Will your marketing fund management stand up to scrutiny?

The Franchising Code of Conduct sets out specific rules regarding the administration of marketing funds, and places limits on how marketing contributions can be spent. Here the Australian Competition and Consumer Commission outlines the rules that aim to ensure franchisors are transparent about the management and use of the franchise system’s marketing fund.

The franchisor’s disclosure document must contain information about whether franchisees will be required to contribute to a marketing fund. The franchisor needs to set out in the disclosure document:

  • Who contributes to the fund
  • How much a franchisee must pay, and whether any other franchisees contribute differently
  • Who controls or administers the fund, and the kinds of expenses the fund can be used for
  • How franchisees can inspect the fund’s financial statements
  • The percentage spent on production, advertising and other expenses in the past financial year.

Be prepared for franchise buyers and their lawyers to pay close attention to what the disclosure document says about the types of expenses for which marketing fees can be used.

Franchisor obligations

To maintain the fund, franchisors have certain obligations. The must, for example, keep marketing fees in a separate bank account.

Under the Franchising Code, marketing fund money can be used only to meet expenses

  • Described in the disclosure document provided to a franchisee, or
  • That are legitimate marketing or advertising expenses, or
  • Agreed to by most franchisees, or
  • That represent the reasonable costs of administering and auditing the fund.

Commonsense goes a long way in determining reasonable and legitimate use of a marketing fund. A franchisor buying advertising in a newspaper to promote a special on products sold by franchisees is a good example of a legitimate use.

The Franchising Code imposes ongoing disclosure obligations on franchisors who run marketing funds. They must prepare a marketing fund financial statement and have it independently audited within four months of the end of their financial year. Copies of both the statement and auditor’s report must be given to franchisees within 30 days.

Franchisors’ documents must be meaningful

Under the code, the marketing fund financial statement must contain sufficient detail to provide meaningful information about who contributes to the fund, and how the franchisor uses the money.

Though preparing an annual statement is mandatory, the independent audit is not necessary if 75 per cent of franchisees who contribute to the fund vote against undertaking the audit.

While the Franchising Code requires the annual statement to contain meaningful information, this is not defined. It makes sense, however, to consider what information will be meaningful for the users of the report: the franchisees. Depending on the system, this could involve information about:

  • Sources of income (such as listing the contributions made by franchisees, the franchisor or associates, or supplier rebates)
  • The nature of marketing or advertising services provided (separately listing expenditure spent on brochures/flyers, website design, equipment rental, newspaper/magazine advertisements, television spots, photography and so on)
  • The geographical scope of the marketing (local/national).

Franchisors must deal with marketing fund money in an honest and transparent manner. When it comes to reporting on marketing fund expenditure, they should provide detailed information to give a clear and meaningful picture of income and expenditure.