Schultz & Associates is a Franchise CPA firm providing accounting, tax and audit services to franchisors, multi-location franchisees and franchise owners looking to grow beyond their first location. Our experience includes FDD financial statement audits for franchisors and ongoing accounting and tax services for franchise operators throughout the United States. For franchisees, our CPA services go beyond tax return preparation. We provide fully adjusted monthly financial statements, location-level reporting, inventory and gross margin accounting, sales tax and tax planning.
For franchisors, our audit team performs the financial statement audits required for the Franchise Disclosure Document (FDD). For franchisees, our accounting and tax team works with established multi-location operators. We also work with owners who have one location and are actively looking to acquire or open additional locations. Schultz & Associates has worked with growing businesses since 2003. Our accounting, tax and audit capabilities allow us to continue serving clients as their businesses become larger and more complex. While we are based in Michigan, we work with franchise clients throughout the United States.
FDD Audits for Franchisors
Franchisors may need audited financial statements for inclusion in Item 21 of the Franchise Disclosure Document. An FDD audit provides prospective franchisees with financial information about the franchisor and must meet the financial statement requirements that apply to the FDD. Schultz & Associates performs FDD audits for franchisors throughout the United States.
For an established franchisor, the audit generally includes the company’s balance sheets and related statements of operations, stockholders’ equity and cash flows for the required periods. New franchisors may have different financial statement requirements depending on how long the company has been operating and the states in which the franchise will be offered.
Our audit team works with the franchisor’s existing accounting records to complete the audit and prepare the audited financial statements. Before fieldwork begins, we provide a document request so the franchisor knows what information we will need. We can then complete the audit remotely using secure electronic document exchange, email, phone calls and Zoom meetings.
Our Franchise Audit Process
We perform FDD audits remotely, which allows us to work with franchisors throughout the United States. Our goal is to keep the process organized and make it clear from the beginning what we need from you.
- Initial discussion. We start with a phone call or Zoom meeting to learn about the franchise, the status of the accounting records and the financial statements needed for the FDD.
- Engagement and document request. After the engagement letter is signed, we provide a list of the accounting records and supporting documents needed to begin the audit.
- Audit planning and fieldwork. Our audit team reviews the accounting records, performs the required audit procedures and follows up with questions or requests for additional documentation.
- Draft financial statements. Once we substantially complete fieldwork, we prepare the draft audited financial statements for review.
- Final financial statements. After we resolve any remaining questions and adjustments, we issue the final audited financial statements for inclusion in the FDD.
Documents can be exchanged electronically through our secure systems. We can handle most questions by email, phone or Zoom, so our audit team generally does not need to be physically located near the franchisor.
Meet the Franchise Audit Team
Our franchise audit engagements are handled by members of our audit team who work directly with clients throughout the audit process.
Lew Boucher, CPA | Senior Auditor
Lew has more than 15 years of audit and accounting experience. He works directly with clients during audit planning, fieldwork and the completion of audited financial statements.
Ben Miller | Staff Auditor
Ben works with Lew on franchise audit engagements, including audit testing, documentation and client follow-up.
Accounting & Tax for Franchise Owners Preparing to Grow
Adding a second location changes more than the size of the business. Before that happens, we can help make sure the accounting is ready for the next step. That includes putting strong accounting processes in place, reviewing the entity structure and considering how payroll will work as additional locations are added.
It is much easier to build these processes before an owner has several locations. The accounting for the first location can become the starting point for how future locations are handled. When the next location opens or is acquired, there is already a structure in place for the accounting, financial reporting and payroll.
Accounting & Tax for Multi-Location Franchisees
Multi-location franchise accounting creates issues that usually don’t exist with a single location. We often find intercompany accounts that don’t agree or transactions between related companies that haven’t been recorded correctly. We also see management companies charging fees to individual locations without a consistent method for allocating them. That can distort the profitability of each location and make comparisons less useful.
Payroll is another area we look at. Some franchise groups continue running payroll separately through each operating company as they add locations. Depending on the circumstances, it may make more sense to have a common company employ the staff and allocate payroll costs among the locations.
A franchise accountant should do more than keep the books and prepare a tax return. The accounting should give the owner a clear picture of the entire business while still showing how the individual locations are performing.
Fully Adjusted Monthly Financial Statements
Good franchise accounting should produce more than a set of books that gets cleaned up at tax time. We prepare fully adjusted monthly financial statements so owners can use their numbers throughout the year. This includes a balance sheet and profit and loss statement with the necessary reconciliations, accruals and other adjustments completed each month.
For multi-location operators, we also want the accounting handled consistently from one location to another. If expenses, inventory or other transactions are treated differently between locations, comparing the results becomes less useful. Consistent accounting allows an owner to compare individual locations with greater confidence that differences in profitability reflect what is actually happening in the business.
The same financial statements give our tax team better information throughout the year. Instead of waiting until the tax return is prepared to identify a problem or discuss planning, we are already working with adjusted financial information.
