Poor franchising can cost millions. Thursday, 5th July 2007 Source : PricewaterhouseCoopers LLP.

Millions of pounds of income could be lost by hospitality and leisure companies, due to the failure to adequately monitor franchising agreements -

Ninety per cent of companies examined by PricewaterhouseCoopers from all sectors have misreported royalties or licence fees associated with franchise and licence agreements, a mistake that can easily go undetected.

Melanie Butler, partner in Licensing Management Services, at PricewaterhouseCoopers LLP said the majority of cases of under-reporting by companies involved human error and misinterpretation of accounting, clerical and contractual aspects of the agreement rather than deliberate understatement:

“Under-reporting of royalties and licence fees agreed in a contract can be costly. This is often the result of misunderstanding the agreement.

“In one examination, we saw under-reporting of sales over a 10 year period that resulted in a 1 million loss. In another case, misunderstanding of the net sales definition resulted in a 1.5 million loss. This money could easily have been gathered by the company if all the processes had been understood and enforced.”

The hospitality sector is looking to franchising as a quick way to grow the numbers without eroding investment capital. In the United States, existing franchisees will account for about two-thirds of the project pipelines over the next two years and while the penetration in Europe is less, it is quickly being recognised as an important and necessary part of the business mix.

Melanie Butler, partner in Licensing Management Services, at PricewaterhouseCoopers LLP added:

“The European hospitality and leisure sector is in its infancy when it comes to franchising and royalty and license fees, which makes it a perfect time to get things right to avoid future pitfalls.

“Now is the time for the industry to ensure that the agreement terms such as net room revenue and allowable deductions are clearly defined, that thorough and unrestricted examinations can be conducted regularly and ongoing contact with franchisees is maintained.

“A routine programme of contact and examinations will identify problem areas earlier and ensure both parties are getting the necessary return on investments.”

For any additional information on Hospitality and Leisure issues contact Angelos Loizou, Member of the Executive Board and In charge of Hospitality and Leisure Industry of PwC Cyprus.

www.pwc.com