What section of the Craters & Freighters FDD addresses the understatement of adjusted gross sales?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchisee fails or refuses to accurately report the Adjusted Gross Sales of the Franchised Business.
- 19.2.4 Warehouse.
Franchisee fails or refuses to operate a warehouse within the Premises necessary for the operation of the Franchised Business.
- 19.2.5 Lease.
Franchisee defaults under the Lease for the Premises and does not cure such default within the period of time required under such Lease, or Franchisee otherwise loses its right to possess and control the Premises to operate the Franchised Business, except in cases of force majeure and where Franchisor has previously granted a request from Franchisee to relocate the Premises in accordance with Section 4.5 of this Agreement.
- 19.2.6 Unauthorized Products or Services.
Franchisee offers or sells any products or services that are not authorized by Franchisor.
In the event Franchisee has sold any such unauthorized products or services, Franchisee must include the Adjusted Gross Sales collected from the sale of such unauthorized products or services when calculating the Royalty Fee.
Source: Item 22 — CONTRACTS (FDD pages 49–50)
What This Means (2025 FDD)
According to the 2025 Craters & Freighters FDD, Item 22 discusses the consequences if a franchisee fails to accurately report Adjusted Gross Sales. Specifically, if a Craters & Freighters franchisee fails or refuses to accurately report the Adjusted Gross Sales of their Franchised Business, it constitutes a breach of the franchise agreement.
Adjusted Gross Sales are critical because they determine the royalty fees and marketing fund contributions that the franchisee owes to Craters & Freighters. The royalty fee is calculated based on a percentage of Adjusted Gross Sales, as detailed in Section 3.2 of the agreement. Similarly, the Marketing Fund Contribution is a percentage (initially 1%, potentially rising to 2%) of Adjusted Gross Sales. Underreporting sales would reduce these payments, harming the franchisor.
Underreporting Adjusted Gross Sales provides Craters & Freighters with grounds for terminating the franchise agreement, as it is considered a default. Additionally, if a franchisee sells unauthorized products or services, the revenue from those sales must still be included when calculating Adjusted Gross Sales and the corresponding royalty fee. This ensures that all revenue streams associated with the Craters & Freighters business contribute to the financial obligations outlined in the franchise agreement.