Disclosing Your Accounting Records
Are you in business for yourself? Have you obtained financing from a bank or another institution or are you paying royalties to a partner or a franchisor or are you receiving royalties from a franchisee? If so, you have probably wondered about the extent of one party’s right to access the other’s accounting records.
In order to understand this principle, let us consider the following example. Under various trade agreements, a contracting party is sometimes required to pay a certain amount to the other party equal to a percentage of its gross sales.
Within the context of a franchise agreement in particular, it often happens that the amount of fees or royalties payable to the franchisor are directly related and therefore depend on the gross income of the franchisee. It should be noted that, among other advantages, this kind of contract allows the franchisee to benefit from a business whose reputation and infrastructure are already established while providing the franchisor wih increased exposure for his brand.
Franchisors' Rights to Access Franchisees' Financial Reporting
Given the above, franchisors often have trouble with the financial reporting practices of their franchisees. Indeed, how can a franchisor be sure of the honest and effective financial reporting of the franchisee? In fact, the franchisee has an obvious interest and motive to avoid declaring his income in order to pay fewer royalties.
It is exactly for this reason, that is, to allow the franchisor to verify that his franchisee has fully declared and reported all of his sales that the franchisee will usually agree to provide access to accounting records upon request. This obligation is generally found in the franchise agreement in the form of a specific clause. In such a case, the franchisor will usually be entitled to have access to this information personally or through auditors/accountants.
Finally, to answer the original question regarding the extent of the franchisor’s rights with respect to commercial financial disclosure, it should be noted that the right of the franchisor to audit the accounting records of the franchisee is often strictly defined by the franchise agreement itself and is usually limited by what is strictly necessary for its application.
Me Harry Karavitis
Alepin Gauthier Avocats Inc.