Franchise organizations lose millions of dollars a year through underreported sales. Underreported sales occur as a result of willful and intentional acts of fraud by franchisees, neglecting store operations, and employee theft. Franchisors have the responsibility to ensure that all sales are reported accurately, store operations standards are upheld, and collective advertising and marketing spend is effectively put to use.
The Mershimer Group has observed that franchise organizations that do not have an effective royalty assurance program in place to monitor and test franchise owners’ compliance with royalty reporting were losing as much as 20% of their royalty and advertising income. The primary objective of the Royalty Assurance Program is to determine if net sales are being reported accurately, royalty and advertising fees are remitted correctly, invoices are within appropriate cost percentages and if the franchise owners are in compliance with the policies and procedures set forth in the Franchise Agreement.
HS Brands understands that improving sales reporting integrity and related royalties means more revenue for advertising and marketing, and results in increased franchise opportunities and owner profitability. By analyzing sales and raw material records, we are able to identify low performing franchise units. These units become “targets” of store visits, royalty audits, investigations, and mystery shops until the source of the poor performance is identified. If intentional underreporting is discovered, we will document and present an actionable evidence portfolio that will allow the company to take legal action. This can result in the removal of the franchise owner from the system and makes a claim for recovering lost revenue and expenses.
The Mershimer Group will build and implement a Royalty Assurance Program specific to any franchisor’s needs. Programs create an atmosphere of sales reporting integrity, employee honesty and compliance assurance. Ultimately, we provide solutions, which help our clients reduce loss, thereby reaching their revenue and profitability goals. The Royalty Assurance Program involves the following components:
- Determining metrics for identifying potential underreporting issues, as well as the magnitude of the underreporting.
- Calculating the current amount of loss and setting goals for improvement.
- Franchise Agreement review and feedback/consultation on royalty assurance language and terminology.
- Develop a high impact program based on deterring underreporting. Focusing on the “worst offenders” as concluded through the yield or other metrics.
- Royalty Audits
- Mystery Shops
- Communication of results and impact
- Regular deterrent and awareness visits at target units
- Development and documentation of underreporting case
- Meeting with underreporting franchisees (and their attorneys) to explain evidence gathered and to discuss next steps.
