Overview of marketing funds for franchises

Changes to the Franchising Code of Conduct (Code) which took effect on 1 January 2015 altered the obligations for Franchisor’s who operate marketing funds.  Following the changes, Franchisors must, in addition to including details of the fund in the Franchise Agreement:

• include the details of the marketing fund in the disclosure document;
• prepare and maintain financial statements concerning the marketing fund;
• keep all funds received towards the marketing fund in a separate account;
• make their own contributions towards the marketing fund; and
• use the marketing fund exclusively for marketing.

These obligations are outlined in more detail below.

Include details of the marketing fund in the Disclosure Document

If a Franchisee is required to contribute to a marketing fund, the Code dictates in section 15 that the following information must to be included in the Disclosure Document:

• the kinds of persons who contribute to the fund;
• how much the Franchisee must contribute to the fund and whether other franchisees must contribute at a different rate;
• who controls or administers the fund;
• whether the fund is audited and, if so, by whom and when;
• how the fund’s financial statements can be inspected by Franchisees;
• the kinds of expense for which the fund may be used;
• the fund’s expenses for the last financial year, including the percentage spent on production, advertising, administration and other stated expenses;
• whether the Franchisor supply goods or services for which the fund pays and, if so, details of the goods or services; and
• whether the Franchisor must spend part of the fund on marketing, advertising or promoting the Franchisee’s business.

Prepare financial statements

Pursuant to section 15 of the Code, a Franchisor must prepare an annual financial statement detailing the fund’s receipts and expenses.  The statement must:

• give a meaningful account of the fund’s sources of income and items of expenditure; and
• be audited by a registered company auditor within four (4) months after the end of the financial year unless 75% of the Franchisees in Australia that contribute to the fund vote not to audit the statement.

Additionally, the statement and auditor’s report must be given to the Franchisee within thirty (30) days of being prepared.  Failure to meet these obligations can lead to a civil penalty of up to 300 penalty units ($54,000).

Keep the funds in an appropriate account

Section 31(1) of the Code requires a Franchisor to keep marketing and advertising fees contributed by Franchisees in a separate bank account.

Equal contributions

If the Franchisor operates multiple franchised businesses, section 31(2) of the Code requires them to contribute to the marketing fund, on the same basis as the other franchisees, for each franchise that they operate.

Use the fund only for a permitted purpose

Pursuant to section 31(3) of the Code, Franchisors can only spend marketing or advertising fees on expenses that:

• have been disclosed to franchisees in the disclosure document;
• are legitimate marketing or advertising expenses;
• have been agreed to by a majority of franchisees; or
• represent the reasonable costs of administering and auditing a marketing fund.

Takeaways

A Franchise can offer particular benefits over other types of businesses, and one of these is access to marketing skills and materials.  These changes mean that Franchisees will be kept better informed about how their funds are being spent, and will theoretically lead to more effective marketing for the entire Franchise.

Links and further references

Cases

Cafe2U Pty Ltd v Bishambu Pty Ltd [2013] FCA 191 – amounts which pursuant to the Franchise Agreement were meant to be paid by the Franchisee into the marketing fund were recovered by the Franchisor as part of the overall damages claim.

Little Images Pty Ltd v Fresh View Venture Pty Ltd [2011] QSC 402 – though this case occurred before the 2015 amendments to the Code, it deals with a number of allegations made by the Franchisee about the Franchisor’s conduct in regards to the marketing fund, including a failure to have the fund audited within the time specified in the Franchise Agreement, a failure to contribute to the fund as agreed in Franchise Agreement, and a failure to spend the fund only for a permitted purpose.

Mr Rental Australia Pty Ltd v IRD Services Pty Ltd [2016] NSWSC 700 – one alleged breach of the Franchise Agreement was that the Franchisor used monies contributed to the Marketing Funds by Franchisees for one Franchise (Old World) to develop and market the products, logos and merchandise of another Franchise (New World).

Legislation

Franchising Code of Conduct

Further information about franchising

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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