How Inconsistent Sales Reporting and Weak Oversight Erode Brand Trust and Profitability
In franchising, trust is critical—but so is verification. Franchise relationships are built on mutual success. However, without effective auditing and compliance programs in place, brands leave themselves open to significant financial risk.
Whether it’s intentional underreporting of sales by or at the direction of the franchisee, honest accounting errors, or a misunderstanding of the franchise agreement, underreported sales and compliance violations cost brands millions in lost royalties every year.
So what exactly is being missed?
The Hidden Risk: Underreported Sales
Not all sales are created equal, especially when they’re not reported at all.
Franchisees may underreport revenue in a variety of ways:
- Ghost POS systems to route untracked sales
- Manual exclusions of delivery fees, catering, or employee meals
- Failure to include third-party platform orders and off-premise sales/catering
- Intentional deduction of credit card or bank fees is typically not allowed in the franchise agreement
- Failure to enter transactions in the POS system altogether. Franchisors often have a false sense of comfort with what they believe are sophisticated POS and exception-based reporting systems. What this technology doesn’t disclose are the thousands of transactions franchisees or employees never enter in the POS system for these systems to analyze and report on.
These aren’t just accounting issues. They’re serious compliance risks that drain brand revenue and create an uneven playing field for honest operators.
Real-World Examples of Franchisee Manipulation
From Mershimer Group’s audit experience, here are a few examples of hidden royalty loss patterns:
- A franchisee sold branded products through off-book delivery platforms, collecting payments via Venmo and bypassing the POS system entirely.
- A location failed to report revenue from in-store video game rentals and vending machines, amounting to tens of thousands in unreported income annually.
- Several franchisees deducted business taxes, credit card fees, and service charges, all of which were clearly excluded in their franchise agreement.
- Franchisees purchasing raw materials, cups, etc, from unapproved suppliers to throw off the franchisors’ yield and usage analysis.
Each of these examples led not only to royalty claw-backs but also to serious concerns about trust and brand integrity.
Franchise Royalty Assurance: What It Is & Why It Matters
Royalty Assurance Auditing is the systematic review of franchisee financials, POS data, supplier purchasing data, and sales reporting practices to ensure full compliance with your brand’s franchise agreement.
At Mershimer Group, this means:
- Reviewing transactional-level POS data
- Identifying unreported revenue streams
- Detecting unusual trends (spikes, dips, or seasonal mismatches)
- Comparing product purchasing against reported sales volumes
- Pinpointing units of risk and focusing future audits accordingly
“We’ve seen cases where brands recovered over $1 million in underreported royalties with just a few targeted audits.” — William Potoglou, CFE, Revenue & Royalty Compliance Lead with Mershimer Group & former Senior Audit Executive at YUM! Brands.
What to Watch For: Common Risk Areas
|
Risk Factor |
Description |
|
Third-Party Delivery Sales |
Not all brands require reporting of DoorDash/UberEats sales. That’s a problem. |
|
Premium Item Promotions |
Franchisees may sell high-margin items off-POS or not include promo redemptions. |
|
“Other Income” |
Video games, catering, rentals, and even loyalty or gift card revenue can go unreported. |
|
Fee Deductions |
Watch for unauthorized deductions like credit card fees, banking fees, or local taxes. |
|
Delayed Payment Sales |
Employee meal plans or accounts receivable customers may fall through the cracks. |
It’s Not Just About Money, It’s About Brand Integrity & Health
When franchisees underreport, it does more than hurt the bottom line:
- It undermines brand standards
- Creates unfair competition among franchisees
- Compromises data accuracy used for marketing, benchmarking, and forecasting
- Damages the brand’s credibility with investors and potential partners
You can’t manage what you can’t measure. And you can’t grow what you don’t audit.
What You Can Do Now
If you suspect royalty leakage or want to prevent it before it happens, here’s where to start:
- Initiate a Royalty Assurance Program
Audit a randomized sample of franchisees each quarter. - Educate Your Franchisees
Ensure they understand what qualifies as “gross sales” and what can and cannot be deducted. - Deploy Technology-Backed Compliance Tools
Use exception-based reporting, transaction monitoring, and automated alerts. - Work With a Specialized Partner
Mershimer Group has helped leading restaurant and retail brands recover millions in missed royalties without disrupting day-to-day operations.
Final Thought
Franchisee relationships thrive on trust, but they survive on compliance.
If you’re not auditing sales, you’re not protecting your brand. Honest franchisees expect the franchisors to be good stewards of the brand and protect their investment.
Let’s talk about how we can uncover hidden risks, recover revenue, and restore balance across your system.
Contact Mershimer Group to learn more.
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