Although 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.
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.
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.
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.
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
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.
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: