KEEPING IT TRANSPARENT

If you contribute financially to marketing a franchise brand and its products, there are rules governing how these contributions can be spent.

The rules governing marketing fund contributions.

Signing up to a franchise will often require you to contribute financially to the marketing of the brand and its products.

Like many arrangements where one party holds the purse strings, concerns can arise about how franchisors deal with marketing fund money.

By Australian Competition and Consumer Commission

The Franchising Code of Conduct sets out specific rules regarding the administration of marketing funds, and places limits on how marketing contributions can be spent. These rules aim to ensure franc his ors are transparent about the management and use of the franchise system’ s marketing fund.

If you area prospective franchisee, the franc his or’ s disclosure document will contain information about whether you will be required to contribute to a marketing fund.

The franc his or needs to set out in the disclosure document:

1. Who contributes to the fund 2. How much you must pay, and whether any other franchise es contribute differently

3. Who controls or ad ministers the fund, and the kinds of expenses the fund can be used for

4. How franchisees can inspect the fund’s financial statements

5. The percentage spent on production, advertising and other expenses in the past financial year. Pay close attention to what the

disclosure document says about the types of expenses for which marketing fees can be used. Be sure you are okay with fees being spent in the manner proposed.

FRANCHISOR OBLIGATIONS

To maintain the fund, franchisors have certain obligations. They must, for example, keep marketing fees in a separate bank account.

Under the Franchising Code, marketing fund money can be used only to meet expenses:

• described in the disclosure document provided to you, or

• that are legitimate marketing or advertising expenses, or

• agreed to by most franchisees, or

• that represent the reasonable costs of

administering and auditing the fund. Commonsense goes a long way in determining reasonable and legitimate use of a marketing fund. A franchisor buying advertising in a newspaper to promote a special on products sold by franchisees is a good example of a legitimate use.

The Franchising Code imposes ongoing disclosure obligations on franchisors who run marketing funds. They must prepare a marketing fund financial statement and have it independently audited within four months of the end of their financial year. Copies of both the statement and auditor’s report must be given to franchisees within 30 days.

MUST BE MEANINGFUL

Under the code, the marketing fund financial statement must contain sufficient detail to provide meaningful information about who contributes to the fund, and how the franchisor uses the money. While it is ultimately up to franchisors to provide these documents, franchisees should take an active interest in ensuring they receive copies.

Though preparing an annual statement is mandatory, the independent audit is not necessary if 75 per cent of franchisees who contribute to the fund vote against undertaking the audit.

While the Franchising Code requires the annual statement to contain “meaningful” information, it does not define “meaningful” information. It makes sense, however, to consider what information will be meaningful for the users of the report: the franchisees. Depending on the system, this could involve information about:

• sources of income (such as listing the contributions made by franchisees, the franchisor or associates, or supplier rebates)

• the nature of marketing or advertising services provided (separately listing expenditure spent on brochures/ flyers, website design, equipment rental, newspaper/magazine advertisements, television spots, photography and so on)

• the geographical scope of the marketing (local/national).

Franchisors must deal with marketing fund money in an honest and transparent manner. When it comes to reporting on marketing fund expenditure, they should provide detailed information to give a clear and meaningful picture of income and expenditure.

SOURCE OF TENSION

If you are a franchisee or thinking about becoming one, make sure you understand the franchisor’s responsibilities when it comes to marketing fund money.

Suspicions and concerns about the use of marketing fund money can be a source of tension between franchisees and franchisors. Where disputes arise, franchisees and franchisors should try to discuss the problem among themselves. If discussion does not resolve the issue, mediation might be a good option. Such services are provided by various state and federal Small Business Commissioners and the Office of Franchise Mediation Advisor.

If you are concerned there has been a breach of the Franchising Code, you can also make a report to the ACCC. For more information about marketing funds and your rights and obligations under the Franchising Code, visit www.accc.gov.au/franchising.

Commonsense goes a long way in determining reasonable and legitimate use of a marketing fund.