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Understanding the Disclosure Document: Financial reporting and payments

Technology has helped streamline the payment process for franchisees and, at the same time, made it easier for franchisors to track sales trends.

Preauthorizing payments
A further feature of automation in the financial marketplace is automatic preauthorized banking, which has been applied to both regular and periodic payments by franchisees to their franchisor. The benefits include greatly reduced numbers of hours and amounts of tedious paperwork for the franchisee to dedicate to his/her obligations for remitting royalties.

Preauthorized banking is also a method for franchisors to ensure the tracking of franchisees’ regular payment history and to increase the frequency by which such payments are made. In fact, some franchisors have even made payments a daily requirement, using automated electronic fund transfers.

Obviously, this makes it difficult for franchisees to withhold payments owing to the franchisor if, for example, they are unsatisfied with any aspects of the franchisor’s performance. Regardless of this issue, of course, prospective franchisees should be aware most franchise agreements would prohibit them from setting off any amounts owed to the franchisor in the case of a dispute; any such setting off would be considered a material breach of the agreement.

The arrival of advanced POS systems and software, automatic bank transfers and inventory control systems has meant a dramatic increase in the transparency of a franchisee’s business. This too should be seen as advantageous to the franchisee, in that the franchisor can more quickly identify if a certain franchise is struggling financially and provide assistance and support. Indeed, transparency should ultimately benefit both parties and be seen as a positive development in the relationship between franchisors and franchisees.

Technology has helped streamline the payment process for franchisees and, at the same time, made it easier for franchisors to track sales trends.

Peter Snell is a partner and franchise lawyer at the Vancouver offices of Gowling WLG (Canada) LLP. For more information, contact him via e-mail at peter.snell@gowlingwlg.com.

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