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Understanding the Disclosure Document: How much does it cost to be a franchisee?

Advertising fund contributions
As mentioned, franchisors must disclose the amounts of money franchisees will be required to contribute to their advertising funds. These types of contributions typically represent a percentage of the franchisees’ gross revenues, payable to the franchisor on either a weekly or monthly basis. In addition to running advertising campaigns, the franchisor’s related administrative costs—including, but not limited to, salaries, accounting, collections and legal fees—may be covered out of the fund.

The franchisor will include statements within the disclosure document explaining (a) it reserves the right to use the advertising fund as it sees fit, including marketing research and development (R&D) for national, regional and/or local programs, (b) an individual franchisee might not benefit directly or in proportion to his/her contributions to the fund and (c) the franchisor is making no representation about any particular level of expenditure to be made to any particular advertising program in any particular territory.

These can be points of contention, as every franchisee always wants more resources devoted to advertising in his/her area, in ways of his/her choosing. Yet, there are good reasons for the franchisor to make clear it can spend the money ‘disproportionately’ as it sees fit, such as efforts to promote its brand in (a) a market where current franchisees are struggling or (b) a territory newly targeted for expansion of the franchise network.

That said, the franchisor must disclose how much of its advertising fund was spent on national, regional and local marketing campaigns—and how much was retained by the franchisor—over the past two fiscal years and an estimate of these numbers for the upcoming year. So, new franchisees are not simply being left in the dark about the fund.

Knowing your financial obligations
One of the most significant benefits of the franchise disclosure document is the financial information it contains regarding the level of initial investment and the fees the franchisee must pay under the terms of the franchise agreement. This information has been collected, analyzed and presented by the franchisor based on its experience and track record with other franchisees and its own operations.

By carefully reviewing this data and applying it to a new franchise’s proposed location and unique circumstances, the franchisee and his/her financial advisor can determine what level of investment to anticipate before setting up the business. Creating a strong financial plan based on these figures will help set the franchisee on the road to success.

Peter Snell is a partner and franchise lawyer at the Vancouver office of Gowling WLG (Canada) LLP. For more information, contact him via e-mail at peter.snell@gowlingwlg.com.

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