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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How can we make Franchise/Royalty auditing more attractive to franchisees?

Let’s face it. If you have come to the decision to either audit in-house or appoint external auditors to visit your franchisee or franchisee network, it is usually for a reason. Unless of course, an annual, or periodic or end of term audit is programmed into the franchisees agreement and explained in clear, concise terms during the franchise recruitment process. But how can it be a benefit to the franchisee? Most will see it as an intrusion to their business and a 1984 approach to ‘watching’ how you are doing.

The benefit to the franchisor is clear; quite apart from identifying undeclared or missing sales from which royalty revenue can be derived, but also to seek out trends where the franchisee or network as a whole are going wrong plus of course making the network feel as if you are watching them. For the franchisee it needs to be seen to be ‘support’ rather than ‘watching’. Will there be a material benefit to them for actively and voluntarily participating?

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

Reloaded – 6 good reasons to start auditing today

This is from last year and I thought I would refresh because the message is still valid.

New evidence from the US, based on auditors research shows that approximately 15% to 20% of franchise locations are underreporting sales by 15% or more. As a result, locating and correcting underreporting behaviour can increase MSF revenue up to 4% annually. So if franchise msf revenue is £1M,on average £40k additional revenue can be generated.

Indeed, further evidence from the US franchise market, where franchise or royalty auditing is more widespread than in the UK, suggests that a program of audits across the franchise network will derive greater results and greater support from the network, than one off specifically targeted audits against franchises known to be under declaring sales.

With these compelling statistics in mind, here are my 6 good reasons to start auditing today:

1) Improved Revenue and Profitability. Auditing encourages your franchises to declare their revenues correctly; where previously you may have missed out on fees and profit.

2) Outsourcing to a trusted and professional business partner, takes away the contradiction between you and your franchisees. They will carry out the audit, as per the franchise agreement, allowing you to carry on supporting your franchise network, without the ‘we don’t trust you contradiction.’

3) The temptation to generate additional undeclared income for a franchisee is enormous, especially in these troubled times. It they know you are watching them; they are far less likely to try to defraud you.

4) The benefit of a partnership between the auditor and the franchisor creates a greater understanding of the requirements of both the franchisee and the franchisor. The auditing process frequently highlights areas where improvements can be made to the benefit of both of the franchise parties.

5) Cost. It need not cost you anything. If you can identify franchisees who you suspect our under-declaring, you can recover the cost of one or even multiple audits from just one visit.

6) Critical Mass. If your business is growing, the chances are that you are using your franchise recruitment fess to support your business. When you achieve Critical Mass, the revenue derived from your management service fees will reach a point where your business is self sustaining and gross profit from each and every new franchisee will go straight to your bottom line. If you audit you increase the prospect of achieving Critical Mass faster.

 

So why Franchise audit?

‘Under-reporting or under-declaring of sales by franchisees is rife in the franchise industry…’ This is a bold statement. But is it true?

Based on US auditors research, approximately 15% to 20% of franchise locations are underreporting sales by 15% or more. As a result, locating and correcting underreporting behaviour can increase MSF revenue up to 4% annually. So if franchise msf revenue is £1M, on average £40k additional revenue can be generated.

Indeed, further evidence from the US franchise market, where franchise or royalty auditing is more widespread than in the UK, suggests that a program of audits across the franchise network will derive greater results and greater support from the network, than one off specifically targeted audits against franchises known to be under declaring sales.

Our own findings show that all franchisors receive a boost in returns when an auditor is introduced to the network; creating an amnesty environment, as the individual franchisees attempt to bring their records to good order. Indeed, most franchisees welcome a Franchise Audit program being implemented. It levels the playing field and ensures all franchisees are held to the same obligations. And in terms of the actual results of an audit; on average 95% of the cost of the audit is recovered in full, by fees detected in the audit process.

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.

 

 

 

Franchise Audit – Can you afford not to?

Spare a thought for your poor franchisees…

In this economic climate, times are tough for all of us. We all have to tighten our belts and your franchisees in particular have to scrutinise the spending of every penny. When trading is poor and the bank balance is shrinking fast; people do the strangest things. They start to think about where they can save it, which bills can they delay paying or who can they avoid paying….  Where can they hide the money, so that they don’t have to declare it? Suddenly those healthy and consistent sales returns from your franchisees can lower dramatically…

Does this sound familiar?

The problems that cash strapped or profit starved businesses face is very common. There is hardly a network of franchisees in the country where this is not an issue. It is highly likely that your business is suffering diminished returns as a result.

So how do you resolve this?

The obvious route is to chase the franchisee hard and question why their returns have reduced so markedly… But if they are trying to hide this information from you in the first place, this is unlikely to be successful. There is another solution.

Appointing a third party auditor to visit your randomly selected franchisees, will have a two-fold effect. On the one hand; just by announcing that an auditor has been appointed will result in a 3% increase in sales declared (US auditor source) and that is even before the auditor has visited. On the other, following an audit, on average we recover sufficient undeclared revenue to cover 95% of our fees, which are by the way, just £500 per audit (standard price, subject to variation).  

Our auditing visits are designed to make the franchisee feel comfortable about our attendance. We want them to feel that there is a mutual benefit to our being there and that we can genuinely assist them with their problems as well as uncover issues which need to be reported. Often this creates an opportunity for the franchisee to come clean and to make a fresh start with you; with any highlighted issues which you can assist with coming to the fore.

We offer a variety of different auditing solutions. The ‘Standard audit’ involves a maximum five hour visit to their premises, alternatively, we can carry out a ‘Take Away ‘Audit (where we visit, remove the files and return them once the audit is completed) or a ‘Virtual’ Audit (where records are passed to us on-line) We also offer a Franchisee Business Review service, where you are picking up the cost of our assisting your franchisee, we carry out an audit behind the scene. We even offer an International auditing service; often your overseas franchisees are the worst offenders! In each case, we will then generate a report to you within 48 hrs of the audit.

The report will highlight issues which the franchisee needs to address and of course undisclosed sales. You can then approach the franchisee and request payment of your missing fees.  We can take on the role of ‘Enforcer’, should this be required, where we will chase the franchisee to make payment, based on the findings in our report. 

Our latest offering is the Franchise Return and Document Collection Service:

How many of your franchisees fail to submit their returns on time and how many fail to submit year end financials or copies of VAT returns submitted as part of their franchise agreement contractual obligations. 

 

The returns or declarations are critical to your business as of course is the MSF or royalty itself. We offer a polite e-mail driven collection service that reminds the franchisee of their obligations. 

But even if your franchisees send their returns and fees in on time, do you know how well their business is doing? You can carry out a franchise audit or a franchisee business review through ourselves of course, but for a more cost effective solution, we can chase the year end submission of year end accounts and/or copies of their quarterly VAT returns. For as little as £25 per franchisee we can collect and submit these directly to you. We can also collate and cross reference against their submitted returns, highlighting immediately and showing franchisees where further investigation and potentially an audit or review may be appropriate. 

Of course much of this is dependant on your franchise agreement and on what authority you have to access your franchisees financial records. Assuming this authority is in place, you can feel comfortable that engaging the services of CBCS to carry out your auditing requirements will result in increase revenue. 

CBCS offer the complete package of auditing and financial support and training solutions for your franchisees. We can be there at the outset, providing training as part of your new franchisee training course, we can provide additional financial training for your existing franchises and of course we can be sourced as a provider of support for the franchisee’s financial and administrative issues.