Tax and Franchises

[Tiggy]

Hello Guys

I am considering buying a license from a Franchisor and wondered how accurate this information from their info manual is:


In my case the initial out going costs include a one off set up fee £3000 and then a license fee £5000 which will be a recurring annual cost.


They have written:

'The annual license fees, not the set up fee, should be allowed by the HM Inspector of Taxes in computing the taxable profits of Licensees chargable to Income Tax or Corporation Tax. This is because the initial fee will be regarded as capital expenditure which is not deductible in computing taxable profits.

What exactly does that mean and is it true?

Tiggy

 

[SuffolkDesigns]

It basically means that the 5k annual fee is a tax deducatable expense, where the 3k initial payment is not.

Sounds right to me, although I am not a qualified accountant. (you proably should aska qualified acountant this type of question to avoid any tax problems in the future.)

 

[Alpha]

Almost true but not quite.

The annual license fee will be allowed as a cost in your tax computation.

The setup fee is quite correctly classified as capital and is treated slightly differently to other costs.

For capital spend the revenue recognise that you receive the benefit of this expenditure over a number of years so they have what is called a capital allowance.

The cost is allowed against tax over a number of years so in this case you would claim a first year allowance of 40% against the first year.

In each of the subsequent years you would claim 25% of the balance (what is left)

so year 1 claim £1200 against tax (40% of £3000)
year 2 claim £450 (25% of (£3000-£1200))
year 3 claim £337.5 (25% of (£3000-£1200-£450))

and so on.

Hopefully this makes things clearer.

 

[Kemble3]

Hi Tiggy

This annual licence fee seems rather high bearing in mind the initial franchise cost is only £3000. £5k per annum off your bottom line seems a huge chunk of change. What is the annul turnover figure in their prospectus ?

Could you tell me what this franchise is and are they affiliated/members of the British Franchise Association?

I have been involved with a large Canadian company where the franchise fee’s were large (up to £250K) but the Franchisor paid a monthly fee of 5% for the royalty fee and 2.5% for the marketing fund.

Best wishes


Ian

 

[Tiggy]

Thanks so much to everyone who has replied - such a great help.

Dear Kemble, I actually rounded the figures down for the sake of ease. The real figures are:
£3250 + VAT
£5500 + VAT

I've been told that the VAT is optional but been advised to go with the + VAT figure.

I have asked to see their financial reports and have been told the following:

QUOTE *Our company's year end was extended to February 2005 the accounts are therefore not due for filing until November 2005. However, I can confirm that the company wrote off all its development costs in the year and made a very small profit*UNQUOTE

So I haven't actually seen anything on paper re the financial health of the company.

The franchise is with a company who provide speed dating, singles parties etc. They do seem quite prominent in the market and I have been told that currently they are the top company in the UK in their field but then they would say that!! Website and positioning in search engines etc seems fine.

Initially it was for just the RM (Romford) territory but having investigated that I soon realised that with only 110,000 people between the ages of 18-55 that pond just didn't have enough fish! Now it will be joined by IG (Ilford) territory which brings that figure upto over 175,000. I'm still not sure if that's enough and am having a hell of a job finding the right statistics and advice to help me without it costing me a fortune.

Also what concerns me is that it took me over a week to find out for myself that RM just wasn't big enough and as soon as I pointed it out they agreed and gave me IG straight away. This appears to me that they knew all along that RM was too small but were still quite happy for me to buy it anyway but maybe I am a cynical old soul.

I spoke to the franchisee who has been with the company for one year and she told me that in her territory that figure is over 250,000. I worked out from what she was telling me that her annual profit after tax and cost of running the business has been deducted is about £10,000 - £12,000.
Bearing in mind that I haven't taken HER initial set up costs off that, or her license fee that she paid at the start of the year and the license fee that must now be found for the following year. I don't expect her license fee to be anywhere near as expensive as mine because she came in in the very earliest days of their expansion.

This is a very rough estimate. Having said that she did seem like she wasn't going for it with full gusto and was quite happy for it to be on a fairly small scale, averaging about 2-3 events per month and a few large singles parties a year.

My other concern is I think that because of where Romford is placed another chunk of my potential base is automatically lost becuase most people commute into London to work and therefore may be more inclined to attend a speed date event there rather than travel back home to attend one, especially on a Friday night. I just think that this is a factor that other areas eg Leeds, Manchester, Notts etc don't have to take into consideration because those areas ARE their hub of activity with no larger more attractive magnet to tempt them away!!!

Not only that I can't help thinking that the wave of the speed dating phenomena is flattening out now because it's not such a novelty any more. Speed dating of course if only one facet of the company and they emphasise that what they are basically is event organisers for singles events with speed dating being their main current flag ship. They are making plans to extend into a variety of things including holidays abroad for singles, acitivity weekends etc.

What is your opinions so far? I'm beginning to see that I really do need to learn about business and understand more how it works. Knowledge is power after all.

But does my line of reasoning so far make any sense?

Any helpful comments much appreciated

Tiggy

 

[Tiggy]

Kemble

Sorry I meant to add, I asked them if they were a member of the BFA and they said something about buying a license is different from and actual franchise and they had been in a bit of disagreement with BFA over it. Not sure what that means, whether they were trying to negotiate membership for a reduced cost or something.

The main reason he gave was that why do they need to pay X thousands of pounds for a stall and publicity etc when they are already being inundated by callers interested to become license holders. It does sound reasonable and I do know that just because a company is not a member of the BFA is doesn't mean they are not a good franchise.

But then he finished off by saying they have decided they will become members, I think he said associate membership and that it was in the pipeline now.

