By Stewart Germann –
All franchisors will be interested in marketing their brands. How is this done? Normally by way of national marketing where the franchisees pay a percentage of turnover; and also by local marketing where a franchisee markets in a particular territory or area.
The national marketing fund can total a considerable sum of money so where is that money held? In New Zealand there is no mandatory requirement to keep the marketing funds in a separate bank account except if a franchise agreement prescribes the requirement to do just that.
There is no franchise-specific legislation in New Zealand but the Franchise Association of New Zealand (FANZ) has a Code of Practice and Code of Ethics, but both are silent on marketing. However, the FANZ has advised that it will be amending the Code of Practice in due course in relation to marketing funds.
Where marketing funds are held is a hot topic and in my opinion there should be a mandatory requirement for all franchisors to keep the marketing fund in a separate bank account which is tantamount to a trust account. After all, the franchisees pay the marketing levies and the franchisor uses those funds to market the brand to benefit all franchisees.
When I draft a franchise agreement I include a clause along the following lines:
“The National Marketing Amount paid by the Franchisee to the Franchisor shall be held by the Franchisor in a separate bank account which shall be deemed to be a trust account along with all other marketing levies received from other franchisees and the Franchisor shall use such funds solely for the purpose of marketing as determined by the Franchisor.”
In Australia the ACCC (Australian Competition & Consumer Commission) administers franchising pursuant to the Franchising Code of Conduct which is a federal code. If a franchisor collects a marketing fee from franchisees then it must give franchisees a marketing fund statement each year. The franchisor must follow the rules set out in the Code of Conduct about how marketing money can be used, who pays into the fund, and reporting to franchisees. Information given to franchisees about the operation or use of the marketing fund must be truthful and accurate.
In the franchisor’s disclosure document the following details must be included:
• Who controls or administers the marketing fund
• Who else contributes to the fund
• The kind of expenses that the fund can be used for
• How much the franchisee must contribute to the fund and whether some franchisees contribute more or less
• If the franchisor or master franchisor must spend part of the fund on marketing or promoting the franchisee’s business
The disclosure document must also include further information about how the fund was spent the previous year, including the percentage spent on production, marketing, administration and other stated expenses. It must also say whether the fund is audited and, if so, by whom and when.
It is important to note that a marketing fund can only be used to pay for costs that the franchisor has told franchisees about in the disclosure document and there must be legitimate marketing expenses.
Over the past two years I have acted for separate groups of franchisees who have become unhappy with the respective franchisors’ handling of the marketing fund and the financial reconciliation. All franchisors should provide an income and expenditure statement in relation to the marketing fund which must be transparent and available to all franchisees in a particular system, in my opinion.
In conclusion, most franchise systems contemplate payments of marketing expenses by franchisees to be held in the marketing fund. The key aspect is how the fund will be administered and the legitimate expenses which can be paid out of the fund.
Stewart Germann
Franchise Attorney
Auckland, New Zealand
Leave A Comment