Are there any exceptions to the audit rights of FSI regarding a Fat Shack franchise?
Fat_Shack Franchise · 2025 FDDAnswer from 2025 FDD Document
ledgers and bank statements for checking and savings accounts; (iv) copies of any checks or other evidence of payments; (v) all contracts or agreements entered into by Franchisee and any third parties related to the FAT SHACK Restaurant; and (vi) any other documents requested by FSI. FSI may audit and inspect documents covering a period beginning with the date on which Franchisee first acquired its FAT SHACK Restaurant and ending on the date such audit is concluded. All documents provided for FSI's inspection or audit must be certified by Franchisee and the appropriate affiliated party, if applicable, as true, complete and correct. Inspections and audits may be conducted following the termination or expiration of this Agreement for any reason. If any inspection or audit discloses a deficiency in amounts of payments owed to FSI pursuant to this Agreement then such amounts will become immediately payable to FSI by Franchisee, with interest and late fees due in accordance with Section 5.4 hereof, except for Acts of Deception which shall be governed by the provisions of Section 16.5 hereof. In addition, if it is found by any inspection or audit that the Gross Sales of its FAT SHACK Restaurant have been understated by 2 percent or more during the period audited, Franchisee must pay all reasonable costs and expenses FSI incurred in connection with the inspection or audit, including the costs and fees of any independent accountant and the travel and living expenses and compensation of any of FSI's employees or agents conducting such inspection or audit.
16.5. Act of Deception
Notwithstanding anything to the contrary contained in this article, if a breach occurs under Sections 5.1, 5.3, 13.3, or 16.1, due to Franchisee failing to pay or report to FSI any sales pursuant to the terms established hereunder; or if Franchisee underpays any amounts owed to FSI, including amounts discovered in an audit of Franchisee's books and records; or provides reports to FSI that are incomplete, inaccurate or misleading in any respect, and said breach remains uncured for 25 days or more after notice of default has been given, said act shall be deemed a deceptive act by Franchisee to prevent FSI from receiving its fees based on the Gross Sales of Franchisee's FAT SHACK Restaurant (an "Act of Deception").
Source: Item 23 — Receipts (FDD pages 53–223)
What This Means (2025 FDD)
According to Fat Shack's 2025 Franchise Disclosure Document, FSI has extensive audit rights over a franchisee's financial records. FSI can inspect and audit documents from the date the franchisee acquired their Fat Shack Restaurant. All documents must be certified as true, complete, and correct by the franchisee. These audits can even occur after the franchise agreement terminates.
If an audit reveals a deficiency in payments owed to FSI, the franchisee must immediately pay the outstanding amount, along with interest and late fees. However, if the breach is due to an "Act of Deception," which includes failing to report sales or providing incomplete or misleading reports, and remains uncured for 25 days after notice, it will be treated differently.
Furthermore, if an audit reveals that the franchisee understated their Gross Sales by 2% or more during the audited period, the franchisee is responsible for covering all reasonable costs and expenses FSI incurred during the audit. This includes fees for independent accountants, as well as travel, living expenses, and compensation for Fat Shack's employees or agents involved in the inspection or audit.