Mom & Pop's

A Franchise Is Still a Business

E-mail in my inbox this morning announced the last chance to get a tax franchise for no franchise fee. Actually, that’s not what caught my eye. It was a bullet point that “No Tax Experience Required” that concerns me the most. That’s like starting a restaurant with no cooking experience, it can be done but it’s not a good idea.

Running a business requires a wide breath of knowledge and some will have to be learned as you run the business. But basic knowledge of the field is mandatory from the start. This franchise may give its franchisees the tax software, the procedures to run the office and some tax basics but is it enough to be successful? The casual reader doesn’t know that the “No Tax Experience Required” is for running the business and not for preparing the tax returns. That requires training if not experience. And to make this example more disconcerting is that the IRS is phasing in licensing requirements for return preparers. A new franchisee that buys in expecting to hire tax preparers can lose business when he/she can’t get the people needed or someone gets sick or quits at the height of the season. If the franchise owner isn’t qualified to fill in, they can’t serve their customers and they lose business. Small businesses usually don’t have the backup employees who can fill in quickly. How often have your seen the owner of your favorite coffee shop at the grill or bussing tables because someone didn’t show up? What would happen if they couldn’t cook and had no one else to fill in? Close early or limit their sales? Or, you went in to have your taxes prepared to find no qualified preparer? Would you go somewhere else or come back later?

The bottom line is that if you buy a franchise, you really need to have the basic skills for that business. While you can learn those skills later, you may really need them now when the business is the most vulnerable.

Create Fans

As I watched the news coverage of Steve Jobs' death tonight, I was reminded why Apple is one of most respected and sucessful businesses in then world. The maverick entrepreneurs decided what they wanted to create and built it. They had a clear vision of who their customer is and, not only what they needed, but dreamed of. They didn't try to be the biggest. They did what excited them and shared that excitement with customer. The customers became fans who stuck with them in bad times and helped the company grow. Just because your business isn't Apple doesn't mean you can't dream, dazzle customers, and build something you are proud of and makes fans. A few guys in a garage started what would become one of the biggest businesses in the world. More than that, they created loyal customers and fans. That's something you don't have to be Apple to do.

Start-up Costs

Before your business opened, I am sure that you spent money on the business. That may have been when you spent the most money. And that spending may have spanned one or more year before your first year in business. How do you handle those expenses? First, don’t worry; you haven’t lost them they just get special treatment, at least for taxes.

What I’m talking about are two sets of special costs. The first set is organizational costs. These are what you spent to get all the paperwork for your partnership or corporation prepared and filed. They can include attorney and accountant fees, costs to file your state registrations, travel to meetings and many others. The second set of special costs are called start-up costs and these can include money spent to create or investigate creating the business. Location surveys, legal costs for vendor contracts, advertising, pre-opening utilities, or pre-opening travel are a few of the costs that you might see as start-up. However, don’t include assets which need to be depreciated as start ups.

Generally, start-up and organizational costs must be amortized over 15 years. Amortization is a type of depreciation where a non-tangible asset is deducted evenly over a time period. But, the IRS allows a limited deduction of the costs in the first year of operation. Currently, a business can deduct up to $10,000 in start up costs and up to $5,000 in organizational cost in the first year. The remaining costs are then amortized over 15 years. There is a phase out and an election statement must be included in there is any amortization, so check with your tax professional. If the business closes before the 15 years of amortization are over, the remaining amortization is taken on the final return.

By the way, if you spend money looking at a business but never seriously try to open or acquire the business, that money is considered a personal loss and not deductible. If you do acquire the business or do attempt to open the business, the expenses may qualify a capital expenses.

Starting a business can take years and you can have expenses long before you open the doors. Keep records of those expenses. You won’t be able to deduct them as you go, but once you open, they become a tax deduction.