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Are Your Financial Reporting Provisions Outdated?

Reading Time 5 minute read

Franchising Bulletin

If there is one area that has changed dramatically due to the evolution of technology over the past decade, it is the area of franchisee financial data reporting.

As recently as ten years ago, in most franchise systems, franchisees were required to prepare and submit periodically (typically monthly, four-weekly or weekly) a written report of the gross sales of their franchised business, often accompanied by royalty payments and advertising fund contributions based on those gross sales for the period.

While some franchise systems still operate on this model, a good majority of franchisors now use technological tools to access the sales data, as well as a number of other financial data, of the franchised businesses in their networks.

These tools allow the franchisor to have real-time access to the data required to calculate royalties and other contributions payable by the franchisees. They also allow the franchisor to obtain prompt payment, through automated bank transfers, of its royalties and other contributions calculated on the basis of the actual sales or gross revenues of its franchisees.

On another equally important level, these tools allow the franchisor to monitor the financial situation of its franchisees' businesses in order to quickly diagnose any problematic or non-standard situation and, if necessary, to intervene to help the franchisee cure it.

To that end, certain software programs include functions that generate an alert when certain pre-established criteria are not met or are exceeded by a certain amount or level, and a dashboard function that allows the franchisor to quickly obtain a picture of the evolution of the financial situation of its network as a whole and, with a simple click, of certain franchisees in particular.

This rapid evolution in the way a franchisor obtains the financial data of its franchisees must, however, be reflected in its franchise agreement.

Thus, the traditional provisions prescribing certain reports to be prepared and transmitted periodically by the franchisees have, for many networks, become obsolete and must be replaced by new provisions taking into account the technological and accounting tools used today by the franchise network.

Other provisions must also be added to the franchise agreement to reflect the manner in which the franchisor accesses the financial data of its franchisees, as well as the obligations of each franchisee to ensure the relevance, the completeness and the accuracy of such data.

Notwithstanding this significant technological development, certain financial records, including the franchisee's annual financial statements and reports on the progress and implementation of certain projects and changes, still remain relevant and useful to a franchisor.

Thus, in updating the provisions dealing with the reporting and financial information required of franchisees, it is important to remember to preserve the franchisor's right to require certain reports and financial information that are not directly available to the franchisor through the technology it uses.

Similarly, certain documents, such as complete annual financial statements (with audit or review engagement report), including notes, are always useful to attest and confirm financial information received during the year and to provide the franchisor with certain additional financial information that may be relevant to the franchisor. It is therefore appropriate to retain, in the franchise agreement, the provisions that deal with this (including both the clause requiring the franchisee to have such financial statements, together with an audit or review engagement report, prepared by an independent chartered professional accountant and the clause requiring the franchisee to forward a complete copy to the franchisor within a predetermined period of time from the end of each fiscal year).

It is also often useful to retain the provision prescribing a mandatory date for the end of each fiscal year of the franchisee (in order to allow for better comparison between the financial statements of the franchisees).

However, depending on the technology used by the franchisor, the provisions dealing with the periodic submission of sales (or revenue) reports and various other financial information, as well as those dealing with the terms of payment of royalties and other contributions calculated on the basis of the franchisee's gross sales or revenue, may be replaced by provisions stipulating, among other things, the following franchisee’s obligations:

  1. The obligation to acquire, lease, maintain and use such technology tools (equipment, software, platforms, etc.) as may be prescribed by the franchisor from time to time, and only such tools;
  2. The obligation to promptly and fully enter and record in such technology tools all financial information required to be entered therein, and to keep such entries constantly current;
  3. The obligation to execute any agreement (including, without limitation, any license agreement, any service agreement, and any maintenance agreement) prescribed by the franchisor;
  4. The obligation to adhere to any platform and communication tools prescribed by the franchisor to allow for the transmission of franchisees’ data to the franchisor, for direct access by the franchisor to the franchisee's technology tools, and the obligation to maintain such communication and access available to the franchisor at all times;
  5. The obligation to provide the franchisor with remote, real-time access at all times (twenty-four hours a day, seven days a week), via the Internet or in any other manner prescribed by the franchisor, to the franchisee's accounting, computer, and, if applicable, electronic cash systems and tools, for the purpose of, among other things, but not limited to, verifying data regarding purchases, sales, revenues, inventory and other transactions;
  6. The obligation to adhere to, and maintain at all times its adherence to, any pre-authorized payment system, by way of pre-authorized electronic payments, prescribed by the franchisor for the payment of any amounts owed to the franchisor and any entity related to the franchisor, as well as the obligation to execute any agreement and any other document required for the purposes of such pre-authorized payment system.

If the franchisor designs, causes to be designed or uses its own technological tools, it is also appropriate to include in the franchise agreement certain provisions to appropriately protect its intellectual property rights thereon.

As for all other provisions in a franchise agreement, these provisions must be adapted to the franchisor's operating methods and the tools used by the franchisor.

They should also be flexible enough to easily adapt to any changes the franchisor may wish to make and to any new tools the franchisor may wish to implement during the term of the agreement.

Fasken has all the experience and resources necessary to help you draft agreements that are complete, appropriate and that properly protect your rights, while avoiding potential pitfalls.


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