Franchise Tutorial 21: Intro to Reporting
Most franchise agreements require the franchisee to report information to the franchisor on a regular basis. This is frequently done on a monthly basis and can be submitted as written reports or digitally. It may simply be financial reports that are generated through point-of-sale systems, online reporting systems or dashboards. Sales, as well as key operating metrics such as billable hours or average customer spend, are looked at. Profit and Loss statements are typically reported annually. Depending upon the franchise system, reports may be required more frequently.
Franchisee reports are required by the franchisor for several reasons.
First, franchisors want to ensure that they are receiving proper royalties. Royalties are often a percentage of the gross revenues, less collected taxes and refunds. Such royalties cover the costs and expenses associated with providing support to the franchisees and the system, as well as providing a profit to the franchisor and its shareholders. It provides the revenues to continue to build the brand. For the franchisees that are paying their fair share of the royalties, it is not fair that they do so while others do not. The non-compliant franchisees, by hurting the franchisor’s financial cash flow, are considered a threat to the system.
Second, the franchisor wishes to ensure that franchisees are not running into financial difficulties. Franchisees are in business to make a profit. If profits are not realized on a consistent basis, they may not stay in business. Franchised locations closing are not good for the brand and for the system as a whole. Good franchisors wish to protect the integrity of the brand and therefore need to be aware of any franchisees in financial difficulty so that they can be proactive in assisting to correct the situation.
Third, franchisors will wish to establish key metrics and benchmarks for the system as a whole. These system benchmarks and averages can be provided back to the franchisee so they can measure their individual performance as it compares to the system as a whole. It will identify problem areas or items of potential improvement. As an example, you might be having a 35% employee turnover, but other franchisees are averaging 20% employee turnover. This provides the franchisee with an area to focus on to improve the performance of the business.
Fourth, the franchisor wishes to monitor overall business trends. Are certain categories of retail items dwindling in sales and needing to be replaced with another product category? Are the average dollar amounts per transaction shrinking?
This may require adjustments to the offering. Is there an unaccounted disappearance of inventory that may require implementing greater security controls? Without monitoring key business metrics and having a basis for comparison, it is difficult to make these and other business decisions.
Franchisees are not just required to report to the franchisor. Similar to any business owner, the franchisee is also required to submit regular reports and financial submissions to the government. Monthly or quarterly, there may be GST/HST reports, payroll reports and remittance of taxes, workers compensation and employment insurance. Although it is the franchisee’s legal responsibility to submit these payments, some franchisors will require copies so that they can ensure that all required payments have been made. Failure to pay government remittance and taxes could result in the government stepping in and closing the business. Again, the franchisor has a strong interest in and commitment to ensuring that the brand continues in the location. Finally, franchise systems need to be able to monitor their franchisees for system consistency. The product and service offering needs to be consistent no matter the location. It is through consistency that a brand is created. Thus, there may be required reports regarding the quality of the product or service being provided. A report regarding customer complaints and how they were handled is also regularly provided to the franchisor.
Reporting is a necessary part of being in a franchise system. It may feel sometimes like “big brother” is watching, but ultimately it is in the franchisees’ best interests as it protects their investment. It is in everyone’s interest that no one be allowed to ‘cheat’ the system and all are paying their fair share.
All franchisees can benefit from reporting and getting feedback as to how they are doing relative to others. This is one of the biggest benefits of a franchise, when compared to opening as an independent. You, the franchisee, have resources that simply are not available if you were on your own. Providing the franchisor with information can assist in improving operations across the system, including early recognition of issues such as internal theft, excessive operational costs and changing market trends – all of which require corrective action.
The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.