Luck Runs Out

Several years ago, I was at the annual convention of a sandwich chain in Las Vegas. I joined some franchisees at the craps table to try and learn the game. One of the franchisees started throwing down thousands on the table, when another introduced this high roller to me as the LP and franchise audit guy. He laughed and said if the IRS couldn't catch his underreporting, he was not worried about me. Fast forward about 7 months and following an investigation where we arranged daily large cash orders for our fake business with this same franchisee, we met again in a hotel meeting room with his attorney and accountant, where I reminded him of the comments he made in Vegas earlier that year, just before we introduced weeks of video recordings showing him delivering the product to us, and accepting large cash payments. Following a royalty audit, we were able to demonstrate that none of those transactions were recorded at the store, resulting in no royalties being collected for those transactions. He lost a three unit network and paid tens of thousands in back fees and expenses. 

I always remember this and others like it when franchise executives tell me they have sophisticated POS and other systems to prevent this, and that this is a self reporting issue. That is great, if the franchisee rings transactions into the register, and buys his raw materials through the system. 

What's happening in your brand? Your franchise owners expect you to have things in place to protect the brand equity and their ad fund contributions. Happy to schedule time with your leadership team to discuss how we help brands protect their revenue and brand standards. Stay tuned for more stories which are meant to educate readers to various methods of underreporting you may not have considered.