Best practice franchise adfund management
Kate Elizabeth — 10th April 2019
With the most recent version of the Franchising Code in effect from 1 January 2015 and the Fairness in Franchising report from the Parliamentary Joint Committee on Corporations and Financial Services issued in March 2019, the world of franchising in Australia continues to be a moving feast, particularly for marketers.
Painting a picture of franchising in Australia
In the Griffith University Franchising Australia 2016 Report, it is estimated there are 79,000 individual franchise outlets, with an estimated combined annual turnover of $146B. These businesses contribute to 8.9% of Australia's GDP, employ an estimated 472,000 people and franchise businesses account for 4% of all small businesses in Australia.
The Franchise Code
The Competition and Consumer (Industry Codes—Franchising) Regulation 2014 has two clauses relating to marketing and advertising fees and funds - Clause 15 and Clause 31.
Clause 15 Marketing or other cooperative funds
15.1 For each marketing or other cooperative fund, controlled or administered by or for the franchisor, to which the franchisee may be required to contribute, the following details:
(a) the kinds of persons who contribute to the fund (for example, franchisee, franchisor, outside supplier);
(b) how much the franchisee must contribute to the fund and whether other franchisees must contribute at a different rate;
(c) who controls or administers the fund;
(d) whether the fund is audited and, if so, by whom and when;
(e) how the fund’s financial statements can be inspected by franchisees;
(f) the kinds of expense for which the fund may be used;
(g) the fund’s expenses for the last financial year, including the percentage spent on production, advertising, administration and other stated expenses;
(h) whether the franchisor or its associates supply goods or services for which the fund pays and, if so, details of the goods or services;
(i) whether the franchisor must spend part of the fund on marketing, advertising or promoting the franchisee’s business
Clause 31 Marketing and advertising fees
(1) A franchisor must maintain a separate bank account for marketing fees and advertising fees contributed by franchisees.
(2) If a franchisor operates one or more units of a franchised business, the franchisor must pay marketing fees and advertising fees on behalf of each unit on the same basis as other franchisees.
(3) Despite any terms of a franchise agreement, marketing fees or advertising fees may only be used to:
(a) meet expenses that:
(i) have been disclosed to franchisees under paragraph 15.1(f) of the disclosure document; or
(ii) are legitimate marketing or advertising expenses; or
(iii) have been agreed to by a majority of franchisees; or
(b) pay the reasonable costs of administering and auditing a marketing fund.
Recommendations from Fairness in Franchising
These two clauses are still relatively loose, and the Fairness in Franchising report from the Parliamentary Joint Committee on Corporations and Financial Services goes some way in their recommendations to provide additional clarity around marketing and advertising.
The recommendations include:
6.132 The committee recommends that the Australian Government amend clauses 15 and 31 of the Franchising Code of Conduct to provide that both clauses apply where a franchisee is required to make regular payments to the franchisor to cover advertising and marketing activities. The language used in clauses 15 and 31 needs to be consistent.
6.133 The committee recommends that the Australian Government amend clause 31 of the Franchising Code of Conduct to provide for civil pecuniary penalties for a breach of the clause.
6.134 The committee recommends that the Australian Government amend clause 15 of the Franchising Code of Conduct to provide that the actual financial statements for the marketing fund account be provided to franchisees within 30 days of the end of each quarter with sufficient detail as to be prescribed in the Franchising Code of Conduct and relevant standards set by the Australian Accounting Standards Board.
6.135 The committee recommends that the Australian Government amend clause 12 of the Franchising Code of Conduct to provide that a master franchisor must comply with clauses 15 and 31 where the subfranchisee is directly or indirectly required to contribute to a marketing or cooperative fund controlled or administered by the master franchisor.
6.136 The committee recommends that the Auditing and Assurance Standards Board prepare and issue an audit guidance and Chart of Accounts for marketing and cooperative fund audits in order to:
- assist accountants and franchisors in the preparation of financial statements for a marketing or cooperative fund; and
- assist auditors to prepare audit reports for marketing or cooperative funds.
6.137 The committee recommends that the Australian Government clarify, through legislation, the distribution of unused marketing funds in the event of the franchisor winding up.
6.138 The committee recommends that, subject to the other recommendations in this report in relation to marketing funds and fees in the Franchising Code of Conduct, the Oil Code of Conduct should be amended so that it contains the same provisions as the Franchising Code of Conduct in relation to marketing funds and fees.
What does this mean for marketers?
While the recommendations have yet to be implemented either through legislation or adopted by the various industry bodies, there are still two changes marketers and brand managers can make now to ensure they are delivering both a strong brand and transparency around the administration of marketing and adfunds.
1. Quarterly transparency
Traditionally, with the adfund audit being done once a year and required to be available by 30 September, some franchise systems haven't provided a lot of visibility around how the contributions were spent, mainly because the chart of accounts could be quite narrow and they were only forced to report annually.
As a reputable brand, with a strong marketing strategy supported by your FOAC and franchisees, there shouldn't be any reason to provide transparency each quarter around the spend.
This level of accountability also helps you ensure that the fund isn't being over-extended and there are results attributable to the spend.
In a previous role, we established LAM rebates from the adfund, in addition to the national advertising campaigns. Franchisees, when spending over a certain % of revenue on LAM, could apply for a rebate for a portion of that spend, thus ensuring we had franchisees actively delivering local area marketing alongside the national campaigns. This helped build their local profile, boosted the efficacy of the national campaigns and increased engagement with, and understanding of, marketing.
2. Spend intelligently
Don't be 'clever' and catch your spending in the 'Other' Chart of Accounts category. Your job is to build a strong brand for franchise growth, and you can best do that when you and your franchisees are working from the same hymn sheet.
Understand what your forecast budget will be for the year ahead, account for a contingency in case of missed sales or network closures and build your marketing strategy to suit the dollars available. We would all love champagne tastes on a beer budget, but if you can't afford a $4m digital transformation strategy throughout the network, don't plan for it.
Additionally, know exactly what type of spend is approved to come from the adfund - your franchisees may have approved marketing technology spend to come from the fund, or it may only be advertising placement and production that is eligible to be charged to the adfund. Perhaps you can put together a project proposal for use of the fund outside pure advertising if, for example, you want to build a new website or app to support the business.
Bring your FOAC (or FAC) along with you, as representatives of the whole franchise body, so they understand your marketing strategy, budget and how you want to administer the adfund.
With the impact of the Fairness in Franchising Report only just starting to be understood, it is important you are across the proposed changes and responsive in changes to legislation and best practice so that there isn't an awkward conversation with the ACCC.