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

Advertisement

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.