FRANCHISEE DATA COLLECTION AND BENCHMARKING

How many of your franchisees provide you with their financial data in compliance with their franchise agreement? Probably not many based on my experience. Even if they do, once you have the data, does anyone actually do anything with it, or do you just rely on the declarations made each month to quantify how your franchise network is doing? Not surprised if you do.. business priorities and all that…

Those of you who know me and have worked with me before will know that CBCS already offers a comprehensive franchise audit service to help you monitor your network and keep on top of levels of under-declared sales or rogue franchisees. Many will know also that we offer a data collection service to allow you to keep on top of your franchisees financials, without antagonising the franchise relationship by requesting an audit be carried out. We have now taken this offering a step further with our Franchisee Data Collection and Benchmarking Service…

In the attached example : A fictitious case, we have collected basic financials and VAT declaration details. From here we have determined a summary of the network  which shows amongst other things: Top 5 overall performers, Top 5 Net Profit and 11 franchisees with over £7k of under-declarations.

Obviously you can add a whole multitude of benchmarking metrics to be analysed, ( e.g. rates per hour, staff costs and advertising costs) potentially reducing your costs and time, site visits and those of your franchisees too, with all the data collected and analysed for you. Once you have all the data, you can incentivise your top performers by perhaps offering a discounted MSF or a reduced advertising levy or presenting a coveted prize at your annual conference. This way your franchisees can see a material benefit to providing you with information.

The benefits to the franchisor are clear:

1	Collect data from franchisees to ensure adherence to franchise agreement for reporting of                               company accounts etc.
2	Analyse data from franchisees
3	Determine under-declarations for potential future audit
4	Look for areas where franchisee underperforming to ensure adequacy of future support
5	Benchmark against network
6	Incentivise based on full network results
7	Data Collection helps makes franchisees clean up their act

More information is on CBCS’s website, in addition to the Franchise Audit services already offered.

 

 

 

 

 

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Your franchise agreement – is it all encompassing?

 Of course it is. Between you, your franchise advisor’s and your franchise solicitor, you have this covered. In  every single way, if your franchisee contravenes the agreement, you have the power (should you choose to use  it) to apply sanctions, remedies or even void the agreement for gross breach of contract.

From my perspective, I am not qualified to comment on the legal minefield that is the franchise agreement. If  instructed to carry out a franchise audit, I will do so on the basis of my client’s instructions and under the  governance of specific terms in the franchise agreement. If I find areas of non-compliance, I will report these  on the basis that their disclosure will allow you to act on any relevant breached terms within the agreement.

Of course, this can be looked at another way… from the franchisee’s perspective.  What if you are a franchisee…

If you are a franchisee and don’t want to lose everything, you need to read, understand and follow the principles outlined below.

Your franchise agreement contains many provisions in addition to those requiring you to do what you are told and pay money to your franchisor on time. You probably never read them, and if you did, you didn’t appreciate what they mean. There are many “boilerplate” (contained in every franchise agreement) provisions that deal with financial transactions, intellectual property protection, ownership and transfer, consents and rights of refusal.

If you forget about these and do certain things that seem perfectly normal in any non-franchise business context, without following the requirements of the contract, your franchisor may declare you in default, and the default will in some instances not have a cure opportunity. You could simply be terminated and lose everything.

You may have done whatever you did that failed to comply with your obligations under these provisions many years ago. They didn’t affect the day to day operations of your franchise or relate to your normal monthly reporting routines. The fact that the franchisor failed to discover the failure to comply until many years later may not excuse what you did or failed to do.

This is an extract from an article written and first published by Richard Solomon on his website: www.franchiseremedies.com. Richard, who is a Franchise Lawyer based in Texas where of course litigation stemming from breaches of franchise agreements is commonplace, (within a franchise market which is considerably more mature than our own), feels very strongly that the interplay of clauses within an agreement should be considered much as one might write a song with various contrapuntal rhythms. The more complete the agreement, the better it is for both Franchise and Franchisor alike. Indeed, Oddly enough it is often franchisor conduct that, notwithstanding the contract language, gives the franchisee an avenue to outmanoeuvre a breach they are purported to have made. Curiously then, if they are aware of their obligations under the agreement and do manage to find a way to contravene it without prejudicing their position, the clauses within the agreement may be worthless. Which conveniently brings me back to my opening salvo: Your Franchise Agreement- Is it all encompassing?

Of course going to the effort and cost of generating full-proof and all encompassing franchise agreements is pretty pointless if you do not know that an agreement is being breached. Suspicions are one thing and within a network of franchisees, there will be those you suspect of breach and those who you do not. Sending in a franchise auditor to look at potential areas of non-compliance need not be costly, particularly if you generate revenue from that disclosed as a result of the process. Indeed, if your franchise agreement, includes terms where on exceeding certain levels of undisclosed revenue determined, this will make the franchisee liable for the auditor costs.

Deploying an external auditor, can also send a message your network, clean up your sales submissions and your working practices or else and with current research from the other side of the pond suggesting that 15% to 20% of franchisees are under-reporting sales by 15% or more. As a result, locating and correcting under-reporting behaviour can increase royalty revenues by up to 4% annually.

