First, it’s important to mention that the agreement in place is based on mutual needs and terms between both parties. Needless to say, both parties should be benefiting from this partnership. In order to ensure the terms are being met and maintained consistently across the board, the franchisor will conduct audits of their franchisees as part of their traditional compliance practices. Audits can vary in form from site visits and evaluations to interviews and written reports for franchisees. Another way to ensure franchisees are staying consistent and being held accountable is to perform random audit checks. This also takes pressure off of the franchisee and prevents them from feeling singled out by the franchisor. By performing consistent royalty oversight, trust between both parties is better maintained. It’s important to have procedures in place that outline the proper ways to submit, calculate and pay royalties. The lack of knowledge on how to properly submit reports is a common factor leading to incorrect royalty payments. The better your systems are for royalty reporting, the smoother the audit checks. In the end, both parties want to comply with all terms set in the agreement. If the terms are not met and a disagreement ensues, then allegations by both parties could be the end result.
WARNINGS THAT COULD LEAD TO INCORRECT ROYALTY REPORTS
1. Consistently late reports
2. Changes in franchisees accounting system or new personnel
3. Additions to their royalty report (such as new product lines)
4. Acquisition of the company or acquisition of a company
5. Franchisee has had incorrect reports in the past
6. History of owing money after audits are conducted
WHAT LEGAL RIGHTS ARE INVOLVED
Generally, the language in the agreement dictates the rights of the party’s audit obligations. From the franchisor’s standpoint, the agreement should include language allowing it and its representatives access to review the franchisee’s financials (including tax records, accounting statements, financial reports and other data). It’s important to take note of what the agreement includes so that the franchisor has rights to conduct the best practices in regards to performing audits. Clear and concise legal language in the agreement regarding the franchisor’s audit obligations is a key component in keeping the relationship between both parties honest and long lasting.