Developing and implementing franchise audits. (Management & Operations).

The success of any franchised business depends largely on the ability of the franchise system and the franchisees to each meet the important responsibilities placed on them. For the system, those responsibilities include perfecting the concept, running the system, and promoting concept growth. Franchisee responsibilities include effectively operating their businesses within the concept and satisfying their other obligations to the franchisor, including monetary obligations. A franchise system will be endangered if either party fails to meet its part of the bargain.

There is no doubt that franchisees typically keep a close eye on how their franchisor runs the system, to ensure that proper investments are being made into the concept and that the concept is being properly run and promoted. Likewise, franchise systems need to be able to monitor their franchisees for system compliance to ensure brand protection. However, compliance with operational and store appearance standards are only part of what the system must monitor. Equally important are franchisee monetary obligations, because it is the flow of funds (in the form of royalties and advertising fees) from franchisee to franchisor that provides the resources to enhance and grow the system.

Audits are one way to monitor franchisee compliance. However, for most franchise systems, putting a franchisee on notice that it will be subject to an audit is a difficult step. Some franchisors see it as contrary to building and developing a cooperative business relationship. Most systems are trying to add locations, not scrutinize the locations they already have for compliance. Yet, an audit initiative that is properly planned, communicated and executed can dispel these apprehensions. The honest and compliant franchisees will support such an initiative, because the objective is to ensure a level playing field. The non-compliant franchisees are a threat to the system, by hurting the concept's financial footing. Non-compliant franchisees are also avoiding the obligations that honest franchisees are meeting, so basic notions of fairness support audits. It is in everyone's interest that no one be allowed to cheat the system. Moreover, even the compliant franchisee will get direct benefits from an audit because auditors can pass along information that can assist the franchisee in improving its operations, including issues such as internal theft, weak internal controls, and out-of-line operational costs.