Here are some age old basics on catching royalty cheats and while there are often additional franchise specific tools available, I hope this offers more of an insight into a dangerous game many only thought they understood. 

If a franchisee purchases “X” amount of coffee [it could be exhaust pipe or yeast or fertiliser or ink or whatever your franchise is into]; your franchisor knows how many cups of coffee and the revenue that should produce.  Jewell # 1 - Your franchisor will also know that for every cup of coffee you sell you should be selling an average of “Y” number of donuts, “Z” number and “whatever else you sell” with an average weekly staff $ productivity.  Jewell # 2 – Most franchise “preferred” suppliers provide your purchase levels to the franchisor.  Now that is often a secret.  But these suppliers want to stay on the franchisor’s “preferred” supplier list.  They “play ball”.

The problem for franchise cheats is that they operate under two primary misconceptions that leave them vulnerable.  Dumb # 1 - they believe that franchisors will only pursue a cheat when they stumble across one.  Cheating is an accepted reality of franchising and franchisors are constantly on the lookout.  Dumb # 2 - they mistakenly believe that to identify a cheat within a network is difficult and therefore unlikely.  This is far from complicated where franchisors can usually skim over a particular network report looking at only a small number of “key indicators” to identify possible targets for further investigation.

Your business is a network benchmark open book right down to how many serviettes you should consume proportionally to the number of floor mats you lease.  That maybe an exaggeration but you should get my point.  Franchisors benchmark performance and when you drop outside of acceptable variance levels in any key category they want to know why.  It may be a training issue but if they know it isn’t, they suspect you are a thief.  And it gets worse if your bank is in cahoots with your franchisor.

Know that if you have been stealing the chances are that the franchisor knows or will work it out.  If the franchisor hasn’t done anything about it you should consider why.  Is he/she distracted and you are filed away for later, are they gathering evidence, or do they see you as having an embarrassingly strong counter-case and enough money to pursue it [and therefore someone to be relieved of any financial ability].

If you are a genius cheat you may have made purchases from suppliers that are not on the franchisor’s preferred suppliers list.  The franchisor won’t normally get information from those suppliers and many smaller networks either a) are not worthy of such supplier consideration or b) are too stupid to ask for it.  However, across a broad range of financial benchmarks you will most likely continue to stand out.  If it “looks like dog poop and it smells like dog poop” you will be checked out.

And don’t forget; some franchisees will be more than prepared to squeal on a fellow franchisee who they think might be avoiding payments to the advertising fund.  Or they might not like you or they might not like that you can afford better holidays. 

Franchisors, even legitimate franchisors, get seriously peeved when franchisees steal from them.  And whether they do, or don’t, they do have the ability to screw you into the ground and you will lose everything if your franchise agreement is terminated and more than everything if penalties are pursued.  Even if you get a lawyer you will be screwed.  So don’t do it.

The most susceptible to the consequences of royalty cheating are multiple franchise owners and they are the least likely to cheat for obvious staff control reasons.  The problem is that some managers do steal and in doing so the franchise owner is in breach of contract.  When this occurs the consequences will differ depending on whether a) it is a repeated occurrence or, b) whether the franchisor is into turning over franchisees when opportunity arises. 

Multiple site franchisees should look to, and duplicate, the information gathering and methods used by franchisors.  The franchisor should [might] assist. 

But once again it begins with selection [selecting the right franchise, the right franchisor, the right franchisee and the right manager], and depends on a healthy relationship and the incentive to produce and operate honestly.  We expect franchisors to select franchise owners wisely; franchisors expect franchise owners to select managers wisely.

I was partially amused at the Dunkin’s article on private investigators.  While setups are not the norm, this wasn’t that unusual - not the first time – not the last.  But using private investigators to catch franchisee cheats is as common to franchising as franchisor’s selecting people that should not be sold a franchise.   And to be fair – it is often fair game. 

Franchisors may have some statistical evidence but to justify serious action and to protect the brand, without damaging the brand, they have to prove intent and systematic cheating.  The private investigators get the real evidence.

On the point of supplier information provided to franchisors this should be considered in two parts in relation to legitimate franchising.  Cheating franchisees cheat the franchisor and every franchisee from advertising contributions and the ability of the franchisor to enhance the franchise. 

Supplier information also identifies those honest franchisees that do not support the group purchasing benefit; these are franchisees that reduce the ability of the franchise to maximise supplier negotiation leverage.  A legitimate franchisor can then work toward educating the wayward franchisee as to genuine group benefit and any [hopefully reasonable] compliance issues.

In rogue franchising however, you are being screwed anyway.  But don’t think that justifies stupidity so never arm the rogue and destroy any possibility of effective civil justice [if that is realistically possible].

All franchisors will routinely pursue a royalty cheat even if it costs more than the theft because the real value is in the message that it sends to the rest of the franchisee network.  

Even if you have a strong case against a franchisor and you have very deep pockets, an experienced lawyer will advise you that proof of franchisee stealing will a) distract any court from a legitimate case, b) ensure the franchisee is seen to be just as dirty as a dirty franchisor, c) ensure you pay at least your own costs and, d) minimise any vaguely possible financial payout. 

I have to ask this question of franchisee cheats; how dumb (#3) is someone who steals their own money?   The cheat hides transactions, doesn’t pay royalty (etc), and in so doing reduces the re-sale value of his business because they cannot disclose the true financial performance of the business. 

We haven’t touched on the implications of tax evasion.  The only tax avoidance consequence that may not be obvious is that a rogue franchisor may choose not to throw you to the Feds if you hand over your first born.  Don’t think for one moment that a franchisor might take advantage of this ugly leverage.    .... Know that he will.

For those in franchise systems where virtually everything is a mandatory purchase from the franchisor the process is obviously considerably easier. 

The subject of this article is how difficult it is not to get caught and I am definitely not denying that rogue franchising often takes all, or most, group purchasing benefits through franchisor/supplier rebate systems and abusive mandatory purchase mark-ups.  That is mostly irrelevant to this topic. 

If you think you are a genius royalty cheat in any franchise and you won’t be caught – you should know that one day someone will pin your ass to a wall and usually before they walk in the door.  If you thought it was your little game you better know it is the franchisor’s game and the dice are loaded.  You will have everything at stake and the franchisor can take the lot.