4 Things to Know About Marketing Funds

In Short

• Marketing funds are contributions from franchisees for franchise-wide marketing and advertising.
• Franchisors control how marketing funds are spent, though some involve franchisees in the decision-making.
• Contributions may go towards national or local marketing efforts, depending on the franchise agreement.

Tips for Businesses

When buying a franchise, ask about the marketing fund, including who controls it and how contributions are used. Ensure you understand any additional local marketing requirements and if the franchisor provides statements or audits of the fund. This can help you plan for ongoing marketing costs in your business.

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Table of Contents

• What is a Marketing Fund?
• Where Do Marketing Funds Come From?
• Who Controls Expenditure?
• What Are Local and National Marketing Funds?
• Key Takeaways 
• Frequently Asked Questions

If you are considering buying a franchise, you must consider the fees you must pay the franchisor. Although you can expect many upfront costs, such as the franchising fee and fit-out costs, you should also consider the ongoing costs. One such ongoing cost is a contribution to a marketing fund. This article will take you through four things you need to know about marketing funds.

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What is a Marketing Fund?

When you own a franchise, there are several fees you need to pay, including:

• initial purchase cost; and
• ongoing royalties. 

In addition to these fees, many franchise systems require franchisees to contribute to a marketing fund. Importantly, this is not a revenue stream for the franchisor. Instead, a marketing fund pays for the marketing and advertising of the franchise network.

Where Do Marketing Funds Come From?

Marketing funds may be raised in several ways, some of which include:

• a flat weekly or monthly fee;
• percentage of turnover (as part of the royalty fee);
• percentage of turnover collected (separately from the royalty fee); 
• mark-ups on product supplied; or
• a rebate from suppliers.

Suppliers might also contribute to the costs of conferences, new product training, supplier expos, or other activities. In these cases, it is good practice for the franchisor to disclose this to franchisees. 

You should also note that the franchisor is accountable to the franchisees for the money collected for the marketing fund. As such, some franchisors prepare a marketing fund statement annually. This statement provides details about the fund’s income and expenses to franchisees. Franchisors in New Zealand do not have to meet this requirement, unlike in other countries, such as Australia.

Who Controls Expenditure?

Typically, the franchisor distributes the funds, using them for marketing expenses and general advertising.

In some instances, franchisees may distribute marketing funds. This involvement might be through a franchisee advisory council or marketing committee.

The franchise agreement may outline the franchisee’s involvement in the marketing fund, including any ability to contribute to the decision-making processes and how much they must contribute. Before purchasing a franchise, you might want to seek information about:

• who administers the marketing fund;
• what expenses the fund can be used for; and
• whether the fund is ever audited.

You should provide the above information in your disclosure documents. However, please note that franchisors must only disclose documents to prospective New Zealand buyers if they are a Franchise Association of New Zealand (FANZ) member. In addition, the FANZ obligations do not include obligations concerning marketing funds.

What Are Local and National Marketing Funds?

While you will use most marketing funds for national advertising campaigns, many franchisors suggest or require that their franchisees also have an additional budget for local promotion. Often, this will be indicated as a small revenue percentage. However, in some instances, franchisors will rebate some of the funds to the franchisee’s local marketing to encourage local marketing campaigns.

The emphasis on local marketing campaigns is significant where the franchise’s offerings differ at each location. Some franchisors might even provide expert assistance to help franchisees develop and execute marketing plans locally. 

Key Takeaways 

If you are considering buying a franchise, you must consider the fees you must pay the franchisor. One ongoing cost associated with franchises is the contribution to a marketing fund. Some key things to know about marketing funds include:

• what a marketing fund is;
• where marketing funds come from;
• who controls expenditure; and
• local vs national marketing funds.

If you need assistance understanding the marketing costs associated with franchises, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page. 

Frequently Asked Questions