Many changes have impacted franchisors over the years, including those driven by a host of factors – wage and hour laws, real estate markets, the rise of the third-party delivery service & ghost kitchens. Those changes have been critical; however, they pale in comparison to the technological explosion of the last twenty-five years. Consider this – as recently as 1998 many franchises were still using electronic cash registers (ECR’s) and franchisees were manually self-reporting their sales to the franchisor!
Certainly, at the time, these devices represented a step up from a dented cash box with its key fastened to the handle; yet, although a technological upgrade, ECRs inadvertently helped enable willful and wanton underreporting of sales to both taxing authorities and franchisors. Today, while there are still a handful of brands using ECR’s, most have moved on to more sophisticated, networked, auto-polled POS systems, along with ACH (Automated Clearing House) drafting of royalties. Yet like the cash box or ECR of old, even these systems are far from “bullet-proof,” and under-reporting of sales remains a risk.
To Mitigate This Risk
1. Brands need to consistently review POS reporting to identify, investigate and resolve “high-risk” transactions, including refunds, voids, and discounts.
2. Brands need someone with the expertise to deal with the issues uncovered. Investigations are both complex and sensitive; by their nature they demand that they are handled fairly, independently, professionally and with adequate discretion.
3. Brands need to acknowledge that even with “bullet-proof” POS systems there is no guarantee that all sales are being entered.
To start, ensure that internal purchasing, yield/usage, and food cost reports identify outliers who are buying too much product for the sales they are reporting. While on the surface this may appear obvious, there have been countless discussions at countless franchise industry meetings where high- ranking executives initially scoff at the idea that this could be occurring in their system. This bravado cools when one of their peers quietly shares anecdotes of how “it even happened to them.”
Numerous franchisees are found to be in default each year simply because they were purchasing raw materials through wholesale clubs, local suppliers or at public markets. Not only do these unauthorized items have the potential to compromise food quality standards, they also run the risk of exposing a corporation to civil liabilities. In a particular case in point an established franchisee was found to be purchasing frequently used mixes outside of corporate supply channels to hide underreported sales; however, the mixes being used contained allergens not identified on corporate provided menu boards or nutrition guides displayed in their stores, thus exposing unknowing consumers to a potential allergic reaction. $
