How do franchisors monitor their franchisees’ performance?

Ensuring that a franchisee performs is important to a franchisor for a number of reasons, including ensuring the continued growth and maintenance of the franchise’s name, reputation and goodwill, as well as ensuring an adequate income stream is generated from each franchisee within the franchise network.  The most obvious tool available to a franchisor to measure the performance of its franchisees is the franchise fee it receives. The franchise fees paid, usually monthly, by a franchisee to the franchisor are typically calculated as a percentage of the franchisee’s gross sales. This should therefore give a good indication as to how well the franchisee’s business is performing.  The franchisor will usually monitor and verify the fees, not just by reading the financial statements that the franchisee submits in accordance with the franchise agreement, but also through the audit rights the franchisor will have under the franchise agreement.  However, this measure will not allow the franchisor to monitor whether the franchisee is performing in accordance with the relevant operating and brand standards.  To do this the franchisor may have to visit the franchisee’s business and do a spot check, an operations audit, or adopt a ‘mystery customer’ programme, which is becoming increasingly common, particularly in retail franchise businesses. The franchisor may also insist on receiving copies of all customer comments and complaints received by the franchisee.