Do You Need a Franchise Accountant? Benefits & Cost Considerations

Patrick: Hey, Patrick Findaro here, co-founder at Vetted Biz. Very excited to have on Michael Reeder, who’s one of the few CPAs that is strictly focused on franchising. Whether it’s working with a first-time franchisee that’s buying their first location or a multi-unit operator, and even some emerging franchisor concepts, Michael has really carved himself out in the franchise community, working with all sorts of franchise intermediaries, franchise brokers, all different types of advisors in the franchising space, working together also with franchise attorneys. And he’s really cementing himself again, as one of the leading accountants in the franchise space.

And today, I’m just excited to have on Michael, who’ll give a bit of bio and how he got into accounting as well as focusing on franchising. And we’ll talk a little bit about the importance of having an accountant, and what he sees going through all these FDDs and all this information that he’s analyzing on behalf of his clients. Michael, thanks so much for joining today.

Michael: Hey Patrick, thank you so much for having me here.

The transition to becoming an Accountant

P: Can you tell us a little bit why you got into accounting, and then how you made the transition to focus on franchising?

M: Absolutely. As we record this podcast episode today, it’s August of 2022. I’m 35 years old. I now own the CPA firm that hired me out of college. But before all of that, college. I grew up in Chicago, went to high school in the Chicago area. Just like a lot of high school kids in the Chicago area, the thing to do when it comes to college is go to a Big Ten school. So, no exception for me. Then, I went to Indiana University and I jumped around majors. I was more focused on having a good time with friends and partying than I was about actually focusing and locking down in college.

So, I was a physical therapy major, I was a journalism major. I couldn’t figure out what I wanted to do, and so, I finished college back home in the Chicago area. I finished at a local community college, and then ended up at a local university called Northeastern Illinois University. And so, it took me five years to graduate college for those reasons, jumping around majors and jumping around schools. I settled on accounting because it was practical, and I needed to pick something because I didn’t want to be the next Van Wilder, taking eight or nine years to graduate college. That’s how I got in. In college, that was literally my thought process of why to go into accounting. Because it was practical, and I needed to graduate as soon as possible.

College’s thought process

P: And were your parents pushing you? Five years isn’t that bad finishing college. It’s not Van Wilder at the eight-year mark, or whatever. Were they hard on you to “Hey, get something that’s practical, Accounting’s good”?

M: Yeah. They were indirectly sending me the message “Hey, you got to graduate.” But I was putting a lot of pressure on myself, those out-of-state years at Indiana, because I lived in Illinois at the time. It’s expensive…

I was aware of the fact that I was spending my parents’ money, and I was jumping around majors and stuff like that, so, I really put pressure on myself to graduate as soon as possible… So I got connected. I graduated college with a degree in accounting for those reasons. That was my thought process in college. It’s, “Graduate, get accounting, it’s practical.” “You should be able to find a job in accounting because accounting is needed out there everywhere.” So, my dad lost touch with a buddy of his, they went to high school together, and they lost touch for 30 years, and they reconnected in 2010 at my cousin’s restaurant in the Chicago area.

Starting at an accounting firm

And my dad’s name is Richard, and his friend’s name is Ronald. “Hey Ronald, how you doing?” “Hey Richard, how you doing?” “Oh, everything is good. My son Michael just graduated college. He got a degree in accounting.” Ronald says, “Oh, that’s cool. My brother Barry, he owns a CPA firm out in the suburbs. They should connect.”

So, long story short, my dad and Ron exchange information, I got connected to Ron’s brother, Barry, in November of 2010, and we just hit it off. And I started working at Barry’s firm, it was Swartz Financial Management at the time, and self studied for the CPA exam for those first few years while I was working at Barry’s firm, became a licensed CPA. I Passed the CPA in 2012, got my license in 2013, became a minority partner in the firm in 2015, and I bought Barry out outright in 2019, so here we’re today. And, I now own the CPA firm that hired me out of college.

Obviously, we switched the name to Swartz and Reeder Advisors, but what got me into what started to be me creating my niche in the franchise industry as a CPA, it really started in 2014. And, what happened there was we acquired a couple things. One, first we acquired a smaller book of business in the area, and in that book of business that we acquired from another CPA who was retiring, one of the clients in that book of business was a self-employed franchise consultant. I’m 27 – 28 years old at the time, and that was the first time I ever heard of what a franchise consultant is. So this client…

P: Yeah, there’s got to be 2000 plus, and there’s nine different organizations. It’s a pretty sizeable market.

Becoming a franchise accountant

M: Exactly, I’d never heard of this before. Then, I would ask him about what he does in his day-to-day, how he connects prospective franchisees and vets them for his inventory of franchisors. I thought it was interesting. He’s a great guy, he’s a very successful franchise consultant, very knowledgeable, still a client to this day, and I consider him a friend too, and a mentor of mine in the franchise industry. But I had another buddy who at the same time he was trying to get out of corporate, and so I told him, “Hey, you should look into this thing called franchise consulting. It’s pretty cool.” And he did, and he was intrigued by it.

