Have you ever wondered what your franchisor is doing with your marketing fund contribution? This is a common question, especially when your franchisor’s marketing does not seem to be working. A centralised marketing system is a key aspect of a franchise, but it is also a common cause of frustration for franchisees. This article explains what information franchisors must give to franchisees about the marketing fund and considers the options a franchisee might have when there are marketing problems in a franchise.

Marketing Fund Basics

What Is a Marketing Fund?

A marketing fund is a common feature of franchise systems that consists of franchisee’s contributions toward marketing for the whole brand. Although all franchises differ, it is common to see marketing contributions of 2-5% of a franchisee’s annual revenue. Alternately, a new franchise may not operate a fund, but instead:

  • request payment of marketing expenses after they have been incurred; or
  • require the franchisees themselves to spend a minimum amount towards local marketing (within the franchisee’s local area).

Why Have a Marketing Fund?

Marketing funds benefit the franchisor because the combined funds allow large-scale advertising and promotion. It can also benefit franchisees, as the increased brand power attracts customers and boosts the value of the business.

However, it can be frustrating for franchisees when marketing does not lead to an increase in sales. In order to ascertain whether a failure in marketing is a breach of the Franchising Code of Conduct or simply a strategic failure, we need to examine the obligations franchisors have with respect to marketing.

Franchisor Obligations

The Franchising Code of Conduct (The Franchising Code) regulates franchisors and franchisees. A franchisor’s marketing obligations will fall under three broad categories:

  • disclosure;
  • reporting; and
  • bank accounts.

Disclosure Requirement

The requirements relating to disclosure are the most onerous and are also hotly contested in franchise disputes. The franchisor must disclose details about how much franchisees must contribute to the fund, as well as how that money will be controlled and administered. This includes disclosure of:

  • whether franchisees contribute at different rates;
  • whether the fund is audited, and by whom;
  • how franchisees can inspect financial statements; and
  • what type of expenses the fund can be used for.

Reporting

In addition to the disclosure requirements, franchisors must also keep records and report to their franchisees. Franchisors must keep adequate records of all:

  • payments into the fund by franchisees; and
  • expenditures out of the fund by the franchisor.

The franchisor must issue an annual financial report relating to the marketing fund within three months of the end of the financial year. They must also present a statement of payments and expenditures to an auditor for audit unless 75% of franchisees vote and agree not to have the fund audited.

If you are concerned about your franchisor’s marketing, you should:

  • check that you have received annual marketing reports;
  • review these reports and ensure there is sufficient information about where the money is being spent; and
  • examine the franchisor’s expenditure.

Bank Accounts

Franchisors must deposit any payments towards the marketing fund in a separate bank account used specifically for the activities of the marketing fund. This account should be used for:

  • legitimate marketing or advertising expenses;
  • expenses relating to the administration and auditing of the marketing fund;
  • expenses that have been disclosed to the franchisees’ disclosure document; and
  • expenses that have been agreed upon by the majority (i.e. more than 50%) of franchisees.

Case Study: Ultra Tune

In 2019, the ACCC brought a successful action against the franchisor of Ultra Tune. Of the $2.6 million penalty the Federal Court imposed upon Ultra Tune, $900,000 was the result of breaches relating to the accounting and disclosing of marketing funds.

Even though Ultra Tune had prepared and audited financial statements and provided them to franchisees, they were still found to be in breach. This was because the reports did not have sufficient detail as required by the Franchising Code. As a result of the lack of detail, it was not possible to determine whether the franchisor’s expenses were legitimate marketing or advertising expenses.

The Ultra Tune case reinforced the strict responsibility franchisors have to administer the fund correctly. It also demonstrated that where marketing fails as a result of non-compliance with the Franchising Code, franchisors can be liable for heavy penalties.

What You Can Do About Misused Funds

If you think your franchisor is misusing marketing funds, you can take the following steps to figure out whether the franchisor is in breach of their obligations:

  1. request information from the franchisor about the fund. This could include information about what the fund is used for and whether it is audited;
  2. request the relevant statements of incoming and outgoing payments from the fund; and
  3. communicate with your franchisor. Raise your concerns with your franchisor directly.

Why Communicate?

If the current marketing plan is not working, you probably want something to change. The most efficient and effective way to resolve the issue may be to raise it with your franchisor. There are two key reasons why you should raise your concerns with your franchisor.

Firstly, the franchisor may not be aware of the issue. They may be willing to increase the amount they spend on local advertising in your area or assist with the marketing strategy to ensure that your business is in the best position to succeed. Keep in mind that franchisors also have a vested interest in your success.

Secondly, the broad duty of good faith requires franchisors to act honestly and co-operate with franchisees to achieve the purpose of the franchise agreement. This places an obligation on franchisors to:

  • consider issues raised by franchisees;
  • respond to requests for assistance; and
  • provide a reasonable level of support.

As a result, the franchisor should be willing to work with you to resolve the issue.

Key Takeaways

If you are having issues with your franchisor’s marketing, you should gather information about the administration and use of the marketing fund and communicate your concerns to your franchisor. Whether they are in breach of their obligations depends on whether they have fulfilled their obligations in the Franchising Code. If you have questions about whether your franchisor is in breach of the Franchising Code, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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