Category

Franchise Fraud

Franchise Fraud Infographic

By | Franchise Fraud, Infographic

Have you ever wondered about how franchisors are managing franchisee fraud? See our series of three articles:

We hope that you like this series. Don’t hesitate to reach out to us if you have questions!



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How Franchisors are Managing Franchisee Fraud

By | Franchise Coaching, Franchise Fraud

Before getting into franchising, you may have had an image of what would happen if you were to catch someone committing fraud within your business. Picture a Law & Order episode, where the person committing fraud is on the stand, peppered with questions until they confess in a dramatic fashion.

But, after spending some time in franchising, you likely have realized that this is not how things go – because relationships are everything. After our popular articles on 4 ways franchisees commit fraud and how to detect fraudulent acts, we decided to add some insights on how franchisors are handling fraud once it is found.

A Family Dispute

Most franchise systems operate as families. The annual convention can feel like a family reunion. Longstanding friendships are formed beyond business, and there can be relationships, and even marriages between franchisees. As a result, franchisors and franchisees know each other’s strengths and weaknesses. They also know how to push each other’s buttons.

A fraud can then seem like a family dispute. And, far from being a “bad guy” franchisees who are committing fraud can simply be in a difficult financial situation based on a spouse’s job loss or unexpected medical bills, for example. On top of this, franchisees, especially those that commit fraud, can be highly leveraged.

A View from the Outside

Customers often have a fuzzy understanding of the relationship between franchisor and franchisee. After all, they may simply enjoy your food, and don’t need to understand the inner workings of your business. As a result, a loud and public dispute could have a negative impact on the local business, and others in the region or nation, not to mention the brand as a whole – potentially creating a self-inflicted wound. Suppliers can also get a negative perception of an internal dispute.

The Risk of Not Acting

As a result of the “family” issue, and the customer issue, sometimes fraud when discovered, goes unmentioned. In fact, a known fraud can justify poor treatment of a franchisee, or other franchisees can take notice, creating an erosion of respect and even loyalty.

Mediation

Often, the best resolution is to work together. According to law firm Nixon Peabody,

“In most instances, brand value can be preserved by quickly channeling a dispute through mediation – with all the major constituents present at the table. This type of intervention often leads to results-oriented solutions without suppliers or customers ever becoming aware of the dispute. A successful mediation can result in a successful business transaction, such as the sale of the franchisee’s locations, that can further bolster the brand’s strength. The earlier the third party is brought in to expedite the negotiated business resolution, the better it will be for the brand and the bottom lines for all concerned. “

Information is Power

While managing this situation, having a paper trail through a series of audits and corrective actions, for example, can strengthen the process. Additionally, having a record of good faith, such as a franchise coach taking an active role in helping the franchisee, can make a big difference. FranchiseBlast’s Brand Consistency software can help create that digital record.



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4 Ways Franchisees May Commit Fraud and How to Prevent It

By | Franchise Fraud, Franchise Operations

Franchisee fraud - what to do about itAlthough they are in the minority, franchisors have to be aware of potential fraud from franchisees. Those who may be hitting hard times financially, will find ways to undermine safeguards instead of reaching out for help. While approved technologies utilized by franchisees may appear innocuous, ambitious ones can leverage them to their advantage to commit franchisee fraud.

  1. Uber Eats

The GPS technology that revolutionized local transportation now conveys food as well as passengers. Such third-party delivery services broaden the customer base with the convenience factor, but the sales they generate are beyond the confines of the franchise framework. Therefore, with sales reported separately.

  1. Parallel Businesses

A common way for franchisees to hide money is to have two businesses running in parallel – one where they pay royalties to the franchisor, and one where they do not.

  1. Loyalty Cards

A great device for rewarding the repeat customer with points toward a free frozen yogurt. But when cashiers swipe their own cards on transactions for non-members, they are rewarding themselves on the customer’s dollar…and on the franchisor’s.

  1. Employee Cash-Back 

Shockingly, some franchisees get their employees in on the scheme. In a recent case in the UK, a franchisor was allowed to terminate a franchisee, based on an illegal cash-back scheme he was running with his employees. After getting amounts deposited into their bank accounts, employees were asked to return cash to the franchisee in a manual safe drop at the store.

