Ensuring accurate restaurant franchise fee payments: Why franchisors and franchisees must reconcile totals to reflect actual sales

Third-party delivery platforms such as DoorDash, Uber Eats, and Grubhub have revolutionized how consumers interact with their favorite restaurants. Prior to the pandemic, it was uncommon for nonpizza fast-food brands to deliver. But when lockdowns became the norm in 2020, food delivery transactions grew 96% — an impressive growth rate that solidified these platforms as part of the restaurant ecosystem.

But while the third-party delivery and in-app experiences can be surprisingly simple for users, the restaurant’s back-end operations to reconcile and support these platforms are quite complex. More to the point, they are exposing franchisees and franchisors alike to financial risks that can — and should — be avoided.

What is a franchise fee and how do franchisors make money?

The challenges in this situation stem from the nature of the franchise business model. Typically, franchisors charge franchisees a range of fees, all of which are computed as a percentage of gross sales. Three of the most common franchise fees are royalties, advertising, and occasionally rent. If a franchisee achieves $1,500,000 in average unit volume (AUV), for example, they might owe the franchisor a six percent fee, or $90,000.

Where this gets problematic is when a delivery sale isn’t actually completed or is being disputed. This issue can happen for any number of reasons. When the original order is placed through a third-party delivery platform like DoorDash, the sale is reported to the franchisor directly from the store’s POS system. But if that order is later cancelled, adjusted, or never picked up because it was placed outside the buffer time window, for example, it still shows up as a “phantom sale” for the full amount in the franchisor’s records.

Individually, these amounts are relatively small. Collectively, they really add up. As a result, franchisees can end up paying thousands or even millions of dollars in royalties and other fees they don’t owe because of unreconciled sales figures used to calculate their fees, thus undermining restaurant cost control.

Significant burden for franchisees

Phantom sales undermine franchise profitability and create a time-consuming hassle for any franchisee that seeks adjustments. That’s assuming franchisees are even aware of the problem, which is not the case for many operators. Detecting phantom sales requires reconciliation of posted delivery sales and actual receipts, which franchisees do not receive until weeks later.

If a discrepancy is found and a delivery order is disputed, however, franchisees have a tedious and complicated process for adjusting their sales. They must submit a report in 30 days. Some franchisees do this consistently while others do not. By the same token, some franchisors will quickly pay back the difference while others will not. This leads to inconsistent treatment of franchisees, meaning two locations with the same sales may be paying much different royalties and other fees to the same franchisor.

All of this erodes trust between franchisor and franchisee, while reducing profitability from using the third-party delivery platforms that comprise an increasingly large portion of the typical QSR’s sales.

Franchised brands face legal action

Phantom sales are an even bigger issue for franchisors. Frustrated by the burden of manual reconciliation with no guarantee of repayment, associations and other groups of franchisees are banding together to seek restitution through class-action lawsuits. These suits can harm the franchise’s brand equity, stock price, and reputation, as well as raise the risk of expensive settlements or judgments.

Even more critically, these lawsuits are not the end of potential liability for brands.

Franchise agreements commonly run for terms of up to 20 years. Small discrepancies caused by phantom sales can easily add up over this period to millions of dollars. For publicly traded brands, this means they may be at risk of materially overstating per-unit sales in franchise disclosure documents and 10k reports — compliance violations that could have serious consequences.

Talk to a reconciliation specialist

The challenge of phantom sales and the resulting overcharges highlights a critical need in the industry for professional recovery and reconciliation services. By offering these services to franchisees, QSR brands can ensure accurate reconciliation of sales data and fees owed to the franchisor, as well as preserve trust in both the brand and third-party delivery platforms.

Delaget provides recovery and delivery reconciliation services for a wide range of QSR brands, helping to support the franchisors’ and franchisees’ right to recover money based on canceled or adjusted delivery sales. Not only can Delaget adapt to the various POS systems and accounting methods brands use for reconciliation, we can also:

• Negotiate a system-wide recovery contract to ensure all franchisees receive the best rate
• Track and reconcile sales data accurately from multiple third-party delivery platforms
• Identify cancelled and adjusted orders that should not be subject to fees

Here are some recent results we’ve achieved with our clients:

500-unit Hamburger Brand

Recovered $184 per location per month

5% royalty

4.5% national ad fee

1% brand fee

Annual franchisee overcharges: $219,780

6,000-unit Hamburger Brand

Recovered $184 per location per month

5% royalty

4.5% national ad fee

1% brand fee

Annual franchisee overcharges: $1,457,280

2,200-unit Chicken Brand

Recovered $257 per location per month

5% royalty

4.5% national ad fee

1% brand fee

Annual franchisee overcharges: $746,328

The presence and influence of third-party delivery platforms like DoorDash and Uber Eats will only continue to grow. Therefore, it is essential for franchisors to make changes that will protect franchisees from phantom sales — and the brand from legal repercussions. Doing nothing is not a safe option, but it is the path many brands are currently taking.

Keep in mind, virtually every franchise QSR brand is struggling with this same issue. What matters is how you choose to solve it.

By partnering with Delaget, brands can take a proactive approach — one that ensures a more equitable, transparent financial arrangement for everyone involved. This benefits franchisees financially, protects brands from legal liability, and makes the entire franchise ecosystem more resilient.

As a reconciliation specialist, Delaget is uniquely able to drive collaboration between franchisors and franchisees to restore trust in the process. Contact us to take the first step toward remediating your phantom sales or making your current restaurant financial reporting tools even more efficient.