Home' The Franchise Review : December 2015 Contents THE FRANCHISE REVIEW
comes at a cost. A vote to not audit is more likely for smaller
funds, where the cost of an audit is disproportionate to the
amount in the fund.
Importantly, if a franchisor wants to obtain agreement to non
audit of the fund, then this vote must now be taken every year,
as the agreement will only last for one year (and not three years
as under the previous Franchising Code). This can easily be
overlooked. If franchisees agreed, however, that no audit was
required before the 2015 Franchising Code update took effect,
those agreements will still apply and there will be no need for
an annual vote until the end of those three years.
Another common mistake made by franchisors is forgetting that
the vote by franchisees not to audit the fund must be made
within three months of the end of the financial year. If a vote is
not held within this time period, it is invalid, and the franchisor
will be obliged to have the fund statement audited.
How the marketing fund is spent can often be a contentious
issue. While having the fund audited may seem to be onerous
from a franchisor's point of view, providing franchisees with
transparency as to what their contributions have been spent on
will go a long way towards keeping franchisees happy.
On the topic of how the marketing fund is spent, franchisors
must also take care to ensure that they comply with the
Franchising Code, and the terms and conditions of their
franchise agreements, when spending franchisees' marketing
The Franchising Code provides that despite the terms and
conditions of a franchise agreement, marketing and advertising
fees may only be used to meet certain specified expenses and
costs. Permitted expenses are those that have been disclosed
to franchisees in the disclosure document, that are legitimate
marketing or advertising expenses, or that have been agreed to
by a majority of franchisees.
Franchisors should therefore carefully consider all proposed
marketing fund expenditure to ensure that it falls within one
of these three categories. If there is any doubt as to whether
an expense was fully and fairly disclosed to all franchisees in
their disclosure documents, or whether the cost is a legitimate
marketing or advertising expense, franchisors should obtain the
consent of the majority of franchisees before going ahead.
In addition, only reasonable costs for administration and audit
of the marketing fund can be paid from the marketing fund.
Franchisors should therefore take care to ensure that the amounts
spent on administration of the marketing fund are fair and
reasonable in all circumstances. Particular care should be taken
to make sure amounts paid to the franchisor or its associates for
administration of the marketing fund are fair and reasonable.
It is not uncommon for suppliers to contribute to marketing
funds; however, if the intention is that their contributions are
only to be partly used on marketing and advertising (or for
some other purpose, such as an annual conference), then it
may be necessary to ensure that the whole contribution does
not go to the fund. Only the amount intended to be spent
on legitimate marketing and advertising activities should be
deposited into the account. Expenditure towards the annual
conference cost is not typically a legitimate advertising or
If a franchisor intends to advance money for marketing
initiatives that are for the benefit of the fund, or that incur
an expense that needs to be reimbursed from the fund, it
would be advisable to seek the agreement of franchisees
before doing so. The Franchising Code is silent about how a
franchisor is reimbursed for those expenses, as it is not typical
administration of the fund.
Franchisors must pay marketing fees and advertising fees on
the same basis as franchisees for any franchised businesses
operated by the franchisor. This does not include businesses
operated by associates.
In summary, marketing funds can benefit franchisees and the
franchise system as a whole, but care needs to be taken to
ensure that the franchisor's obligations under the Franchising
Code are met, and that franchisees feel as though they are
receiving value for their marketing contributions.
Veronica is a partner in the Retail, Franchising and Licensing Group and
Property and Commercial Group in the Perth office of HWL Ebsworth, and
has more than 20 years of experience in franchising law.
Yang is a Senior Associate in the Retail, Franchising and Licensing Group
and Property and Commercial Group in the Perth office of HWL Ebsworth,
and has experience in a range of property and commercial matters,
Note: this article is only intended to provide general information and
should not be relied upon as legal advice. In particular, this article is not
a comprehensive statement of all of a franchisor's obligations under the
Franchising Code in relation to marketing funds.
Franchisors should take care to
ensure that the amounts spent on
administration of the marketing
fund are fair and reasonable in all
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