How to be Franchise Audit Ready

Franchise audits are vital for maintaining the financial health of your business. However, many new franchisors find this process challenging, struggling through it due to a lack of preparation and understanding of what it’s all about. This can lead to compliance issues, financial discrepancies, and even damage to the brand’s reputation.

So, what exactly is franchise auditing? How does it work? And why is it so important for the financial health of your franchise business?

In this episode, Stacy R. Farber, CPA and I discuss how to prepare for a franchise audit, what to expect, and strategies for managing your franchise's finances as it grows.

Stacy brings over 25 years of experience in audit and financial leadership experience to her engagements. She is the  Connecticut Audit and Attest Practice Leader.  and has extensive experience completing financial statement audits, single audits, and reviews and compilations for multiple industries, including franchising entities. 

We discuss: (timestamps)

02:26  What is a franchise audit?

04:20  What auditors look for in financial statements 

08:00 What negative equity means for your franchise

10:02 How revenue recognition affects your financials

12:56 How long does a franchise audit take?

14:38 How far back should auditors look?

16:45 How often should you do franchise audits?

17:48  What to do if your franchise sale gets denied

18:49 Cash vs. accrual accounting 

25:54 Common issues in franchise audits

27:41 Best practices running a franchise  

34:03 Actionable tips to get  your business franchise audit ready

Sample of what you will learn:

How revenue recognition affects your financials

Revenue recognition is when your business officially counts money as earned or more accurately, when you've actually earned that payment. For most businesses, like manufacturers, it's straightforward: once the product is shipped, the sale is earned and can be recorded as revenue, even if payment hasn't been received yet.

But with franchising, it's more complicated. The initial franchise fee might not be recognized until the franchise opens, because there are many steps involved, like finding a location and training staff. Some businesses simplify this by separating these steps so they can recognize revenue sooner. Royalties, on the other hand, are usually straightforward and are recognized weekly or monthly, depending on the type of franchise.

Getting revenue recognition right is important because it influences how your financial health looks like to others, particularly by your investors, regulators, and other stakeholders

Here are a few relevant quotes from the episode:

"So as a business owner, you want to make sure you have good controls in place, basically over all of your financial records, but especially cash and journal entries." - Stacy Farber

"When you're starting these businesses, you want to think about who you want reviewing and approving certain things, just to make sure that there's a segregation of duties so one person isn't doing everything." - Stacy Farber

"To find the right auditor, ask yourself: Do you like the person? Do you think you can have a relationship with them? Do you think you can trust them? Do you think they're going to give you a good product? Do you think they're going to be responsive?" - Stacy Farber

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