There are therefore two messages from this:

• Make sure the franchise agreement is all encompassing
• Follow through with regular auditing inspections to highlight that you are looking and locate  much needed missing revenue from your network

But I am sure you are all doing this already…

Chris Burton

11^th September, 2014

It all seemed like such a good idea….

People buy franchises because they are persuaded, they will make money, they will improve their work/life balance and because they want to run their own business.

Two to three years on. How many franchisees feel that their original aspirations have been fulfilled?

I suspect if you carried out a survey; the answer would be relatively few. But then we are in the depths of the biggest downturn in 80 years. You would expect that many would be suffering. And so they are…

But why?  Franchisors go to great lengths to promote the viability of their franchise proposition. They will tell you that within two to three years you will be generating £x sales and £s profit. They will advise that they will support you all the way and will assist you in the marketing process throughout the lifetime of an agreement.  

Of course most franchisors do support their franchise network very effectively and with realistic projected levels of income sold to the prospective franchisee as part of the recruitment process. The anticipated levels of turnover and support are being achieved. But there are also some franchisors whose projections were maybe unrealistic and the support promised to help the franchisee through the myriad and complexities of actual day to day business is sadly missing. Franchisees who acquired a franchise from one of these franchisors could well find themselves in a bit of a mess.

But of course that is not the whole story. It is frequently the franchisee who gets it wrong…  How many franchisees’ start off with the best intentions and then over time decide that their way is the better way and deviate away from the proven franchise system?  We know there are many as that is what the franchisors tell us. One estimate (from a US based franchise consultant) put this at a third of every franchisors network. That is a third of every network attempting to buck the system, to find their own way of doing  things and of course many of those also attempt to avoid declaring all they have sold, with a view to avoid paying all their fees.

Can you imagine that happening at McDonalds? Control of your franchise network, as well as supporting and nurturing them is one of the biggest challenges that franchisors face. Many franchisors have good and effective controls in place to prevent a franchisee going off the rails, but some don’t and it is these franchisors who will have the biggest problems…

So who is to blame? There is no simple answer. It may be the franchisor who has failed in their obligation to support their franchisees. It may be that their sales projections were unrealistic, or that they are simply not paying enough attention to who is declaring what and why some franchises are just not performing as well as they should be. Moreover, it may be the franchisee who just feels they are cleverer than the franchisor; that they can buck the system or that they can make a little extra on the sly.

In both these cases, the franchisor is left to pick up the pieces…

 Chris Burton is the Principal Advisor at CBCS. (www.cbcservices.org) CBCS specialise in Franchise Auditing, Support and Franchisee financial training.

 

 

 

Are you a UK Franchisor with international Franchisees? Are you concerned that they are not disclosing their sales properly and are you missing out on MSF or royalty revenue?

This is a potential minefield, with language, cultural and geographical barriers. To be honest it is very difficult to police and potentially very costly.
In most case the first port of call would be your master franchise within the country or countries concerned. There are two issues here:
1) Are they collecting sales data and revenues correctly/effectively?
2) Are they passing the info and funds to you as they should be?
If they are responsible for collecting information and funds on your behalf then any costs associated with verifying that figures are correct should be covered by them… Yes, but that still effects you in the long run…
At CBCS, we recognise that auditing internationally, particularly in developing countries is often not considered because the main cost to the Franchisor is not the audit fees, it is travel. And yet frequently your international franchisees are the worst offenders when it comes to disclosing their revenue and royalties correctly. So how do you get round this…?

The biggest cost is frequently travelling to and from the destination country (particularly long-haul). Why would you pay for someone to travel business class, when economy is just as acceptable? If you can travel economy when you go on holiday with your family, surely you can when you are on business? Then there is the cost of hotels and transport to and from the various franchisee destinations. Again, there is no need to occupy two floors of the Presidential Palace, when the Holiday Inn will suffice and is why not take advantage of trains and buses rather than hire cars, taxis and flying? Strict control of a business trip that involves multiple sites will reduce your cost markedly and can turn this into a viable option.

international business travel can be expensive…

And what of the other obstacles mentioned above: language, cultural, even local business ethical issues. Language will always be a barrier if one party or the other does not speak the same one with any fluency. You have to assume that as a UK Franchisor, your franchisees, be they in Kansas City or Outer Mongolia will have some understanding of English. So mostly this is not an issue; communication can be more challenging, but not impossible. Cultural differences are easy enough too. An understanding and willingness to comply with local cultural and business ethics is part of preparing for a trip to another country. Again preparation is key.
The additional preparation and the challenges of working in another country make international franchise auditing more complicated than the domestic version. As a result costs for audit and of course travel will be a little higher, but the returns could well be higher too.
CBCS offer a full range of Franchise auditing and business review services both domestically and internationally. Please give us a call or e-mail us, if you wish to discuss this potentially difficult area in more detail. We will treat each case individually and can tailor an auditing package designed specifically for your franchise operation and of course to the individual countries involved.