What constitutes a material breach of the Pearce Bespoke Franchise Agreement related to audit results?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
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 the 2025 Pearce Bespoke Franchise Disclosure Document, there are two instances related to audits that would be considered a material breach of the franchise agreement.
First, if an audit conducted by Pearce Bespoke determines that the Royalty Fees or other amounts paid were underpaid by more than two percent (2%), and this occurs twice or more within any five (5) year period, it will be considered a material breach. This means that if a franchisee consistently underreports revenue or other amounts owed to Pearce Bespoke, leading to a significant underpayment of royalties, the franchise agreement can be terminated.
Second, a franchisee's failure to fully cooperate and timely complete the audit procedures is also a material breach. This includes providing the required financial records and information in a timely manner and cooperating with the auditor. If a franchisee is uncooperative or delays the audit process, Pearce Bespoke can consider this a material breach and potentially terminate the agreement. In this case, the franchisee will also pay all of Pearce Bespoke's costs and expenses that Pearce Bespoke incurs resulting from the franchisee's lack of cooperation and untimeliness.