial reporting.
Consolidation - In some cases, franchisors may have an ownership stake or a controlling financial interest in a franchisee. This would require care to determine if and when consolidation is appropriate in financial statements. Making incorrect consolidation determinations can misrepresent the economics.
Disclosures - There are extensive disclosure requirements under accounting standards meant to provide transparency into franchisor systems, agreements, commitments, related parties, and more. Keeping up with evolving disclosure guidance is key.
Performance reporting - With a distributed network generating revenue across franchisee units, franchisors need robust systems to track disaggregated performance data and tally systemwide results accurately. This informs management and satisfies reporting needs.
Managing these areas requires specialized accounting expertise related to franchisor operations and structures. Investing in financial personnel with franchisor accounting experience is an imperative for growing franchisors seeking to get reporting and controls right from the start. Companies that fail on the accounting side compromise regulatory compliance and market transparency.
How QMK Consulting can help solve these challenges
QMK Consulting is well-positioned to help franchisors address some of their biggest accounting and finance challenges:
Revenue System Setup - Our team can configure recognition policies and systems to handle initial franchise fees, continuing royalties, advertising funds, and more in line with accounting standards. Getting revenue systems right from the start prevents rework.
Disclosure Process Support - We keep up-to-date on disclosure rule changes and help clients compile the detailed franchise disclosure documentation required in a compliant format. We also review for quality and completeness.
Consolidation Analysis - With deep technical accounting expertise, QMK Consulting helps clients appropriately assess equity investments, joint ventures, and control determinations that may require consolidation of outside entities. We know where franchisors trip up.
Intellectual Property Valuation - Our licensed valuation experts can deliver marks for the fair market value of franchisor intellectual property and brands. These valuations hold up to auditor and regulatory scrutiny to reinforce trademarks and other intangible assets.
Financial Reporting - QMK helps franchisors develop reporting packages tailored to this unique industry to deliver both systemwide performance snapshots along with individual franchisee-level operating analytics.
In summary, QMK Consulting has both the franchising industry knowledge and the technical accounting skills to solve common challenges franchisors face. Our customized solutions help reinforce financial integrity and regulatory compliance from startup into mature growth.