It is common for franchisors to establish marketing funds, although it is not mandatory under the Franchising Code (the Code). A marketing fund is an account to which franchisees make financial contributions. Then, the franchisor can use the funds to pay for marketing and advertising to benefit all in the franchise network. However, you must follow strict disclosure obligations when establishing and utilising a marketing fund. This article explains the basic disclosure requirements regarding marketing funds to ensure you fulfil your obligations under the Code.
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How Can You Use A Marketing Fund?
Unless your franchise agreement says otherwise, franchisees usually do not get a say on how they can spend marketing money. Nevertheless, you can only spend the marketing fund on areas you outlined in your disclosure document. Typically, franchisors use the marketing funds to cover legitimate marketing or advertising expenses or reasonable costs in the administration and auditing the funds. Additionally, you can use a marketing fund to pay for expenses that a majority of franchisees contributing to the fund have agreed to pay.
Under the Franchising Code, you must:
- place payments to the marketing fund in a separate account;
- make your contributions equal to those of other franchisees if you operate a franchise business or corporate operation; and
- only use payments from the fund to meet expenses that you have disclosed in the disclosure document, are legitimate marketing expenses or have a majority of franchisees agreed to.
Your Disclosure Obligations
Under the Franchising Code, you have various disclosure obligations that help inform current and prospective franchisees.
The disclosure document should follow the standard format the Franchising Code sets out. If you operate a marketing fund, you must include the following in your disclosure documents:
- who contributes to the fund, including franchisees and franchisors if they operate a franchised business or corporate outlet themselves;
- how much each franchisee must contribute, including any varied rates that some contributors might pay;
- who controls or administers the fund;
- whether you audit the fund and details of the auditor;
- how franchisees can access and inspect the marketing fund’s financial statements;
- how you can use the marketing fund;
- the fund’s expenses for the last financial year;
- whether you supply goods or services that the fund pays for; and
- whether you must spend part of the fund on marketing or promoting the franchisee’s business.
Marketing Fund Statements
In addition to your disclosure obligations, you must also prepare an annual marketing fund financial statement if franchisees contribute to a marketing fund.
What to Include in the Statement
The marketing fund statement must include enough detail to give franchisees meaningful information about the fund’s income and expenses. Meaningful information allows franchisees to understand how, when, and on what you spent the money from the fund. Ultimately, franchisees want to know where their financial contributions are going and whether your fund use was appropriate.
The level of detail you provide will also depend on the different expenditure items. For example, more considerable expenses, such as 60% on ‘Advertising – Social Media’, will require more detail than other minor expenses.
Additionally, Australian Consumer Law (ACL) prohibits you from engaging in misleading or deceptive conduct when producing the marketing fund statement. For this reason, you must be upfront about expenditures from the fund and convey this to your franchisees.
Auditing
Generally, an independent auditor must also audit your marketing fund’s financial statements. However, there is an exception to this requirement where 75% of the franchisees who contribute to the fund believe that an audit is unnecessary. Notably, your franchisees have to vote on this within three months after the end of the financial year, before the financial statement is due. Therefore, you should retain proper records of any such vote.
When it comes to auditing, you must:
- prepare an annual financial statement within four months after the end of the last financial year detailing all of the fund’s receipts and expenses for that outgoing year;
- audit the statement within four months after the end of the financial year it is prepared for;
- give the franchisee a copy of this statement within 30 days of either its preparation or give franchisees a copy of the auditor’s report within the same time; and
- pay the reasonable costs of administering and auditing the fund which you can pay using the fund’s resources.
Key Takeaways
Although it is not mandatory under the Franchising Code, it is common for franchisors to establish a marketing fund. Franchisees can then use the funds to meet expenses that franchisors have disclosed in the disclosure document. This includes legitimate marketing expenses or expenses a majority of franchisees have agreed to. However, establishing and using a marketing fund also entails strict disclosure obligations and, in most instances, mandatory independent auditing for financial statements.
If you have any questions about marketing funds, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A marketing fund allows franchisors to obtain financial resources from their franchisees for promotional or marketing activity purposes.
If franchisors operate a franchise business, they must make their own contributions equal to those of other franchisees.
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