Marketing funds are a common feature of franchise systems, particularly for those that are well-established and those with nation-wide promotional campaigns.
The purpose of the marketing fund is to allow the franchisor to obtain financial resources for their promotional or marketing activity. These financial resources are usually dependent on financial contributions from the franchisee network.
We go through the administration of marketing funds and tips for you as a potential franchisee in determining its benefits.
Administration of Marketing Funds
If a franchisor operates a marketing fund, they have specific obligations that are set out in the Franchising Code of Conduct (the Code). Franchisees should review the disclosure document carefully to determine whether the franchisor has fulfilled their obligations. We have set out some examples in the table below.
|Disclosure Requirements||The franchisor must disclose details regarding how the marketing fund is controlled, administered and how much the franchisee is required to contribute. The franchisor should provide a disclosure document before you sign the franchise agreement.|
|Financial Statements||The franchisor is required to provide a copy of the marketing fund’s financial statements each financial year and an auditor’s report (unless 75% of franchisees vote otherwise).|
|Bank Accounts||The franchisor is required to deposit any payments towards the marketing fund in a separate bank account used specifically for the activities of the marketing fund.|
Other Marketing Fees
If the franchisor is just beginning their franchise operations, a marketing fund may not make sense. The franchisor may instead:
- request payment of marketing or advertising fees; or
- require a minimum spend towards marketing or promoting the franchise within a particular area. This is often called a local marketing contribution or local marketing fee, which goes to separate service-providers.
If a franchisor requests that you pay marketing or advertising fees, they have a requirement to maintain a separate bank account. You should take note of all the potential fees used towards marketing or advertising, either to the franchisor directly or to other service-providers.
Analysing Marketing Funds
The franchisor has an obligation to disclose certain aspects of the marketing fund in the disclosure document. This allows the franchisee to understand the fees they have to pay, whether the franchisor is managing the fund correctly and whether the franchisor’s marketing fund will benefit their business.
Some due diligence questions a franchisee should ask include:
- Does the franchisor have an obligation to distribute their marketing efforts evenly throughout the franchise network? For example, if you are the only franchisee in a particular state or territory, will the franchisor allocate marketing/advertising spend in your area?
- Will you pay the same or less amount towards the marketing fund as other franchisees?
- What are the franchisor’s long-term marketing plans, including their aims and goals?
- How will the franchisor use the marketing fund contributions?
As a prospective franchisee, you should assess your franchisor’s marketing fund. If you have any questions or need advice about purchasing a franchise unit, get in touch with LegalVision’s franchise lawyers on 1300 544 755.
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