Now first question is what is Franchise and Franchise Audit(s)?
Franchise is an authorization granted by a company, firm or individual to an individual, firm, company or a group enabling them to carry out specified commercial activities which are subject to Franchise audits to ascertain the authentication of Licensee records.
In simple words, Brand owner allows third party to use his brand name and business ideas to carry out their own independent business which is subject to few conditions such as, the brand owner demands a one-time franchise fees or frequent royalty payments or sometimes both for use of their brand name.
For example, The Franchise owner (the Licensee) shall pay 10% amount of his total sales of the month as royalty payments on the 7th of following month
Now that we know about the Franchise let’s discuss how to start and what conditions are there for starting a franchise?
Throughout decades successful business owners always believes that the true success is expansion. More and more people want to buy famous brand because every businessman wants a settled business. That’s how the idea of franchise came
Mr. John S. Pemberton. In 1886, started one of the first successful American franchising operations he concocted a beverage comprising sugar, molasses, spices, and cocaine. Mr. Pemberton licensed selected people to bottle and sell the drink, which was an early version of what is now known as Coca-Cola. (source wikipedia)
Challenges for setting up a Franchise
Setting up a Franchise after investing a huge amount is not enough. The most important factor while setting up a Franchise is to keep the quality consistent with the original because operations without proper procedures, plans, and actions can go wrong which will result in a loss of reputation and finance for any franchise business. The brand Owner or Principal licensor wants the franchise to flourish to save his interest in royalty payments.
Why Franchise Audit is necessary?
After setting up a Franchise the principal brand owner wants to secure his interest in the Franchise. He wants to receive his share of the profit and the business transparency is the utmost responsibility of the Licensor. However, the authentication of records shown by the Licensee (Franchise owner) is always an area of concern.
That’s how the idea of Franchise Audit came into existence.
What are the key points in Franchise Audits?
- Consistency of sales register with GST Returns of the month.
- Royalty payment should be equal to the agreed percentage of Sales of the month.
- Cash Deposits consistency with Cash Sales.
- Products and consumables purchased from authorized sellers only.
- Only authorized personnel is limited to cash handling.
- Brand Owner requires Licensee to deposit cash collection of the day in the bank the very next day.
- Does Franchise maintain statutory compliances such as ESI, EPFO, GST and salaries and wages register etc.?
- Customer feedback is necessary for elimination of grounds of errors and performance improvement
- If Franchise requires any specific certification or license such as FSSAI, Music License, Trade License etc.
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For more detailed questions and key points please download the internal audit checklist