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Royalty Audits – High-Risk Franchisees

We were retained by the franchisor of a chain of fast food restaurants to perform royalty audits for “high risk” franchisees. It was alleged that some franchisees were under-reporting their revenues, and under-paying the royalties owing to the franchisor. We reviewed the annual revenues report by all franchisees over a 5 year period, and identified the franchisees that should be subject to a royalty audit, based on specific criteria we developed with the franchisor.

Our role involved:

  • Reviewing the quarterly revenues reported by each franchisee to the franchisor;
  • Reviewing the quarterly royalties paid by each franchisee to the franchisor; and,
  • Interviewing the franchisee to understand how data on revenues was collected and reported to the franchisor.

During our royalty audit, we identified products that were being sold by certain franchisees but had not been approved by the franchisor. Sales from these products were not being reported to the franchisor. We reviewed cash register receipts and quantified the sales that were earned from the sale of the unauthorized products, and calculated the royalties that would be owing to the franchisor on these sales.

We also identified several mathematical errors in the revenue reports submitted by some of the franchisees, which understated the royalties that were owing to the franchisor.

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