The Franchising Code of Conduct sets out the rules that govern Marketing Funds. As Franchise Lawyers, we know that whether you already have a Marketing Fund or simply want to set one up, you will need to follow the rules regarding:
- Reporting; and
- Restrictions on spending.
Remember, it doesn’t matter what you actually call your Marketing Fund, (e.g. advertising fund, promotional fund), so long as it serve a similar purpose, it will be considered a Marketing Fund. Similarly, it doesn’t matter what you call the marketing contrition, so long as the money goes into the fund, then it will be regulated by these rules. Our Franchise Lawyers have come across franchisors who call the marketing contribution by some other name, hoping to get around the disclosure and reporting obligations.
Before you can set up a Marketing Fund, or require any franchisee to contribute to the Marketing Fund, you need to disclose:
- how much the franchisee needs to contribute to the marketing fund (items 14.6 and 15.1(b) of the Disclosure Document);
- who contributes to the fund (item 15(1)(a) of the Disclosure Document);
- whether franchisees contribute at different rates (item 15(1)(b) of the Disclosure Document);
- whether the fund is audited and if so by whom (item 15(1)(d) of the Disclosure Document);
- how the funds finical statements can be inspected (item 15(1)(e) of the Disclosure Document);
- what kind of expenses the fund may be used for (item 15(1)(f) of the Disclosure Document);
- the funds expenses for the last financial year (item 15(1)(g) of the Disclosure Document);
- whether you have any associates that supply goods or services to the fund (item 15(1)(h) of the Disclosure Document); and
- whether the fund will be used to promote a specific franchisee (item 15(1)(o) of the Disclosure Document).
Another obligation in regards to operating a Marketing Fund is the requirement of keeping records. You must ensure to record all:
- payments made into the fund; and
- all expenditures made by the fund.
This is because, as our Franchising Lawyers can tell you, you are required, within 4 months of the end of each financial year, to have a detailed statement setting out these payments and expenditures audited by a “registered auditor” and to give them to your franchisees (clause 15.(1) of the Franchising Code of Conduct). The statement needs to be given to your franchisees within 30 days of it being prepared, and the auditor’s report also needs to be given to your franchisees within 30 days of it being prepared (clause 15.(1)(d) of the Franchising Code of Conduct).
There is, however, an exception to the requirement for the statement to be audited. This happens if 75% or more of your franchisees vote and agree to not require the statement to be audited. This is because in some cases, the cost of the audit can be a significant portion of the fund, and is therefore not worthwhile. This does not mean franchisors can take a lax approach to reporting. Not only could this potentially be a breach of the Good Faith obligation, a franchisor who does not keep proper records can be hit with a $51,000 fine by the regulator (the ACCC).
Restrictions on spending
Money that is collected into the marketing fund can only be spent on:
- legitimate marketing or advertising expenses;
- expenses relating to the administering and auditing of the marketing fund;
- expenses that have been disclosed to franchisees under item 15.1(f) of the Disclosure Document (see above); and
- expenses that have been agreed upon by the majority (i.e. 50%) of franchisees (clause 31(3) of the Franchising Code of Conduct).
You are also not allowed to require franchisees to pay for an additional fee to cover any administration or auditing expense in relation to the marketing fund (clause 15(3) of the Franchising Code of Conduct).
Marketing Funds for franchises are heavily regulated by the Franchising Code of Conduct. If you are a Franchisor and want advise on how to set up or to see whether you are currently complying with your obligations, then contact us and one of our Franchising Lawyers will be able to help.