A large part of the appeal of bigger franchises like McDonald’s or KFC is the brand recognition that comes with the purchase of such a franchise. Marketing is a key aspect of this. But it isn’t limited to national or global campaigns that the head office coordinates.

Individual franchisor involvement in the marketing of their own franchise is a key part of the success or the business, but of course, they also benefit from the larger scale advertising provided by the franchisor. 

Marketing funds are a crucial part of the success, or lack thereof, of a franchisor’s business. These funds act as a pool of financial resources, obtained from the collective franchisee network, that allow a given franchisor to pay for large-scale promotional activity. 

But operating such a fund comes with obligations under the Franchising Code of Conduct (FCC). This code is regularly changed, so should often be checked for changes that might affect the way you operate your business. 

As a final point of reference, marketing funds can be administered by a fund administrator. However this article assumes that the franchisor will be administering the marketing fund themselves. 

What Obligations Do You Have Under The Franchising Code Of Conduct? 

Preparation Of Financial Statement And Auditing 

Many of the obligations owed to your franchisees are set out in section 15 of the FCC. A short list has been included summarising them below. 

  1. The franchisor, as the fund administrator, must (within 4 months after the end of the last financial year) prepare an annual financial statement detailing all of the fund’s receipts and expenses for that outgoing year. This statement must include details of the fund’s receipts and expenses
  2. The franchisor must also have the statement audited within 4 months after the end of the financial year it is prepared for. This audit will not be necessary if within 3 months after the end of the year, 75% of franchisees who contribute to the fund vote to agree that the audit is not necessary for that particular year. 
  3. The franchisor must give the franchisee a copy of this statement within 30 days of its preparation. If an audit of the statement is required, the franchisor must give the franchisee a copy of the auditor’s report within 30 days of receiving it
  4. The franchisor must pay the reasonable costs of administering and auditing the fund from within the funds resources. 

Disclosure Requirements 

Franchisors must also maintain a Disclosure Document to inform current and prospective franchisees. The purpose of this document is to give current and prospective franchisees information from the franchisor to help them make a reasonably informed decision. It also gives key information about how the franchise is expected to run.  

Annexure 1 of the FCC lays out the format of the disclosure document. This document must be updated within 4 months after the end of each financial year. Section 15 of this annexure sets out what information about the marketing fund needs to be disclosed. 

This section’s requirements have been laid out in full below. 

For marketing funds, the following details must be disclosed:

  1. The kinds of persons who contribute to the fund (for example, franchisors, franchisees or outside parties)
  2. How much the franchisee must contribute to the fund and whether other franchisees must contribute at a different rate;
  3. Who controls or administers the fund;
  4. Whether the fund is audited and, if so, by whom and when;
  5. How the fund’s financial statements can be inspected by franchisees;
  6. The kinds of expense for which the fund may be used;
  7. The fund’s expenses for the last financial year, including the percentage spent on production, marketing, administration and other stated expenses;
  8. Whether the franchisor, master franchisor or an associate of either of them supplies goods or services for which the fund pays and, if so, details of the goods or services;
  9. Whether the franchisor or master franchisor must spend part of the fund on marketing or promoting the franchisee’s business.

Payments To And From Marketing Funds

If a franchisor requires the franchisee to pay money to a marketing fund that is controlled or administered by the franchisor, section 31 of the FCC sets out a series of requirements. 

  1. Payments to the marketing fund must be placed in a separate account to that of the franchisor. 
  2. If the franchisor operates a franchise, they must make payments to the marketing fund equal to those of the other franchisees. 
  3. The franchisor must use payments from the fund only to meet expenses that have been disclosed in the disclosure document, are legitimate expenses for marketing, or have been agreed to by a majority of franchisees required to make payments. 

Good Faith 

Under section 6 of the FCC, all parties to a franchise agreement must act in good faith to each other. Per the common law definition of good faith, this essentially requires you to act reasonably and not exercise your powers arbitrarily or for some irrelevant purpose. 

Your conduct may lack good faith if you act dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of a contract. 

For example, let’s say you own a franchise. You pay less than the rest of your franchisees towards the marketing fund. Not only would this violate section 31 of the FCC, but it would also violate the good faith requirement in section 6. 

What Are The Penalties For Breaching The FCC Obligations? 

The penalties for breaching the obligations listed above are not a gentle tap on the shoulder. In regards to the preparation of financial statements as well as auditing of the fund, the penalty is 300 penalty units. 

As an example of such a penalty, in 2017 Domino’s was penalized for failing to produce the financial statements for the marketing fund and auditors report to franchisee’s within the time frames listed in the FCC. The penalty for the infringements amounted to $18,000. This serves as a rough example of what the penalties can be. 

Penalties also exist for breaching disclosure requirements. If the document is not provided, or if not properly updated within 4 months after the end of each financial year, the penalty is 300 penalty units. Similarly, if the obligations in respect of payments to and from the marketing fund are not met, the penalty is also 300 penalty units. 

How To Manage Marketing Funds

When managing a marketing fund, there are two main aspects to stay on top of. The first is how the fund should actually be managed. The second is how information in relation to the fund should be disclosed

For both of these aspects, the FCC legislation is a very important starting point. The Australian Competition and Consumer Commission (ACCC) also acts as a valuable resource. They provide a general rundown of the FCC, and what you must do as a franchisor in relation to the marketing fund. The case law that informs the FCC is also crucial. Again, the ACCC is very helpful. They provide a series of media releases that often refer to important case law in this area.

For example, a release from December 2020 went into detail about breaches in relation to marketing funds.

These sources of information should give you a broad idea of how to properly manage marketing funds. However, to ensure proper compliance and the avoidance of penalties, consulting with an expert franchise lawyer is highly recommended, especially given the ever changing nature of the FCC.

Key Takeaways

Marketing funds are a crucial part of many large franchises, but they are not unregulated. They are quite strictly controlled by the FCC. In ensuring your compliance with these strict regulations and standards, it is recommended that you consult an expert franchise lawyer

If you need a hand with anything to do with existing or prospective marketing funds, you can reach out to us at team@sprintlaw.com.au or contact us on 1800 730 617 for an obligation-free chat.

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