Franchise Fraud

For the past 15 years, Lyonswood has been actively engaged in the investigation of franchise matters, particularly in regards to master franchisees or franchisors. It has become more and more apparent from the volume of inquiries we receive, from franchisors related to suspected fraud on the part of franchisees, that there is a real need for thorough invesitgation. The importance of gathering of irrefutable evidence in an admissible form to stem the losses and rid the franchisor of a fraudulent franchisee is paramount.

It has become apparent that there is a feeling of frustration on the part of franchisors when it comes to finding a competent investigation company to carry out cost-effective, efficient and thorough investigations which allow franchisors to make informed decisions regarding their franchise agreement. To address this, we have compiled some of our many commendations from past clients, which you can view here.

Lyonswood Investigations and Forensic Group has used the knowledge gathered on the numerous and successful franchisee investigations to build a specialist team of investigators with expert knowledge in this field. The team is dedicated to bringing about the securing of conclusive evidence of not just breaches of franchise rules but also criminal actions on the part of franchisees and their staff.

Lyonswood Investigations and Forensic Group is not a mystery-shopping organisation that simply uses students and overseas visitors and unlicensed persons to undertake its investigations. All investigators employed by Lyonswood are fully government-licensed private inquiry agents with many years of investigation experience in a broad cross section of matters related to corporate due diligence, fraud and surveillance.

It is common when dealing with franchisors to hear the following comments, “We don’t really wish to spend a lot of money on this?” or “We know that they are taking a couple of hundred dollars each day and whilst we don’t like this we accept it as the cost of investigation outweighs the losses”.? Whilst we understand that corporate fiscal responsibility is paramount and commercial decisions need to be made, it has been our experience that to accept shrinkage (a polite word used by employers for theft) of this volume as allowable losses is to send a message that you expect to be defrauded.

Our experience has been that when amortisation is taken into the mix of over, say, five years, the cost of investigation is inconsequential in the scheme of things. Even if the losses are only $200 a day, when extrapolated out to a year, the losses can be the franchisors percentage of sales on $72,800. Our experience is that franchisees who are tickling the till are skimming far more than this amount. With the average cost of a franchise investigation being $5,000 to $11,000, the cost of investigation pales into insignificance when compared.

We have set out below some of the most common scams that we have uncovered to demonstrate the different lengths to which some franchisees and employees of franchisees will go to defraud the franchisor and employer. These are however just a few of the ways that we have discovered and given the passage of time and deviousness of some franchisees we expect that many other methods will come to light. Whilst we accept that an employee of a franchisee is the responsibility of the franchisee, if a franchisee is not detecting fraud on the part of the employee then this still reflects in losses for the franchisor and can be viewed as skimming by the franchisee.

TYPES OF FRAUD COMMITTED BY FRANCHISEES

REGISTER FRAUD

Keying the register: This activity generally involves the franchisee or employee of the franchisee activating the register via a key and not via keying in the sales data. This is the most common type of register fraud. Often tokens or coins are left on or near the register so that the person defrauding the franchisee/or can remember at the end of the shift just how much they need to take in cash before they depart. For instance, a five cent piece indicates $5, a ten cent piece $10, a one dollar coin, $100 etc. There are many other methods used to keep account of their ill-gotten gains.

Using the register to add up but not record the sale: This method give the fraudster some caver in the sense that they are seen on the register and appearing to use the register to record the sale. However, at the point of taking the money and handing over the sale the register screen is cleared or the register is keyed open and the money is transacted without record.

Leaving the register opened: This method is also very common and surprisingly observed in almost every franchise we have investigated. It is a dangerous and devious practice and should never be seen as laziness and must always be considered as a method of fraud unless otherwise proven.

Registering only part of a sale: This is one of the most clever and hard to detect methods of register fraud and again has been detected in almost every franchise investigation Lyonswood has undertaken. There are two kinds of partial sale register fraud, that done by a franchisee to take sums and still actually record a sale and thus being able to be seen as ringing up all sales. Again this type of fraud is monitored and the cash to be stolen calculated by the placing of tokens or coins. The other method is generally the employee method similar to that method employed by the franchisees themselves however with an added dimension, that of giving product to relations and friends by say ringing up a coke only but actually transacting a hamburger and fries at the same time.

Operating the register in training mode: Many franchisors have a method of allowing franchisees to actually train employees on the registers whilst they are in training mode. Thus anything rung up in this mode is generally accepted by the franchisor as being not an actual sale. Our experience has been that particular registers are isolated and used for this purpose only and video evidence obtained covertly has demonstrated employees and franchisees utilising a number of registers and only using the register in training mode for a fraudulent purpose.

PRODUCT FRAUD

This is an area where franchisees will either produce their own product elsewhere or perhaps source it from other providers at a lower cost that n the franchisor provides it under the terms of the franchise agreement.

Producing and selling more product than is declared: Many franchisees have been caught out manufacturing and selling more product than they actually declare.

Buying from sources that are not approved or contracted: In one case we discovered a franchisee buying in parallel products from another unapproved supplier and running a separate set of records. No receipts were given and the customers were encouraged via discounts to pay cash.

RECEIPT FRAUD

Producing unauthorized receipts: Whilst protocols might be in place for register or back office generated receipts to be issued to customers, when franchisees are defrauding the franchisor quite often other receipt books are kept to monitor undisclosed sales.

STORE AUDITS

In the event that fraud is discovered by Lyonswood then we can value add by placing a qualified licensed investigator inside the franchise business to monitor the sales and customer flow. We have discovered in many cases that when we are actually inside the business as opposed to covertly viewing it from the outside, (most franchise agreements permit independent audits) the sales are far greater for the same days as those that were disclosed in previous weeks when we were covertly surveying it. A full weeks sampling of actual sales with an in-store investigator conducting an audit usually provides a franchisor with very different and greater income figures than those of prior weeks.

This added evidence just adds further weight to the investigation and in turn provides figures from which an assessment can be made regarding the recovery of losses against the fraudulent franchisee.

No matter what shape or form the fraud takes, Lyonswood Investigations and Forensic group has the resources, skill and technology to remedy the situation and get the franchisor back to an expected level of sales and profitability and more importantly to recover losses against the franchisee. If you’re worried about franchise fraud, contact Lyonswood today to see what tailor-made services we can provide for you and accordingly formulate an approximate quote.