Marketing Funds - Money Well Spent?

By Tony Garrison, HWL Lawyers

One of the most important considerations with any business will always be “how do I let people know that I am here and what I am selling?”

The average business has to consider on an annual basis how much money has to be put towards advertising and then the headache begins in terms of which is the best medium to get you the most business.

In many franchise systems, these concerns are taken away from the franchisee by the existence of a marketing fund. These systems use marketing funds as one of the primarysources of financing marketing initiatives.

A marketing fund allows a number of franchisees to pool together revenue and use it to create local, regional, state based or national marketing campaigns. 

There is no requirement, whether legislative or otherwise, for a franchise system to have a marketing fund. However, the law has acknowledged the prevalence of marketing funds in the franchising sector and has accordingly created regulation in this area to ensure that franchisors are held accountable to their franchisees.

The aim for most purchasers of a franchise is that they are buying a brand that has already proved itself to have selling power. The aim of the marketing fund is to ensure the selling power continues and is improved upon.

Before entering into any Franchise Agreement you should always carefully read the provision relating to contribution to a marketing fund or advertising levy so that you know exactly what you will be required to contribute andwhat your rights are.

The best way to truly assess the marketing fund in the franchise you’re considering buying or already own, is to review both the positive and negative aspects. The following points are a few of the pros and cons:

What are the positive aspects of a marketing fund?

  • The worry and hassle of arranging the advertising for the business is taken out of your hands.
  • Your franchise will have access to better and larger marketing campaigns such as radio, television and magazines, that, as an independent business, you might not have been able to afford.
  • The more franchises there are, the larger the amount of money going towards building brand recognition (and hopefully as a result drive up business with more money for you).

What are the negative aspects of a marketing fund?

  • Fees. There is no easy way of putting it, but the money has to come from somewhere and it will be out of your business, whether you want to spend it or not.
  • Even though taking the responsibility for advertising out of your hands can be a positive, it can also be a negative in that you have to trust a third party (who, chances are, you’ve never met nor will) to best decide how to advertise and sell your product for you.
  • A large marketing campaign might not necessarily let people know where you are located and therefore whilst building brand recognition is always a good thing it may not assist you as much as a concentrated local advertising campaign would have.

Obligations under the Franchising Code

Marketing funds are primarily dealt with in the Franchising Code of Conduct (the Code).

The Code creates obligations for fanchisors that have elected to set up a marketing fund for their particular franchise system. These obligations are in place to ensure that franchisees have access to information about how the marketing fund is being expended.

Under the Code, franchisors must:

  • Prepare annual accounts of the marketing fund;
  • Have the accounts audited by a registered company auditor by 31 October each year (unless 75% of the franchisees who contribute to the fund have voted and agreed that the franchisor does not have to comply with this requirement); and
  • Provide its franchisee with the accounts/audited financial statement within 30 days of the audited report being prepared.

[Note: Since the Code was amended in March 2008, the financial statements for a marketing fund must now include all of the fund’s receipts and expenses for the last financial year.]

In addition to the franchisor’s reporting obligations, there is also a specific section of the Disclosure Document in which the franchisor must set out information in relation to the marketing fund. Franchisees should review this section carefully when considering a franchise system as it contains information such as who is required to contribute to the marketing fund, who controls and administers the marketing fund, the kinds of expenses it may be used for, the expenditure for the last financial year and whether there is any obligation for the franchisor to expend any proportion of the marketing fund specifically on the franchisee’s business.

Is there anything I should be aware of?

Your Franchise Agreement and the Disclosure Document should contain everything you need to know in respect of the marketing fund in question and the franchisor is obligated to provide you with a copy of the

Code. If you don’t understand the Agreement or the Disclosure Document you should speak to a franchise solicitor or suitably qualified individual who can explain to you what your obligations are.

Some of the key issues you should look for are:

  • If the franchise is a national franchise how much money will be spent on national rather than state or territory based campaigns?
  • How much of the marketing fund is spent on administrative costs related to marketing?
  • Will there be a forum whereby you will have a right to voice your opinion?
  • Will the advertising be directed towards the general public who you want to buy your product or will it be towards potential franchisees?
  • What are the expenses of the marketing fund that can be deducted?
  • Is the fund audited?

Marketing funds are integral to any business and it is important that they are utilised correctly to ensure that the maximum benefit is derived.