Franchise Financial Guide

A franchise is a business with a landlord on the profit line

Buying a franchise buys you a brand, systems and support — in exchange for an upfront fee and a permanent share of your revenue. That trade can be excellent or terrible, and the difference is almost entirely visible in the numbers before you sign, if you know where to look. This guide is general information; a franchise purchase warrants specific advice from an accountant and a lawyer who both work with franchises regularly.

Understand the fee stack before you sign

Franchise costs come in layers, and the disclosure document must set them out. Read them as a system, not a list:

• Upfront — the initial franchise fee, plus fit-out, equipment, initial stock and training. The franchise fee itself is generally not immediately deductible for tax; ask your accountant how each component is treated.
• Ongoing royalties — usually a percentage of gross revenue, sometimes a fixed amount. Percentage-of-revenue means the franchisor gets paid whether or not you make a profit.
• Marketing levies — contributions to a marketing fund you don't control. The Franchising Code requires reporting on how the fund is spent; read it.
• Everything else — mandated suppliers (often at above-market prices), technology fees, training fees, renewal fees, and transfer fees when you eventually sell.

The question that matters: after all layers, what margin have existing franchisees actually achieved? The disclosure document, and direct conversations with current and former franchisees, are your evidence. If a franchisor discourages those conversations, that is itself information.

Your protections and obligations

Franchising in Australia is governed by the Franchising Code of Conduct, administered by the ACCC. It mandates disclosure before you sign, cooling-off arrangements, and dispute-resolution processes — the ACCC's current guidance sets out the specifics, and the Franchise Disclosure Register lets you research systems before committing. None of that replaces due diligence; the Code ensures you get information, not that the deal is good.

Royalty accounting, done properly

Once operating, treat royalties and levies as first-class costs in your books, not afterthoughts:

• Record royalties and marketing levies as distinct expense lines — never buried in "fees" — so you can see your true cost of being in the system.
• Reconcile the franchisor's royalty invoice against your own sales records every period. Errors happen in both directions, especially after POS changes.
• Understand what "gross revenue" means in your agreement — whether it includes GST, refunds, discounts and delivery-platform sales changes the royalty materially.
• Watch GST treatment: royalties and levies are typically taxable supplies to you, so credits generally apply — your BAS agent can confirm the handling.

The numbers to watch monthly

• Gross margin after franchise costs — your real trading margin is what remains after royalties, levies and mandated-supplier premiums.
• Break-even revenue — know the weekly figure at which you cover rent, wages, franchise costs and loan repayments. Percentage royalties raise it.
• Labour as a share of revenue — in most franchised formats this is the biggest controllable line, and award compliance failures in franchises attract particular regulatory attention (franchisors can share liability, so expect scrutiny).
• Cash set aside for tax and GST — franchise cash flow feels strong because revenue is immediate; the tax on it is not optional.

Benchmark, and use the network

One genuine advantage of a franchise is comparability: dozens of businesses run the same model. Ask the franchisor for system benchmarks — sales per labour hour, cost-of-goods percentages, average transaction values — and demand to know which quartile you're in. A franchisee who runs their back office well can also see problems early instead of at tax time; the disciplines in our finance function guide apply doubly when a royalty clock is running.

Think about the exit from the start

Franchise value on sale is constrained by the agreement: remaining term, renewal rights, transfer fees and franchisor approval of the buyer all shape what you can realise. Keep clean, software-based books from day one — a purchaser (and their bank) will pay for provable earnings and walk away from a shoebox. If the business only works when you personally are behind the counter, that caps the price too; the owner absence test is a useful lens well before you plan to sell.