Franchisees should be aware that in many cases the Franchisee is required to contribute to a marketing fund in addition to paying Franchise fees and also in addition to the payment marketing fund fees under a lease.
Typically a contribution to a marketing fund is 2% to 5% of the Gross sales or a minimum amount. A Franchisee may also be required to contribute a marketing fund under a lease of about 2%-4% of the yearly rental. The way in which the Franchisor deals with the marketing fund is entirely at the discretion of the Franchisor.
The Franchisor is usually not obliged to spend any part of the fund on marketing the Franchisee’s particular business. The fund may be spent promoting the brand in other areas that will have no benefit to the local area Franchisee.
The local area Franchisee would then be required to spend its own additional funds on local area marketing.
These terms may seem unfair but it has become the commercial reality of entering into Franchise agreements.
The Franchising Code of Conduct requires the Franchisor to disclose details in relation to how the fund is administered and the kinds of expenses which the fund may be used, but it does not prevent the Franchisor from exercising an absolute discretion as to how the fund may be spent.
Franchisees often complain that the fund is used to promote the Franchisor’s own brand in order to sell more Franchises. The Franchisee usually feels that this does not benefit the local area and that it is paying for the Franchisor’s own promotional costs.
This may not be an issue if the Franchisee is commencing operations in a capital city or high population areas where the brand is known. But where the brand is just establishing a presence in a new area, depending upon the integrity of the Franchisor, the Franchisee will be left to its own devices to fend for itself despite a significant chunk of its turnover being spent on “marketing” that it will get no use of.
My advice for any Franchisee starting out in an untested area is to negotiate with the Franchisor that the Franchisor will contribute back an upfront marketing costs for a period of time.
A mechanism should be agreed to that sees the contributions to marketing being put to effective use for the area.
The number of existing Franchises in the area, the maturity of the brand, and the experience of the Franchisee will all be factors that determine how those provisions may be implemented.
For more information please contact Evan Sarinas.
This release is not intended as legal advice and all liability is disclaimed for reliance on it.