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Amortisation of Franchise Fees

 

Hi I am reposting this as I didnt get a response the first time - any help with this would be appreciated.

I know the convention is to amortise franchise fees is to apportion over the life over the franchise agreement. I have a client who has signed up to a 5 year franchise agreement so my intention was to amortise over 5 years. However, he is saying that he will renew at 5 years and operate the franchise for at least 10 years (Given the amount he paid he would need this amount of time for the business case to be viable). My question is therefore, can I amortise the original fee over 10 years rather than 5 given the intent is to trade for 10 years or am I restricted to 5 years? The reason it hs come up is that the amortisation charge is restricting profit and therefore his ability to draw divs, if it was amortised over 10 yrs then there would be more headroom for potential divs. Any views appreciated.

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23rd Sep 2017 13:57

Will he have to pay a further fee to renew after five years?

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24th Sep 2017 15:31

From your description, the client's only obvious "intent" is to inflate profits so that he can take dividends.

Is there any evidence from the client or the franchisor that the extension has even been discussed and might be granted? As johngroganjga suggests, would the renewal not involve a further fees? If the longer term is required "for the business case to be viable", why did the client not contract for the longer term in the first place?

Has the client borrowed to fund the franchise purchase? If so, the lender might take a dim view of accounting policy being driven by profit extraction requirements. If there is no renewal at year 6, that's a big write down you are left with.

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25th Sep 2017 13:18

Thanks John and AA.
John to answer your question yes a franchise fee is payable upon renewal.
I also should have been more precise in my original question. The transaction has two parts; he has bought an existing franchise from a franchisor this was done under an asset purchase arrangement where he bought the existing franchise as a going concern. At the same time he entered into a 5 year franchise agreement with the master franchise holder to operate the business. The initial fees to the master franchise are not significant (they make their money on royalties). The area I am seeking clarification is the amortisation associated with the purchase costs that he has incurred through the asset purchase agreement.

To answer the subsequent questions:

"Is there any evidence from the client or the franchisor that the extension has even been discussed and might be granted" No evidence as yet, the contract states . "Subject to the approval of Franchisor and satisfaction of all the conditions set forth in this Agreement, both parties may renew the Agreement"

"Why did the client not contract for the longer term in the first place?" Franchise licences are only granted for 5 years

"Has the client borrowed to fund the franchise purchase?". He purchased the franchise from the existing franchisor by agreeing to payment plan whereby he pays in monthly instalments over a 5 year term. The fees he paid for the master franchise were small and paid outright without financing.

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