Legal advice
Under pressure
Manzoor Ishani discusses the pressures on a franchisor's marketing and advertising fund and reveals the best way forward out of difficult economic times
The overall responsibility for advertising, marketing and promoting a franchised business rests with the franchisor. Often the franchisor will do this in return for the franchisees making a payment, on a regular basis, usually a specified sum or a percentage of turnover. Typically if a franchisee was required to pay 10 per cent of its gross turnover as an ongoing franchise fee, the requirement for making a contribution to the fund would be in the region of 1 to 2.5 per cent.
An ethical franchisor will ensure that the money received is placed in an account which is kept separate from all its other business accounts and the money is used only for the purposes of advertising, marketing and promoting the franchisor's brand and concept, for the benefit of the network as a whole.
This can include the establishment and maintenance of a website and the printing of point of sale material, brochures, product catalogues, and the like which franchisees either receive without further charge in certain maximum quantities or purchase from the franchisor more or less at cost. The fund should not constitute a pool of money into which a franchisor can dip from time to time to solve its cash flow problems, or indeed for the purpose of recruiting new franchisees!
In theory, over a short-term cycle of two to three years the cost of advertising etc. would be covered by the monies in the fund. In some years there would be a surplus and in other years there might be a small over-spend. In some cases a franchisor will purposely accumulate a surplus in order to finance an expensive promotion in the near future, a radio commercial for example.
However, in practice, few franchisors find that there is enough money in the fund to pay for the things that they genuinely feel they need to do to promote the business. A straw poll I conducted of 10 franchisors of various sizes and stages in their development, from a franchisor whose shares are quoted on the London Stock Exchange to one who has been operating a job franchise for no more than three years, only one franchisor said that there was a surplus in the advertising fund, at the end of their financial year, and that surplus was generally very small, indeed far too small to create any accounting or tax problems.
The other nine, without exception, have in every year hugely overspent their fund and as a consequence they have been subsidising the fund so that whenever the money ran out, the franchisor made good the deficit out of its own resources. In two cases the franchisors admitted that they had hoped to recover the over-spend from future contributions but this had yet to happen. It was their belief that as the network grew, so would the fund, but in their experience so does the advertising spend!
It has to be said that not all franchisors follow this route. Some franchisors leave the question of advertising entirely to their franchisees, either giving them a free hand in terms of expenditure or alternatively agreeing with them a marketing plan with a legal obligation on the part of the franchisee to follow it.
Some franchisors have a system of sharing the burden, so that the franchisor is under an obligation to undertake certain basic advertising (again to be paid by franchisees making contributions to a fund) but there is also an obligation on franchisees to expend certain amounts on local advertising to promote their own businesses.
There is no hard and fast rule and each franchisor must examine its business closely, to see the degree to which the success of its franchisees is dependent upon advertising and to try to find a structure that suits both franchisor and franchisee. There is no doubt that the conducting of advertising, marketing and promotions centrally can bring enormous benefits in terms of economies of scale and franchisees certainly get a bigger bang for their bucks than if they were to go it alone.
I know at least one franchisor that has gone back to its franchisees and has agreed with them an entirely different structure. In other cases franchisors have asked franchisees to make one-off payments to pay for one-off promotions or campaigns.
Where there is a consistent over-spend, the franchisor needs to decide whether returns on advertising are such that it should continue to subsidise its franchisees, whether it can cut back on its advertising to an acceptable level or meet its franchisees, explain its dilemma and reach some sort of accommodation with them. It may be that it will be a combination of one or more of these, but the lesson to be learned by those in the process of structuring a franchise is to spend a little more time than they would otherwise be inclined to on this aspect of the business to make sure that they get their figures right at the outset. In the current climate, businesses should be increasing their advertising and marketing spend rather than reducing it.
Manzoor Ishani is a Senior Solicitor Consultant with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally.
