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Franchise royalty and operational audits in Georgia can be the basis for a lawsuit between a franchisor and franchisee, or a critical element to resolve a pending contractual dispute. The keys to audits are understanding their purposes and applying the information they provide to improve franchisor-franchisee relationships, instead of using them as a punitive tool.
The franchise audit attorneys at Franchise.Law have years of experience in advising franchisors on issues involving royalty and operational audits. We are licensed in North Carolina and Florida and are not licensed in Georgia. We represent franchisors across the country, working to head off contractual disputes with objective audit results or, where conflict with a franchisee is unavoidable, to resolve it with the evidence a properly conducted audit provides.
Your franchise agreement, which is attached as an exhibit to your Franchise Disclosure Document (FDD), should define the timing and circumstances under which you can call for either a royalty or an operational audit. At a minimum, Georgia franchisors should have a right to request an audit at least annually, or at random with a short notice period if a franchisee’s royalty payments or operations are not consistent with expectations.
A franchisor typically designates an experienced financial auditor to conduct a royalty audit that will verify whether a franchisee is paying an appropriate amount of royalties and fees required by the franchise agreement. Auditors that provide this service often use special software and analytical programs to inspect a franchisee’s bank statements, tax filings, point-of-sale data, and other relevant information to confirm that the franchisee is not underreporting sales or revenue. Franchisors with multiple franchisees conduct these audits to prevent any one franchisee from unfairly benefiting from marketing and royalty payments made by other franchisees.
An operational audit does not focus on revenue as much as it determines if the franchisee is properly representing the consistent business and operations of the franchisor. Consistency across all franchises is crucial for a franchisor to protect its reputation. A franchisor might develop an operational audit checklist to ascertain that a franchisee is adhering to standards of quality and uniformity.
If you become involved in a dispute with a franchisee, your suspicions or beliefs will not be sufficient to support your side of the argument. You will need to show evidence to back up your claims. The conclusions from a royalty or operational audit in Georgia will provide that evidence.
When an audit is handled proactively, it can preclude expensive and time-consuming litigation or arbitration. You and the franchisee can each review audit results and develop a plan to resolve problems before either party initiates a lawsuit.
If those efforts fail, the results can be referenced in the lawsuit as part of specific allegations that add substance to claims and defenses. They can show a clear and unequivocal factual picture that supports a breach of contract claim, which can support a motion for summary judgment and resolve the case without a lengthy trial. If you are considering or are already involved in franchise agreement arbitration or litigation, consult with the franchisor attorneys at Franchise.Law for advice on how a royalty or operational audit can address your issues in that dispute.
Since 2016, the attorneys at Franchise.Law have used royalty and operational audits to help franchisors work through franchise agreement disputes in Georgia and elsewhere. Please call our office to schedule a conference with one of our lawyers about optimizing the potential of your audit rights to serve your best interests.