Long story short, my friend, in 2015, he quit his corporate job and he became a full-time franchise consultant. And he joined the FBA back then in 2015. In those early years of networking in the FBA ecosystem, I went down to Orlando in 2015 and met the great people at the FBA. Sabrina, Chris, Wanda, Amanda, Chelsea, just a great team over there. But I went down there with my friend, because he was there and I went with him, and I’m a CPA in this industry, I think it’s interesting. When people found out that I was a CPA they started asking me questions about “Oh, I got a buyer and they’re investing in this brand and they have questions about what entity should they be. What should their funding strategy be?

Network of franchise consultants

They have question about bookkeeping and taxes.” And so, my buddy was really the first one who would ask me these questions, “Hey Mike, do you mind talking to these candidates of mine to see if you can answer their questions? And who knows, maybe you get a client out it.” So I said, “Sure.” My buddy started referring me his candidates and I would provide a free complimentary CPA consultation call to these buyers referred to me by my network of franchise consultants, to answer any questions that they have in the context of accounting, tax, entity structure, funding…

P: Okay, That’s a $1,000 of value right there, because if they do an S corp versus a different structure, it could be huge savings or avoid issues down the line.

M: A hundred percent. My focus has always been, Patrick, with this process was just provide that free consultation, that upfront value for free. Provide massive value to your client, the dollar equivalent is a lot. Deep dive into these topics, and then increase the chance that they will want to do business with me once they actually are in business, and so that’s been the case. Still doing the same thing, still have a great relationship with the FBA. I’ve cultivated a relationship with franchise consultants across the country, I’ve done a lot of independent networking on LinkedIn with franchise consultants all over. Then, I have a nationwide network of franchise consultants, franchise brokers that I am a normal part of their process with their candidates.

P: Yeah, it’s huge.

Being a CPA

M: Yeah. I’m providing value to two different parties in that overall equation right there. One, the candidate, because I’m answering their questions that are specific to accounting, tax, funding, entity structure, etc., but also the franchise consultant, because the problem that my process is solving, Patrick, is saying, “Hey, talk to Mike. The CPA with a niche in the franchise industry is a better alternative than the status quo.” Which is, “Go talk to your CPA” So a couple things to unpack there. Number one, a lot of these clients are coming out of corporate, they don’t have a CPA. They’ve just doing their taxes on TurboTax because it’s W-2, mortgage interest, simple.

P: Or it could be an HR block, or some other… I don’t know what it’s called. An advisor, but it’s not a CPA that’s helping them. It’s like, accounting specialist, or whatever the title is.

M: Exactly. And then also, the average CPA out there is on that shortlist of what are known in the franchise industry as deal killers. A lot of franchise consultants tell me that they’ve had bad experiences with these deal killers. Who are deal killers? CPAs, financial advisors, spouse, that other family member that has the ear of the person. And there are situations where there are red flags and it’s probably not a good idea that that particular candidate moves forward with that brand for reasons X, Y, or Z.

CPA’s Red Flags

We’re not over here aggressively urging people to buy businesses with no due diligence. There are red flags, and I’m sure that we’ll unpack some of that type of stuff on this podcast, but I’m an entrepreneurial CPA. I am a business owner. As I mentioned, I own the CPA that hired me out of college, and I’m the advisor to hundreds of other business owners.

I love the business ownership life. I love the entrepreneurial life and all that comes with it, the perks and also the challenges. And I love the challenge, I love working for myself. And so, I’m not trying to talk anyone out of business. I encourage people, but CPAs out there tend to be conservative by nature. And when their client approaches them, “Hey, I’m thinking about buying this business, What do you think?” The CPA, a lot of the times, their default reaction is to be skeptical, to poke holes in it, to questions, and next thing you know, the client is just freaked out and they don’t want to do it anymore.

Become aware of the franchise industry

P: Yeah. Many CPAs will assume every candidate could invest in a McDonald’s, but McDonald’s has different requirements, net worth, operational expertise. Then, you can do as good as you are eligible and can qualify into their franchise, but not everyone can be a McDonald’s franchisee or a franchisee of a big brand because of capital constraints, or just not being industry-experienced in that space. Probably a lot of CPAs look and be, “Oh, I’ve never heard of this brand,” but it is a brand that’s a niche in that specific segment and it’s the market leader, or it’s the fastest growing one, and I guess a lot of people have to pay their CPA extra because they’re paying them to educate on the franchising space.

M: Yeah. That’s a great point. And to your point, it’s not just CPAs, the majority of the market out there when they hear the word franchise they think of QSR. They think of KFC, McDonald’s, Taco Bell, and that’s really the job of the franchise consultant, to really educate their candidate in all of the things out there. All the industries that’s in all the varying different levels of investment requirement, and ownership model. Owner-operator, manager model, semi-passive. But yeah, to your point CPAs are included in that group of the entire market that, when they hear franchise, they automatically think Dunking Donuts and there’s just so much more to it.

