What is a compliance audit and why are they important for owners of franchised brands?

Compliance expert Duncan Colvin explains how audits are a necessary tool for all responsible franchisors

What is a compliance audit and why are they important for owners of franchised brands?

What is a franchise compliance audit?

It is simply a ‘health check’ of each individual franchise territory to determine how successfully they are representing the franchise brand. Every territory contributes to the overall health of a franchise business.

And all franchisors need to know if each and every one of their business partners is complying by the rules and standards of the brand. Franchisees need to operate by the terms of the franchise agreement. Franchise compliance audits are the most simple and effective way to safeguard the integrity of a brand.

That is why time and effort needs to be set aside to audit each franchise territory. Without doing this, it is impossible to maximise business success and brand integrity. Franchise brands can be complex and often difficult to control.

A compliance audit will give business partners and their office managers’ clarity regarding their responsibilities to the franchise brand. Therefore, an audit is just as important to the franchisee, as it is the franchisor. And franchisees will understand the importance of operating by the rules, if they know their work is going to be checked and verified.

Franchisees will benefit from joining a brand that has a robust business structure and an effective compliance auditing programme. For franchisors, having a robust operating system should be one of the main selling points when it comes to attracting high calibre franchisees.

A compliance model to suit an operations manual

In short, a franchise operations manual is a company’s rule book which franchisees need to follow. However, just because a company has drawn up and published a 750-page agreement, which sets out its rules and code of conduct, it doesn’t necessarily mean franchisees will follow this information to the letter. 

Sometimes standards are not upheld and must be dealt with quickly and effectively. It may be that franchisees, and their highest paid employees, fail to read and absorb all 750 pages – which is certainly not surprising. So, it’s unrealistic to expect them to remember every little detail by heart.

Resolving non-compliance

Many franchise owners attempt to prevent and correct non-compliance by appointing regional managers who keep a regular eye on franchisees. But even this approach won’t solve every issue. Typically, this method of compliance often results in receiving generic, rather than the more important specific, feedback.

This approach yields less detailed feedback, making it counterproductive. Therefore, to combat this, franchisors are advised to employ full-time support from individuals who are skilled in monitoring compliance.

Using compliance audit scoring to manage a franchise brand

A good compliance audit will select relevant questions. This may sound simple, but is not always easy to achieve. An in-depth compliance requires a well-formulated audit framework and programme. 

For example, ask questions such as: ‘Has a fire evacuation been completed and recorded within the last six months?’ Or, perhaps, ‘Are the products on site from approved suppliers only?’

Every question requires an appropriate compliance score, in accordance with the importance of the topic concerned. The aim is to produce an in-depth level of compliance. It will also generate plenty of significant data which needs to be analysed.

Questions which are scored ‘fail’ often indicate wider issues within a business structure. All compliance audits should focus on being constructive, rather than being used as a system of punishment for ‘less successful’ franchisees. That said, there is no harm in recognising the best-performing territories.

Here is a list of hospitality-specific areas which require regular compliance auditing

Operational Standards: Ordering, Stock Control, Record Keeping (Invoicing/Deliveries), Product Quality (Preferred Suppliers/Approved Products), Equipment Usage, Margin Control, Till Monitoring and Security.

Financial Standards: Payment Programs (Royalty Payments), Cash Control, Payment Machine Controls, Banking Procedures and Revenue & Loss Prevention.

Brand Standards: Uniform, Décor/Design/Signage, Advertising/Marketing, Customer Experience, Service and Cleaning

Due Diligence: Payroll, Statutory, Policies & Procedures.

Important compliance areas

1) Service standards

This relates to customer-based topics, such as ‘customer experience’ and ‘customer retention’. It will check quality of service from the initial ‘welcome’, through to the ‘ordering’ of a product – such as food. It is often worth dividing a compliance audit between in-store and drive-thru processes.

The audit should investigate ‘quality of food’, as well as ‘how helpful and friendly the staff have been’. The ‘cleanliness of the dining areas’, ‘cutlery’ and ‘general ambience’ also needs to be checked on a frequent basis.

It is not uncommon for franchise owners to order cheaper food products, rather than those written in the agreement, which will only provide an inferior experience for customers. Franchisees may choose these ‘incorrect’ methods to reduce costs and ultimately boost profits.

2) Finance and royalties checks

Royalties are paid to the franchisor based on sales data. But often there is no way of knowing if franchisees are under-reporting sales, in an attempt to reduce royalty payments to the owner. A thorough compliance audit should check all paperwork associated with sales submissions.

It is vitally important for a franchisor to know if a business partner is falsifying data. A robust franchise audit helps to ensure the accuracy of data and makes it easier to discover if there is any fraudulent activity taking place.

3) Security checks – stock, staff, money

Keeping stock, staff and money secure is vital. Every franchise business owner is responsible for the working conditions provided for their staff. If a single franchise business fails in this department, there could be severe reputational damage inflicted on the brand. This will affect even successful and well-run businesses within the wider franchise network.

A compliance audit will check all storage areas for security. It has been known for stock to be stored in an open container at the back of a building, where there is no adequate CCTV, and in an area where anybody could drive up and steal the items. 

All franchise agreements must contain a stock delivery and storage protocol to protect the company from losses. A robust audit will detail when stock has been received, moved and stored securely at all times.

Although card transactions are the most common form of purchase nowadays, cash is still widely used. An audit must ensure that any abuse regarding cash sales is swiftly discovered and dealt with, to prevent future problems.

A compliance check investigates till receipts, banking slips, safes and associated paperwork to guard against fraud. An audit also examines ‘security of staff’ and the effectiveness of the company’s CCTV.

Compliance overview

All audit reports should be tailored to each individual business, rather than become a largely generic overview regarding the network. When done effectively, an audit will assist franchisees and franchisors to make corrections to their daily processes. 

Companies are advised to consult independent compliance specialists to undertake complex and meaningful audits. These partners have the experience and knowledge to offer solutions through tried and tested business coaching.

Any franchise brand currently struggling with compliance, should contact Venners to discover how they can help. Compliance audits are a vital tool in managing a franchise brand, in order to maintain reputation. And this applies at all stages of the franchise journey.

Duncan Colvin
Duncan Colvin