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For some drafters of franchise agreements, the provisions relating to a network’s advertising fund are similar from one network to another and do not require any particular attention.
Shouldn’t they simply stipulate the obligation of each franchisee to contribute to an advertising fund managed by the franchisor, the rate (or amount) of the advertising contribution and the terms of payment, somewhat like a royalty?
In reality, this is far from sufficient!
In recent years, advertising funds and their management by franchisors have been the subject of increasing questioning, and even disputes, by franchisees and franchisees’ associations.
One of the main causes of these questions and disputes often results from the fact that the franchise agreement is silent on several issues related to the management by the franchisor of the advertising fund.
Does your franchise agreement cover the main issues related to the management of your advertising fund?
To find out, here is a checklist of questions to which you should be able to find clear answers in your franchise agreement:
- What is the rate, or amount, of the contribution required from each franchisee?
- What are the terms and conditions of payment for this contribution?
- If the franchisor, or a company related to the franchisor, operates one or more businesses in the franchisor’s network, is the franchisor also required to contribute the same amount to the advertising fund for its businesses?
- Can the rate, or amount, of the contribution to the advertising fund be changed if needs or circumstances require? If so, who can initiate such a change, who must approve it, and what process must be followed to do so?
- Similarly, can a special contribution be required from franchisees in certain circumstances? If so, what is the decision-making process for establishing, and approving, such a special contribution?
- What can the advertising fund be used for? With rapid development of new forms of advertising, promotion and communication using technology (such as the Internet, social networks, various marketing platforms, the metaverse, etc.), this question will become increasingly important for many networks. As examples, can the advertising fund be used to:
- Design and maintain one or several websites?
- Build and maintain technology applications?
- Advertise on computer platforms or social networks?
- Participate in trade shows, exhibitions, conferences and promotional or public relations events?
- Design, produce and distribute various tools, and participate in activities and events for the purpose of recruiting new franchisees?
- Develop online sales tools?
- Conduct market studies and various marketing or new product or service development research?
- Donate to or sponsor charitable or community organizations?
- Establish and maintain a central ordering or customer service system (by telephone or computer)?
- Are amounts held in the advertising fund to be invested in advertising within a specified period of time (for example, within a fiscal year)? If so, what is that period?
- Are amounts held in the advertising fund to be invested in advertising within a specified territory (for example, within a region or province)? If so, what is that territory?
- May the franchisor withdraw from the advertising fund various costs and expenses of an administrative nature, such as:
- Fees or charges for the management of the advertising fund? If so, at what rate or in what amount?
- Costs for the preparation of any statement or accounting report of the advertising fund?
- Legal fees for drafting or negotiating any agreement related to the activities of the advertising fund?
- Legal fees for the collection of any amounts owed to the advertising fund?
- Can the franchisor make advances to the advertising fund? If so:
- Who makes the decision to make such advances and in what amount?
- Do such advances bear interest and, if so, at what rate?
- When are such advances, and the interest thereon, to be repaid?
- Is the franchisor required to maintain a separate accounting of contributions payable and paid to the advertising fund and expenses and disbursements made from that fund?
- Is the franchisor required to maintain a separate bank account for the advertising fund?
- Is the franchisor required to report to the franchisees the income and expenses of the advertising fund? If so :
- How often and when?
- In what manner?
- In what form?
- What is the required content of each report?
- What information does not have to be disclosed to the franchisees?
- Do franchisees need to be consulted on decisions regarding the advertising fund? If so, when and how (eg, through an advertising advisory committee)?
- Is the approval of the franchisees required for certain decisions relating to the advertising fund (eg, for any increase in the required contribution or any special contribution)? If so:
- How is this approval to be obtained?
- What is the process to be followed to obtain this approval?
- What proportion of the franchisees is required to obtain this approval?
- How is this proportion calculated: by franchisee, by location, by amount of contributions, or in some other way?
- Are businesses operated by the franchisor or an affiliate of the franchisor counted in this proportion?
- Do franchisees, or their representatives, have access to the books, records and other documents of the advertising fund? If so, how often and in what manner?
- At the end of the term of a franchisee’s franchise agreement, is the franchisee entitled to recover the unexpended balance of its contributions to the advertising fund?
If your franchise agreement does not provide a clear answer to each of these questions, it may be time to review and update it.
It is important to note that this list is not exhaustive. Some issues specific to certain industries and the way certain franchisors operate are not addressed.
This is particularly the case for those few franchisors who use a separate entity (for example, a related company or a franchisees’ cooperative) to manage the advertising fund of their network. Such a structure requires a few specific clauses in the franchise agreement as well as an agreement between the franchisor and this separate entity.
This is also the case for franchisors who use more than one advertising funds (for example, regional advertising funds) which also require additional specific clauses.
In any event, it is always preferable to call upon the services of lawyers who are experts in franchising to draft these provisions (as well as any franchise agreement).
Fasken has all the expertise and resources necessary to help you draft complete and appropriate agreements that protect your rights while avoiding potential pitfalls.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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