Franchise Royalty Audit

A franchise royalty audit is the franchisor's right to inspect a franchisee's financial records to verify that royalty payments and advertising fund contributions are accurate and based on actual gross revenue. This right is standard in virtually all franchise agreements and typically allows the franchisor (or an independent accounting firm) to examine tax returns, POS reports, bank statements, and sales records. If an audit reveals underreporting of revenue, the franchisee must pay the shortfall plus interest and, in many agreements, the cost of the audit itself. Royalty audits are conducted on a sample basis or when the franchisor suspects underreporting based on anomalous revenue patterns relative to peer locations.