Franchises
Audit, tax, and advisory for franchisors preparing franchise disclosure documents and for multi-unit franchisees growing across locations and markets.
Overview
Franchising creates two distinct sets of accounting needs. Franchisors must generally include audited financial statements in their franchise disclosure document under the Federal Trade Commission’s Franchise Rule, and they must apply ASC 606 to initial franchise fees, royalties, and advertising fund contributions. Multi-unit franchisees, on the other hand, need consistent unit-level reporting, franchisor compliance reporting, and financing support as they add locations. Pease Bell, a Top 200 U.S. CPA firm headquartered in Cleveland, Ohio, serves both sides of the relationship.
For emerging and established franchisors, we provide FDD audits, revenue recognition analysis, and tax planning, including multistate considerations that arise when royalties flow in from many states. For franchisees, we provide tax, accounting, and multi-unit reporting so owners can see how each location performs and meet their franchisor’s reporting requirements. Audit, tax, and advisory sit under one roof, so both groups work with one team.
How We Help Franchisors and Franchisees
FDD Financial Statement Audits
Audits of franchisor financial statements prepared for inclusion in the franchise disclosure document, including planning for first-time audits and coordination with franchise counsel on timing and state registration requirements.
Franchise Fee Revenue Recognition
Application of ASC 606 to initial franchise fees, development fees, royalties, and other charges, including evaluation of the practical expedient available to private franchisors for certain pre-opening services.
Advertising Fund Accounting
Accounting and reporting for brand and advertising funds, including presentation of contributions and spending in the franchisor’s financial statements and annual reporting to franchisees where agreements require it.
Franchisor Tax Planning
Entity structure, state income tax exposure from royalty income across many states, and tax treatment of initial fees and other franchise payments, coordinated with the financial statement treatment.
Multi-Unit Franchisee Reporting
Location-level financial statements, royalty and sales reporting to the franchisor, and consolidated reporting for lenders, so franchisees can compare units and meet their franchise agreement obligations.
Franchisee Tax and Growth
Tax planning for new unit build-outs, depreciation and cost segregation analysis, entity structure for additional locations, and financial support for acquisitions or sales of franchise units.
Challenges We Help You Address
- ✓Emerging franchisors facing their first audit for an FDD
- ✓Allocating initial franchise fees between license and pre-opening services
- ✓Presenting advertising fund activity correctly in financial statements
- ✓State tax exposure from royalties earned in many jurisdictions
- ✓Franchisees managing reporting and performance across many units
Frequently Asked Questions
Does a franchisor need audited financial statements?
Generally, yes. The FTC Franchise Rule requires franchisors to include audited financial statements, prepared under U.S. generally accepted accounting principles, in the franchise disclosure document. A phase-in is available for start-up franchisors, allowing unaudited statements in the early period before audited statements are required. Some registration states impose additional requirements, so franchise counsel should confirm what applies.
How are initial franchise fees recognized under ASC 606?
Under ASC 606, the franchise license is generally treated as access to the franchisor’s intellectual property, so the initial fee allocated to it is typically recognized over the franchise term rather than at signing. Franchisors that are not public business entities may elect a practical expedient to account for certain pre-opening services as distinct, which can allow earlier recognition of part of the fee.
How are royalties recognized by franchisors?
Sales-based royalties are generally recognized as the underlying franchisee sales occur, under the sales-based royalty exception in ASC 606. This means the franchisor does not estimate future royalties at contract inception. Royalty revenue therefore tracks franchisee sales performance period by period, and franchisors need reliable, timely sales reports from franchisees to record it accurately at each period end.
What accounting does a multi-unit franchisee need?
Multi-unit franchisees typically need consistent location-level financial statements, accurate sales reporting for royalty calculations, payroll and sales tax compliance in each jurisdiction, and consolidated statements for lenders. As unit counts grow, an organized entity structure and standardized monthly close process become important for both management decisions and franchisor compliance.
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