What constitutes a material breach of the Pearce Bespoke Franchise Agreement related to audit procedures?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchisee will make all of its financial books and records (including the tax returns of Franchisee, its Personal Guarantors, and its shareholders) available to Franchisor or its designated representative at all reasonable times for review and audit by Franchisor or its designee. Franchisee will keep its financial books and records for each fiscal and calendar year in a secure place and will make them available for audit by Franchisor for at least five (5) years. If an audit conducted by Franchisor results in a determination that the Royalty Fees or other amounts paid to Franchisor are deficient (underpaid) by more than two percent (2%), Franchisee will pay Franchisor for the reasonable costs and expenses that it has incurred as a result of the audit. If pursuant to audits, the Royalty Fees have been deficient by more than two percent (2%) twice or more within any five (5) year period, this will be considered a material breach of this Agreement. In addition, Franchisee's failure to fully cooperate and timely complete the audit procedures is a material breach of the Franchise Agreement and Franchisee will pay all of Franchisor's costs and expenses Franchisor incurs resulting from Franchisee's lack of cooperation and untimeliness.
Source: Item 22 — CONTRACTS (FDD page 39)
What This Means (2025 FDD)
According to Pearce Bespoke's 2025 Franchise Disclosure Document, a material breach of the Franchise Agreement occurs if, during an audit, the Royalty Fees or other amounts paid to Pearce Bespoke are found to be underpaid by more than two percent, and this happens twice or more within any five-year period. Additionally, failure to fully cooperate and timely complete the audit procedures also constitutes a material breach.
For a prospective Pearce Bespoke franchisee, this means maintaining accurate financial records and ensuring timely and complete cooperation during any audits conducted by Pearce Bespoke. Underpaying royalties by more than two percent can trigger an audit, and repeated underpayment or non-cooperation can lead to a material breach of the agreement.
It is important to note that if an audit reveals that the franchisee has underpaid by more than 2%, the franchisee is responsible for covering the costs and expenses incurred by Pearce Bespoke for conducting the audit. Franchisees should ensure they understand their obligations regarding financial reporting and audit cooperation to avoid potential breaches and associated costs.