As a franchisee, you will want to know where the marketing funds are going. The benefit of inheriting the brand and expertise of a franchise is one of the main reasons you are interested in running a franchise. But where does the marketing expenditure go and what is it used for exactly?

A well-established franchise model will allow an individual to inherit the branding and its associated expertise. The associated expertise can include the nature of campaigns it would be entitled to pursue, the targeted audience of any advertising and the promotional features it would be permitted to engage in. The marketing approach of a franchise is twofold:

1. Brand advertising: This benefits the entire franchise system; and

2. Local advertising: This type of marketing specifically promotes the one franchised outlet. Now we turn to the question of where do the marketing funds come from and where do they go?

What is a ‘marketing fund’?

It is not unusual in a franchise agreement to be required to make regular contributions into a ‘marketing fund’. These contributions will then be utilized for the national promotion of the company’s brand. This may be in the form of a television campaign, a full-page spread in a well-known magazine, a radio ad or a product catalogue for every franchisee. If the franchise agreement calls on the franchisee to make these regular contributions, the franchisor will be required to create a financial record of all receipts and expenditures/expenses. This record must cover the financial year and is required by the Franchising Code of Conduct (“the Code”). The Code also requires for all financial statements to be finalized and audited at least four months before the end of the financial year. The auditor will then prepare a report, which will be attached to the financial statement, and both of these documents are passed onto the franchisee for their perusal no more than one month (maximum of 30 days) after it has been finalized. If 75% of the franchisees within a network agree not to have the marketing fund audited, the franchisor will not be required to do so. Any administrative costs or audit obligations that are required should be paid out of the marketing fund.

What is ‘Local’ marketing?

In contrast, for a franchisee to market its own franchised outlet, it must use its own funds to promote the specific branch. Often there are marketing materials included in the franchise agreement, which a franchisee can use, provided that they are not breaching any of their ‘Image and System’ obligations. Most of the time, the marketing team that works for the franchisor will develop a range of promotional images, fonts and materials. The franchisee will then elect the method of advertising that works best for them depending on the nature of the promotion that they are running. A franchisee’s interests will not always align with the existing conditions of the offers of promotion. Some franchisees are of the view that the franchise will benefit by interacting with the local community and local not-for-profit organisations. This type of promotional offer can be executed in conjunction with whichever promotional activity the franchisor is running on behalf of the entire network. 

Conclusion

As a franchisee, it is essential to understand where and how your money is being spent. Whilst Local Marketing is at the personal expense of the franchisee, in many cases this type of marketing is considered the more effective approach to marketing because it targets a specific audience. If you require any advice on franchising, LegalVision would be happy to assist. Please contact 1300 544 755 and one of our experienced franchise lawyers will assist in any queries you may have.

Lachlan McKnight

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