Q: How do franchise systems organize their advertising efforts?
There are a few ways franchisors structure advertising requirements for their franchisees, but the most common is to establish a general ad. This is typically a franchisor-maintained bank account to which franchisees contribute ongoing fees, which may be expressed as a fixed sum or a percentage of their sales (though in some cases they are tied to other criteria, such as the population of a franchisee’s territory). The fund is administered by the franchisor at its sole discretion, but is intended for activities that will (a) have a general benefit for franchisees across the system and (b) promote brand awareness.
Alongside the obligation to pay into the central fund, many franchisors require franchisees to commit to local advertising within their own territories, such as search engine optimization (SEO), printed flyers and brochures and community sponsorships.
Some franchisors also institute advertising co-operatives, which are led and governed by groups of franchisees to conduct approved marketing activities across their territories.
Q: What are the typical requirements for franchisees to contribute to the ad fund?
The requirements may vary depending on the type of business, the fee structure and how new the system is, but for a conventional franchise opportunity—such as a restaurant—it would be reasonable to expect to pay two to three per cent of sales into the central fund and one per cent locally.
Ad fund fees are typically due at the same time as royalties. Franchisors will also review or audit franchisees’ activities to ensure they are meeting their local ad spending obligations.
Another option is for franchisors to organize collective advertising and allow franchisees to pay in as a credit against their required fees. One example would be when a digital marketing company is hired to oversee social media campaigns with a focus on local engagement. To participate in these programs, franchisees may be required to contribute in lieu of the fees set out in their franchise agreements.
Q: What should prospective franchisees keep in mind about ad funds before signing on?
Franchisees should not assume they will receive a direct benefit in line with the amounts they contribute to the fund. Their franchise agreements will express as much, alerting them to the likelihood the funds will not be expended in any proportionate way relative to their territory or size of contribution.
A franchisee opening his/her business in a territory where the franchisor has never previously had a presence may seize on the above clause as an opportunity to get the franchisor to match his/her local ad dollars, perhaps over a set period, so generating brand awareness in the untested market is not the sole responsibility of the franchisee.
Franchisees may also want to find out what kinds of activities the ad fund typically supports. The franchisor might use it to help solicit and recruit new franchisees, for example, and while some franchisees might complain such activities do not provide a general benefit, others may appreciate the advantages associated with a growing profile for the franchise system.
Disclosure documents must inform new franchisees of the amounts of ad fund money retained and spent by the franchisor during each of its past two fiscal years and projections for the current fiscal year. Too much retained and not enough spent would raise some questions, but many franchisors actually spend more than 100 per cent of the fund on ads.
Chad Finkelstein is a partner at Dale & Lessmann LLP in Toronto. For more information, follow him on Twitter at @ChadFinkelstein and contact him at (416) 369-7883 or via e-mail at email@example.com.