How to Prepare for a Franchise Marketing Audit?
- Bane Franchising & Commercial Lawyers
- Jul 18, 2024
- 4 min read
“You have to spend money to make money.”
This quote fits well into the franchising world, where the franchise has a dedicated marketing fund for various marketing activities, such as campaigns, advertising, building a brand image, creating awareness, and eventually expanding!
While the franchisor or its fund administrators manage the marketing fund, the franchisees are obligated to contribute a certain amount. However, franchisees have no idea how marketing funds are being used on a day-to-day basis.
Accordingly, to maintain the transparency and trust of the franchisees, an annual franchise marketing fund statement is prepared and shared with them. Further, the statement is audited by a company registered auditor to ensure that the marketing fund has been allocated appropriately and is used for legitimate marketing expenses as agreed upon by the franchisees.
What are the payment regulations related to franchise marketing funds?
Clause 31 of the Franchising Code of Conduct discusses ‘payments to and from marketing funds’, the initial preparation required for creating a marketing fund, and how the marketing fund amounts will be used. To understand the requirements, please refer to the following pointers:
If the franchise agreement requires, the franchise is directed to pay money to a marketing fund controlled by the master franchisor/franchisor.
The marketing fund must be maintained in a separate bank account.
Irrespective of the franchise agreement, the find administrator must utilise the payment to meet the expenses disclosed under paragraph 15.1 (f) of Annexure 1, of the Franchising Code of Conduct which are legitimate expenses that have been agreed upon by the majority of franchisees that contribute to the marketing fund.
Lastly, the funds are used to make reasonable costs of administering and auditing the franchise marketing fund.
What is the obligation of the franchisor related to marketing fund audit?
Clause 15 of the Franchising Code of Conduct lays down the following obligations of the franchisor related to marketing fund audit:
The franchisor must prepare a marketing fund financial statement mentioning the fund receipts and expenses made in the previous year within four months of the end of that financial year (by October each year).
Once received, the franchisor must give the franchisee a copy of the audit report of the marketing fund, within 30 days of the fund administrator/franchisor receiving the report (irrespective of point 1 above).
The costs of conducting the marketing fund audit may be paid by the monies in the marketing fund, as per Clause 31 (4).
The marketing fund financial statements must be audited independently unless 75% of the franchisees vote against it. The voting must be conducted among franchisees every year within three months after the end of the financial year.
What additional details need to be added in the disclosure document related to the marketing fund?
The disclosure documents and key fact sheet need to be in tandem. The disclosure document must be prepared according to Annexure 1 of the Franchising Code of Conduct and must have the following information as regards to the marketing fund:
The kinds of persons who contribute to the fund (for example, franchisee, franchisor, outside supplier);
how much the franchisee must contribute to the fund and whether other franchisees must contribute at a different rate;
who controls or administers the fund;
whether the fund is audited and, if so, by whom and when;
how the fund’s financial statements can be inspected by franchisees;
the kinds of expense for which the fund may be used;
the fund’s expenses for the last financial year, including the percentage spent on production, marketing, administration and other stated expenses;
whether the franchisor, master franchisor or an associate of either of them supplies goods or services for which the fund pays and, if so, details of the goods or services;
whether the franchisor or master franchisor must spend part of the fund on marketing or promoting the franchisee’s business.
What if I don’t file my franchise marketing fund statements for the audit as per the Franchising Code?
As per clause 15(4), non-compliance with filing a franchise marketing fund statement for the audit as per the Franchising Code of Conduct attracts 600 penalty units.
Leading cases of non-compliance on Franchise Marketing Fund statements for audit as per Franchising Code
Delicia Case
Delicia Franchising Pty. Ltd is an example of heavy penalties imposed on a company that failed to deliver the annual marketing fund financial statement in 2022. The ACCC also found that they provided insufficient details about fund receipts and expenses to franchisees since 2020 and delayed audit reports.
Delicia paid a penalty of $11,100 for failing to serve a financial statement at the year-end of 2022 and had to provide an undertaking, admitting to breaching the Franchising Code of Conduct for providing insufficient details.
UtraTune Case
Ultra Tune is the second-largest motor vehicle repair and maintenance company in Australia, with over 270 service centres. It failed to comply with the disclosure clauses and provide sufficient information regarding the marketing fund expenditures, attracting a judgment penalising it for $2,604,000.
However, this was reduced to $2 million after it was determined that the cause of such a breach was not deliberate actions but ‘egregious inadvertence.’
Along with this hefty penalty, they were also ordered to refund prospective franchisees' deposits, publish correct advertisements, and implement a compliance program.
Quick Checklist to ensure that you are all set for your franchise marketing audit
If you tick each of the following boxes for your marketing fund statement, you are ready to submit it for audit.
It is simple to read and doesn’t contain jargon that is only understandable to accounting professionals.
It gives meaningful information about the expenses.
It has the additional details as required by clause 31 of the Franchising Code of Conduct.
Conclusion
Preparing a franchise marketing audit is important for maintaining franchisee trust, ensuring compliance, and projecting a positive image. While the details that need to be included are given in the Franchising Code of Conduct, the documents containing the information related to franchise marketing funds differ between franchise systems.
For this reason, it is important to talk to an experienced franchise lawyer in Australia who can give guidance on how to prepare for a franchise marketing audit and help you complete the necessary documentation.
Ready to get your franchise marketing statement and audit prepared and submitted on time?
Schedule a consultation with Bane Franchising & Commercial Lawyers today, and let us handle the rest!
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