Preparing for Franchise Audits: Checklists and Reports
October 22, 2021
Franchisees are often unaware that franchisors can audit any and all franchisee records once they have bought a franchise. Franchisor auditing practices can create a lot of problems for franchisees.
1. Franchisors often recruit outside auditors that may not understand the business. This can result in auditors finding “franchise revenue” where there is none.
For example: There may be certain types of revenue exempt from royalties or with reduced royalties, but auditors may not be aware of this and they may find underreported royalties, forcing a franchisee to spend time and money proving the auditor’s mistakes.
2. Franchisees may put their own funds into the business to help keep it afloat, pay for additional marketing, etc.
Being Proactive With Franchise Audit Reports
Without detailed records such as deposit slips or transfer records, auditors may see these added funds and consider them to be underreported revenue. This again can result in further work for the franchisee, showing the franchisor where the funds came from. If the franchisee is unable to prove the source of funds, franchisors can demand royalties on those funds or find the franchisee in default of the franchise agreement.
Aside from the problems associated with a finding of underreported royalties or sales, even in a relatively good audit, franchisees often have to spend substantial time providing the requested records. This is when it pays off to plan and work ahead. Be proactive in putting together a franchise audit checklist and reports, so that you are ready should the franchisor conduct an audit.
Be Prepared For Your Next Franchise Audit
Franchise Audit Checklist
It is best that a franchisee prepare well in advance of an audit by putting together a franchise audit checklist. Franchisees can do so by keeping detailed records, including:
- Deposit slips
- Invoices
- Receipts
- Withdrawal records, etc.
While it may be somewhat burdensome to maintain such detailed records, keeping a franchise report can serve franchisees well in the long run by avoiding some of the perils and pitfalls associated with franchisor audits.
Need More Than Advice for Franchise Audit Checklist and Reports?
Are you concerned about a franchise audit and need legal help? The attorneys at Garner, Ginsburg & Johnsen P.A. have years of experience fighting for the rights of franchisees, which includes providing assistance in the event your franchise is audited. We can also provide legal assistance with other matters, including breach of contract and getting out of a franchise.