6 tips for franchisors managing credit risk

For most retail franchisors, their franchise owners are their largest debtors. Depending on the operating model and procurement relationships, this amount can start to stack up if a couple of months are in arrears

1. Two-way communication

It is critical in any relationship to sustain two-way communication, and the franchise owner and franchisor relationship is no different. Speaking with the franchise owners and understanding their situation can give early insight into any challenges that lie ahead.

2. Performance information

Having regular, accurate and comparative management information is a must in order to assess the true financial position of your franchise network but also in spotting trends that could present risk in terms of credit.

Cloud accounting systems are well suited to monitoring franchise networks. For example, CounterBooks, an Associate of Franchise Development Services, is an online retail accounting system providing full network reporting with net worth and liquidity of each franchise owner and comparison from the previous months. This data allows retail franchisors to identify those franchise owners that are under-performing and thereby take remedial action.

3. Open book accounting

It is highly recommended that open book accounting be specified by the franchisor for the franchise owner. This requires the franchise owner to submit monthly or quarterly sets of accounts to the franchisor and entitles the franchisor to fully audit the franchise owner’s accounts at any time.

4. Process and procedures

A franchise relationship is a legal arrangement between two parties. There will be clauses outlining the obligations of each party. Nearly all Franchise Agreements specify payment terms and if these are not met, the contract can be terminated by the franchisor.

With this in mind, the franchisor should have a strict and well-documented procedure dealing with any lack of payment should the matter proceed to the courts.

5. Making the decision based on fact

We recently met with a franchise that had a franchise owner who had requested an extension to their credit limit and a payment break. Upon requesting a copy of their accounts, the franchise owner decided he was “ok” and no longer needed the credit extension. This sudden change of mind questions the true rationale and importance of his request.

When a franchise owner is requesting financial support, it should be reviewed with strict and vigorous financial due diligence – thereby analysis of the true financial position of the franchise owner is required.

Franchisors should review the decision based on management accounts and forecasts provided by the franchise owner.

6. Follow up and monitoring

Once a new franchise location has been established, the franchisor should regularly follow up and monitor the performance of the franchise owner. This serves two purposes:

(i) The franchise owner is provided with the support promised by the franchisor in their contract.
(ii) The franchisor ensures that the franchise owner is complying with their contract and all fees due are being paid.

CounterBooks is an online retail accounting system. It is specifically designed for retail franchise businesses, so it makes dealing with and controlling cash and credit card sales a simple task. From conception, CounterBooks has been innovatively designed to help manage many of the challenges faced by retailers on a daily basis, which other accounting systems do not.

Written by Adrian Sandbach, Operations Director of CounterBooks