The Franchising Code of Conduct (‘the Code’) imposes onerous obligations on franchisors who operate a Marketing Fund. It’s important that franchisors are aware of their responsibilities and comply strictly to avoid breaching the Code and incurring penalties.
Obligations
Franchisors must have a separate bank account wherein all marketing fees charged to franchisees are deposited and by 31 October of each year, the franchisor must:
- Prepare an annual financial statement which details the receipts and expenses for the last financial year;
- Provide adequate detail of the receipts and expenses so as to give meaningful information regarding the sources of income and expenditures; and
- Have the statement audited.
Franchisors must also provide a copy of the financial statement within 30 days of preparing it and provide a copy of the audit within 30 days of receiving it from the auditor.
A failure to comply with such obligations can result in a civil penalty of 600 penalty units which is equal to $133,200.00.
Meaningful Information
The Australian Competition and Consumer Commission (‘ACCC’) has determined that meaningful information is such that allows franchisees to understand how, when and on what the Marketing Fund was spent on.
In 2019, the Federal Court held that a major Australian franchisor, Ultra Tune had failed to comply with its disclosure obligations. The primary judge held that providing a profit and loss statement for a Marketing Fund is a breach of the obligation to provide sufficient detail of the receipts and expenses so as to give meaningful information about sources of income and expenditures. It was held that descriptions such as ‘promotion & advertising – television’ provides insufficient detail as it leaves franchisees with limited information as to how the money contributed has been spent. The court maintained that an itemisation as broad as this does not allow franchisees to make an assessment as to the appropriateness of the expenditure based on the detail of the financial statement. The court concluded on this point by stating that, ‘a franchisor would be well advised to err on the side of candour, rather than secrecy’. The Full Federal Court affirmed the decision on appeal.
We advise our clients to include as much detail as possible in preparing the statement and consider it as being an explanation to franchisees of all Marketing Fund activity in the past financial year.
Avoid Auditing
Franchisors can avoid having the financial statement audited if by 30 September they obtain a 75% majority vote of franchisees in favour of foregoing the audit.
Marketing Spend
Marketing Fund monies can only be spent on expenses that are disclosed to franchisees in the disclosure document, legitimate marketing expenses, expenses that have been agreed upon by a majority of franchisees and for paying reasonable costs of administering and auditing the Marketing Fund.
Contact us for Marketing Fund Advice
Operating a Marketing Fund allows franchisors to implement a marketing strategy that ensures the businesses within the franchise system are being marketed effectively and that the marketing material aligns with the Brand. However, it is important to consider the strict obligations that both the Code and the ACCC impose of franchisors who operate a Marketing Fund. IP Partnership acts for franchisors nationally. If you are a Franchisor and you have any concerns about what information is sufficient in your marketing disclosure please do not hesitate to contact our office and speak with an experienced solicitor. It is our job to ensure that our Franchisor clients not only comply with the Franchising Code of Conduct but also reflect your business in a positive way by providing exceptional professional services to your franchisees and potential franchisees.