The thing is I don't really have any business experience and I am dealing with a man who has been involved in the running of businesses for over 30 years. It just feels to me that he is a very smooth talker and makes everything seem so straightforward and reasonable but because I'm not practised in negotiation and the business world generally its only after the conversation when I've had time to think about that I realise that its actually not that straightforward. Often it's not about what you have been told but what you have NOT been told and are too inexperienced to even realise the issue exists.

Everytime I email him asking him for answers to fairly basic questions or for some data he always calls me back instead of emailing me. It does get me frustrated because I just need him to email me a yes or a no, reasons where he needs to and the data that I need to have.

I think he prefers the phone because he knows he's a good talker and there is nothing wrong in that, or maybe he thinks that's just a better way of doing things. But it does also mean that he can present things in a better light way by maybe slightly sugaring the pill! It is easier to influence someone when you use your gift of the gab than just put the plain facts down in black and white and let them stand for themselves.

Verbal communication obviously leaves no trace unlike the written word so when it comes to business issues I think it'svital to get everthing on paper because then there is no misunderstanding. I'm not saying he never commits to an email and on certain issues, like the quote about the company's year end accounts have come from an email sent after he had already told me as much on the phone.

The forecasts in their prospectus were glowing and rosey but then they usually are in these cases. Basically in year one it forecasts a £20,000 a year profit after tax. This is mainly because it's based on the assumption that 40 attendees attend each event. But from my enquiries with current license holders their figures are more likely to be in the early to late 20's. This also does not take into account free tickets or the fact that a handful of 'dates' may be part of the organisers regular stand in to make the numbers up when, as is often the case, females are more plentiful than males.

I understand from speaking to current licensees that there is,surprisingly, rather a lot of repeat business in this industry. The emphasis isn't really on coming along to an event and meeting your sould mate but rather that it's a great place to come along, have fun, meet loads of other people and see what friendships etc develop from there.

My main problem is constantly coming to a dead end when I'm trying to research something. Like, I want to find out how the speed dating industry is doing in general, has it peaked, how does the future look?, but i don't know where to go for the info.

I didn't mean to go on for this long!!

Tiggy

 

[Kemble3]

Hi Tiggy

I have never been one for “beating around the bush” so my advice to you is simply walk away from this Franchisor and look for a another alternative.

Any company not willing to divulge its company figures to potential franchisees seems rather suspect to me. If the latest accounts are not available why didn’t they off earlier ones?? At least this would give you an idea of their growth rates and the size and stability of the company you will be working with. They should of also given you proof of earning potential, a P & L summary and cash Flow projections, did you receive this? Also how long is your licence for, the majority of franchises operated a 5 to 10 years basis.

And why go down the franchise route with this type of venture? You could quite easily set up a independent company and the initial fee and licence fee you are required to pay would go along way to helping your cash flow in the early months of your new venture. What real added value is this franchise company giving you? I wouldn’t think the set up costs would not be to high with the bulk of the capital investment going toward a stunning website. I am sure there are some great web designers here on this forum.

Sorry if I am sounding negative about this franchise opportunity but what you are tell me makes for uneasy reading, I’ve seen a lot of people get their fingers burned, and I wouldn’t want this to happen to you.

If you have any other questions please feel fee to contact me, also could you email a link to this companies website.

Best wishes

Ian

[email protected]

 

[Kemble3]

Hi again Tiggy

So what you are saying here is you would become a Licensee and NOT a franchisee?

I agree that the BFA isn’t the ”be-all-and-end-all” of trade bodies and I know of some very large franchise companies who are not members. However, it does give smaller operators some credibility, as the BFA selection process is very strict. Franchising is a great route to stating a business but it is not a guarantee of success and that facts I have from you about this venture simply do not add up.

This guy you are dealing with sounds a very smooth operator. If you want, tell him you have employed the services of a outside consultant to verify the validity and long turn future of this particular venture, and I will have a word with him (free of charge of course) and see if he can pursued me of the financial benefits a speed dating licence!! I do think he is taking advantage of your limited business experience, and it sound like he wants to make money from you and not to offer a long term business opportunity.

Also has he offered to let you see a copy of the license agreement yet? Any good franchise company will provide this document early on enabling you to get it checked out by a solicitor?

My advice. WALK AWAY FROM THIS TODAY. Think about starting your own company.

Best wishes


Ian

 

[Tiggy]

Ian thankyou so much. You have been a great help. I have already decided not to go ahead with this. I just don't feel as though I can really trust these people. When I went to the interview I went fully prepared for a grilling but it seemed like he was only interested that I seemed intelligent, confident and was approachable and smart. I think my lack of business acumen must have worked in my favour!

I didn't exactly take to him anyway but I put that to one side and just concentrated on the offer. I was fairly shocked at some of the comments he made eg 'our girls are nice confident girls but they aren't the sharpest pencils in the box' about his own staff and colleagues!!!

Speed dating is a very young industry and they have only been in business for a few years.

I honestly believe that they are trying to expand and grow their business too fast and too soon. I think they were probably flushed with success fairly early on in the start of the business because speed dating was 'all the rage' and it's levelled off a bit now so they have decided to sell licenses.

I too have thought that I could start my own business (which is what I prefer anyway to be honest - I am a bit of a maverick!) with the kind of money that I will be handing over.

The experience has been worthwhile because it has taught me a lesson. I need to do some kind of business course so that I am not so easily spotted by the big sharks as a little, naive tiddler!! Fortunately I have benefitted from this and all it has cost me is the price of a one day travel card and a few phone calls.

By the way they did give me a copy of the license agreement at the first meeting and I was planning to have my solicitor check that over once I had satisfied myself about the other concerns. The license was due to run for 3 years at the same fixed price fee.

How can I become more business savy? Any books or courses that anyone could recommend?

Many thanks once again

Tiggy