Inventory, Gross Margins and Tax Accounting
Inventory affects more than the balance sheet. It directly affects cost of goods sold and gross profit. That makes the inventory method important for both monthly financial reporting and income tax preparation.
For monthly reporting, many franchise operators do not want to perform a complete physical inventory every month. When a client performs physical inventory quarterly, we can use the prior quarter’s gross margin to estimate inventory during the months between counts. Once the next physical count is completed, we adjust the books to the actual inventory. This gives the owner more meaningful monthly financial statements while regular physical counts help keep the accounting accurate.
Inventory also has its own set of income tax rules. Internal Revenue Code Section 471 generally governs the tax treatment of inventory. Certain small business taxpayers that meet the gross receipts test under Section 448(c) have additional options for accounting for inventory under Section 471(c). These businesses may be able to treat inventory as non-incidental materials and supplies. Depending on the circumstances, they may also use a method that follows the treatment of inventory in their financial statements or books and records.
The tax rules can also affect which costs must be capitalized into inventory. Section 263A contains the uniform capitalization rules, commonly referred to as UNICAP. Certain small business taxpayers that meet the Section 448(c) gross receipts test are exempt from these requirements. As a franchise operation grows, we need to consider whether it continues to qualify for the small business exceptions and whether its existing inventory accounting method remains appropriate.
An inventory method is also an accounting method for tax purposes. Changing the way inventory is treated may require an accounting method change, including the filing of Form 3115. For that reason, we look at inventory from both sides: producing useful monthly financial statements and making sure the tax treatment is appropriate.
Working With Franchise Reporting Systems
Every franchise system is a little different. We may not have worked with the exact software your franchise uses. But once you have worked with enough franchise reporting systems, they start to look familiar. Sales are still sales. Credit card fees are still credit card fees. Gift cards, royalties and other franchise activity may be reported differently. We generally know what we are looking for and where to start.
When possible, we obtain access to the backend reporting system so our accounting team can pull the information we need directly. We are not looking to recreate reports the franchise system already produces. If the system already gives us good information, we use it.
Our job is to take the accounting further where the franchise software stops. That may mean reconciling reports to the accounting records, recording information that does not make it into the general ledger or making month-end adjustments. It may also mean bringing information from several sources together. For multi-location owners, we want that information handled consistently from one location to another.
The franchise system gives us an important piece of the accounting. We combine that information with the other accounting records to produce fully adjusted financial statements that give the owner a better picture of the business.
Franchise Royalty Reporting
If your franchise requires you to calculate and report royalties, we can handle that as part of the monthly accounting process. Some royalty calculations are straightforward. Others involve formulas and adjustments that can become tedious month after month.
You can certainly do this yourself, but we work with financial information and calculations all day. In many cases, we can get through the reporting more quickly and take one more monthly task off the owner’s plate.
Sales Tax for Franchise Locations
We can also handle sales tax reporting for franchise clients. Our accounting team can calculate the sales tax due, prepare the required returns or payment coupons and keep track of the filing schedule.
For franchise owners with multiple locations, this can become another repetitive compliance task. We already have much of the sales information as part of the monthly accounting process, so it often makes sense for us to handle the sales tax reporting at the same time.
Franchise Tax Preparation & Planning
Tax planning for a franchise owner should not start when the tax return is being prepared. Because we are already working with the accounting during the year, we have current financial information available when it is time to make tax planning decisions.
As franchise owners add locations, they may also add entities and states. We prepare the business and owner tax returns and look at how the entire group fits together. That includes estimated taxes, entity structure, equipment purchases, depreciation and state and local tax issues.
Owning several franchise locations can also make a tax return look very different from the return of an owner with one location. Our franchise tax accountants look at the combined results of the businesses rather than treating each tax return as an unrelated filing. The goal is to understand the owner’s complete tax position before making planning decisions.
Meet the Franchise Accounting & Tax Team
Our franchise accounting and tax clients work with a team that handles the monthly accounting, financial reporting and tax work throughout the year.
Matt Wilkins, CPA | Tax & Accounting Manager
Matt works with business owners on accounting, tax compliance and tax planning. He also works with our accounting team to review financial statements and address tax and accounting issues as they arise during the year. mwilkins@schultz-cpa.com
Xiang | Accountant
Xiang works on the monthly accounting for franchise clients, including reconciliations, financial statement preparation and month-end adjustments. She can also dig into the backend reports of a client’s franchise software to find the sales, fees, royalties and other information we need to complete the accounting.
Mary-Kate Sweet | Staff Accountant
Mary-Kate assists with monthly accounting, sales tax reporting and other ongoing accounting work for franchise clients.
Talk With a Franchise CPA
If you are a franchisor that needs an FDD audit or a franchise owner looking for help with accounting and tax, talk with our team. We can start with a phone call or Zoom meeting to learn about your franchise and determine what you need. Reach out to Matt and he would get you on the schedule mwilkins@schultz-cpa.com.
Schultz & Associates works with franchise clients throughout the United States from our offices in Michigan.