Under what circumstances can understatement of Gross Sales be considered an incurable default for a Kidokinetics franchise?

According to Kidokinetics's 2024 Franchise Disclosure Document, understating gross sales can lead to termination of the franchise agreement without an opportunity to correct the issue. Specifically, if a Kidokinetics franchisee understates Gross Sales by 5% at any time, or understates Gross Sales by any amount on three or more occasions, regardless of whether the franchisee corrected the issue in the past, it is considered an incurable default.

Gross Sales for Kidokinetics includes all revenues from goods, services, and products sold through the Kidokinetics business, including cash, credit, and the full redemption value of gift cards or coupons. Exclusions from Gross Sales are limited to sales tax remitted to governmental authorities, documented refunds to customers, and documented employee discounts up to 3% of Gross Sales. This definition is important because the franchisee pays a percentage of Gross Sales to Kidokinetics as a royalty.

This policy highlights the importance of accurate financial reporting for Kidokinetics franchisees. The franchisor takes a strict stance on underreporting revenue, likely due to its direct impact on royalty payments. A prospective franchisee should ensure they have robust accounting practices in place to accurately track and report all sales. The franchisee should also clarify with Kidokinetics what documentation is required to prove that sales taxes were remitted, refunds were issued, and employee discounts were given.