Franchise agreement concerning

P: And what’s the number one or couple of concerns that the first call with that perspective franchise buyer who’s going through the process, about to sign a franchise agreement, what’s the first one or two things that they ask you about?

M: Well, they always ask me about entity structure and funding strategy. And that is really what the complimentary consultation calls are focused on the most. I am not a lender. Okay? I am not a funder. And I’ve got great relationships with the funders out there, the lenders. I am not in competition with them, but I am a great strategist. I’m a great strategist when it comes to someone who’s buying a business and getting the certain facts unique to their situation. And then advising them what I think and then backing it up with reasoning. Why they should go a certain way for entity structure and why they should go a certain way for funding.

The entity structure and funding conversation, those are the questions that I’m always getting asked about the most on the complimentary consultation calls. And so, when answering it, it’s case by case. I always get context on three different buckets for each person that I talk to.

The three buckets:

Bucket number one, what is their investment level? Bucket number two, what is their allocation of assets, the investment level of the franchise that they’re going to invest in, initial plus 12 months. The first 12 months what’s their investment for their particular franchise that their zoning in on. Bucket number two, allocation of assets on the personal financial statement, and bucket number three, household income and expense situation. When I get context on those three buckets, then that drives the entity structure and funding conversation. I may talk to one person and I will come away from it and my opinion would be they should go LLC with an SBA loan.

I might talk to another person, and the takeaway from that is they should go ROBS C corp, completely self-funded. I’m not a big fan most of the time of going ROBS C corp and SB at the same time, it could make sense but there’s lots of fees there. But the big key is that everything is unique to each candidate’s situation because, every candidate, they have their own unique combination of investment level, allocation of assets, and household income expense.

Then, just because an LLC makes sense for client number one, doesn’t mean that it’s going to make sense client number two and vice versa. Just because client number two goes ROBS C corp, doesn’t mean that it makes candidate number three, who’s going to go S corp with funding with a home equity line of credit, for example. So, the entity structure and funding conversation is customized to everyone, got to get context on those three buckets. That is really the meat and potatoes, Patrick, of these complimentary consultation calls that I have with buyers.

Industries and states particularities

P: And then, you throw in the complexity too that every state’s a little different, and industries like healthcare depending in a state, it could have to be a C corp or, depending on the industry that the client’s invested in, that’s another thing I guess that will drive the funding and/or the entity structuring.

M: 100%. If you’re going to go into a medical, if you’re going to go into a Ellie Mental Health, or Anodyne Pain, or a 100% chiropractic and you’re in Texas, the corporate practice of medicine laws are nuanced by state. Every state has different laws and so, in Texas if you’re going to own a medical business, then it needs to be a professional corporation or a professional limited liability company that needs to get… Means that the actual operating entity needs to be owned a licensed medical professional.

And if the franchisee is not a licensed medical professional, then they’re going to have a two-entity setup, where they’ve got the operating entity owned by a medical professional that they and the franchisor will work collaboratively to source in their area. That’s going to be the main licensed practitioner that’s going to run their location, and then a separate company owned by the franchisee that’s going to be the signing party to the franchise agreement, and also, will serve as a management company where the profit will flow through in the two entity set up.

Franchisor guidance

P: And surprisingly, I have an experience from six years ago where a client was opening up a property management franchise, and for that state and what he was going to be doing, it really should have been a C corp. And he already started the entity LLC, he had already done all these things, and the franchisor didn’t tell him, didn’t jump in and give any guidance, and he didn’t have a CPA. Spent all this money, wasted all this time, had to unwind everything and start again on the whole structure.

The importance of a good team of advisors

M: Yeah, exactly. That’s not a good situation. Only adds to an already stressful situation, because investing money, even if they’re going to invest and crush and be ultra-successful, it’s natural to be anxious when you’re investing a lot of money in something, and you have to go through a ramp up period where you’re seeing more dollars out than dollars in because you’re ramping up the business. And it’s not just CPA, it’s also, you got to have a good attorney too because attorneys are more state-specific. Depending on your license, you can only practice in certain states, and so, any buyer needs to have a good CPA from day one.

And they also have to have a good attorney, because if they had a good attorney as well as a good CPA, then one of those two, and it most likely would be the attorney when it comes to state statutes that required this or that, that would’ve been snuffed out at the beginning and it would’ve avoided a situation where they structured as an LLC, and now they have to dissolve it and do an inc. That’s lost money, lost time, and you got to spend in what are costs that are necessary and are costs that are unnecessary. And surrounding yourself with a good team of advisors, mainly a good CPA and a good attorney from day one as a business owner, just no brainer. You got to spend money on that, just because it’s going to result in both short-term and long-term savings.