How franchisors can stay compliant with marketing rules

Inside Franchise Business: franchisors need to abide by regulations around marketing fundsThe concept of a marketing fund in a franchise network is undeniably a great idea and provides a means of injecting much needed marketing money into a network.

It also gives franchisees confidence to invest as a marketing spend is guaranteed. It should give franchises access to marketing initiatives and channels that would be impossible on the budget of a ‘stand alone’ business.

These benefits rely on the proper, transparent and responsible administration and management of the marketing fund. If this fails, the concept of a marketing fund becomes altogether different and it can quickly transcend into a major cause of franchise conflict. It is commonly one of the first complaints raised by a disgruntled franchisee.

The level of involvement of franchisees in decision making for marketing expenditure differs across various industries and offers both pros and cons for a franchisor. Inclusion promotes confidence within the franchise network but can also become an unwelcome headache when differences of opinion arise. In most cases, involvement is welcome but there will be a need for the franchisor to be the final arbiter on decisions.

What franchisors must do to stay legal

The key legal requirements are as follows:

Marketing money must be maintained in a separate bank account.

If the franchisor operates any stores/units/outlets they must contribute in the same manner as other franchisees.

Marketing dollars may only be used to pay expenses that:

  • Have been disclosed to the franchisee in the disclosure statement, or
  • Are legitimate marketing or advertising expenses, or
  • Have been agreed to by a majority of franchisees.

The fund may be used to meet the reasonable cost of administering and auditing.

The disclosure document must state the following:

  • Who contributes to the fund
  • How much the franchisee must contribute to the fund and whether other franchisees contribute at a different rate
  • Who controls or administers the fund
  • Whether the fund is audited and, if so, by whom and when
  • How the fund’s financial statements can be inspected by franchisees
  • The kinds of expenses for which the fund may be used
  • The fund’s expenses for the last financial year including the percentage spent on production, advertising, administration and other stated expenses
  • Whether the franchisor or its associates supply goods or services for which the fund pays and, if so, details or the goods or services
  • Whether the franchisor must spend part of the fund on marketing, advertising or promotion of the franchisee’s business.

The statement must be audited by a registered company auditor within four months after the end of the relevant financial year. The only exception to the auditing requirement is where 75 per cent of the franchisees who contribute to the fund agree that it need not be audited. This is unlikely to be agreed in most cases.

Keeping full and proper account of the receipts and expenses of the marketing fund is a critical task for any franchisor operating a marketing fund. If this is managed diligently, the process of preparing the statement and engaging the auditor at the end of the financial year is time and cost effective and should be part of a routine work flow. Four months is ample time to complete this task and provide the report to the network.

Franchisors should ensure marketing fund contributions from all franchisees are standard, although this is not a legal requirement. Franchisors who grant marketing fund concessions or agree to varying rates of contribution will struggle to justify this to the franchisees who contribute at a higher rate than others franchisees. Remember, the disclosure document requires franchisors to state ‘how much the franchisee must contribute and whether other franchisees must contribute at a different rate’.

Some common causes of dispute with marketing fund are:

  • Franchisor failure to meet the time frame for disclosure requirements set out above. We saw the ACCC crack down on this by issuing an infringement to Dominos Pizza earlier this year.
  • Franchisor failure to give sufficient breakdown of the expenditure in the financial statements to allow franchisees meaningful visibility into the spend.
  • Franchise units with different characteristics reacting to a ‘one size fits all’ approach.
  • Where marketing needs to be localised, franchises operating across different regions not being serviced equally.
  • Disagreement as to the marketing strategy and plan.
  • Franchisors using the marketing fund to trial unproven marketing initiatives which may not work or may not benefit the network equally.
  • Franchisors allocating excessive amounts to pay salaries of in-house marketing staff or the franchisor making a profit from suppling marketing material franchisees. Note the disclosure requirement regarding the supply of goods or services for which the fund pays and, if so, the franchisor need to supply details of the goods or services.

While no-one can guarantee the results of a marketing program all franchisors in this space must approach the administration and management of the marketing fund with diligence and a ‘weather eye’ to the legal requirements. As with most aspects of franchising, the recipe for success in this area is a blend of compliance and common sense with no scope for greed, apathy or tardiness.