How to Prevent Fraud

Metrics

In baseball, you can’t tell the players without a scorecard, and the same goes for franchisees. In lieu of being on site all day, every day to monitor best practices, franchisee activity can instead be tracked. As a franchisor, you can arm yourself with performance tools to keep a close eye on your unit-level economics.

With a dashboard and a monthly metrics scorecard, you have a customized, at-a-glance review of established benchmarks that also flag irregularities and recommend guidance on how to resolve those issues.

When specific ratios are standardized, fraudulent activity can be identified. Only a full franchise management system will provide the evidence that supports subsequent actions: be they legal proceedings or managerial intervention.

Surveillance

Another way to track fraud is through surveillance. Innovations in today’s industry have led to direct connections between Point of Sale transactions and video surveillance – simplifying the monitoring process.

If you are looking for a fast, simple and intuitive way to protect your business from fraud and regain lost revenue take a look at Solink. Many of the world’s biggest brands are working with their video surveillance solutions.

Embezzlement or Inefficiency?

Most franchisors charge royalties based on sales. If numbers begin to plummet or even fluctuate, what is the cause?

  • Is it an honest franchisee who is genuinely struggling, doesn’t know their numbers or orders supplies they don’t need?
  • Or is it a franchisee who is making a concerted effort to reduce the declared sales amount and line their pockets?

It is hard to say unless valid comparisons are made with intuitive software that produces easily digestible data.

 

You can read more of our posts on fraud here:

 



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Detecting Franchisee Fraud

By | Franchise Fraud

stop franchisee fraud Do you suspect that your franchisees are misrepresenting their sales in order to pay less royalties? Or are they ordering from unauthorized third parties to reduce costs? While more prevalent in some franchise systems (where they are indicators of a larger systemic problem), fraudulent franchisees can be found in any system. Here are a few ways you can leverage data to preparing yourself for “the talk” – or worse: legal action.

The core requirement: collecting data

The techniques suggested here rely on having access to information. If you don’t have any information, you’ll be flying blind. Data lets you paint a more accurate picture of the situation. Most of this information should come from the operational solution that your franchisees use on a daily basis. Here’s some of the information you should be collecting – they don’t apply to all franchise concepts, but having more is better:

  • Real-time sales data from the point of sale.
  • Cost of goods sold from the point of sale.
  • Purchase orders from all the primary suppliers
  • Quotes from your customer relationship management tool
  • Schedules from your scheduling calendar

The core technique: benchmarking ratios

Noticing that a franchisee’s sales are substantially lower than your expectations doesn’t get you very far. All you have is a hunch. To validate that fraud is actually occurring, you need to compare two data points. Why? If you want to reduce royalties, it is easy to simply misrepresent top-level sales. Franchisees can “forget” a few transactions paid in cash or entered in a separate system.

What is much harder is to fudge two different indicators that are heavily correlated.

Restaurants

Benchmark the Purchases/Sales ratio across the system. When two locations have comparable sales but one buys much more raw product that the other, it means either they are highly inefficient, that there is some kind of theft going on (by the franchisee or by the employees) or they are purchasing goods from an unauthorized supplier. Instead of looking at the top level ratio, savvy franchisors drill-down to the specifics such as “Chicken purchases” / “Sales of all items containing chicken”. By looking at the ratios for certain proteins, they get a better idea of the store’s behaviour.

Retail

Retail systems allow you to track specifics on an item-per-item basis. For each item, you can compute the percentage of missing items as a (Purchased – Sold – In Stock)/Purchased. These items have either been stolen by customers or sold via some external system. By benchmarking ratios against a large number of locations, you’re able to pinpoint the most probably root cause.

Service franchises

In the service industry, one often cannot use the above ratios because no physical items are transferred between the franchisee and the customer. In these cases, two other ratios can prove helpful. First, the percentage of quotes accepted can be benchmarked across the system. Second, the percentage of time the franchisee (or one of their employees) is busy is also a good indicator. In both of these cases, low rates indicate a poorly performing franchisee and not necessarily a fraudulent one. However, if you drill-down to the root causes you’ll be able to determine if lost jobs (or jobs from other sources) are actually being secretly performed.

The silver-lining: improving performance

What’s interesting is that having access to this information and being able to benchmark these ratios across all locations can serve a broader purpose than just identifying fraud: it is a great way to improve performance across the system. The exact same indicators let you drill down into a unit’s weaknesses, giving you insights on what they need to do to improve.



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