Advertising: who pays for it?

One of the Golden Rules of franchising (there are many!) is that all franchisees should be treated the same and that is one of the reasons why franchisors don't negotiate individual franchise agreements. Franchise agreements are the same for all franchisees as are their terms. This includes payment terms. They are all required to pay ongoing franchise fees at the same rate and the same applies to their advertising contributions.

So, all the money that franchisees contribute (and incidentally, most franchisors also contribute on the same basis as their franchisees) goes into an advertising fund. The franchisor, sometimes with advice from a marketing committee, which usually includes franchisees, administers and manages the fund and uses it for advertising, marketing and promoting the brand and the network as a whole. The money is kept separate from the franchisor's money and at the end of each financial year the franchisor gives an account of the movement of monies in that fund to its franchisees. So far, so good. However, there may be occasions when one or more franchisees claim that the franchisor is misusing the advertising money by not spending it for 'its intended purpose'.

It is not uncommon for franchisees who are in dispute with their franchisor to make such allegations - after all, they are easy enough to make. Advertising, marketing and promotions is by nature a flexible concept. The purpose to which advertising monies are put and the effect is subjective. Clearly there are items of expenditure that have the effect of 'benefiting the network as a whole' and in such cases franchisees will agree that there is nothing wrong with that.

However, advertising money is also spent by franchisors on other things such as advertising in local newspapers, publishing entries in local directories etc. Not all franchisees benefit equally or to the same extent from such initiatives. One franchisee may get good customer response from an advertisement placed in a local newspaper whereas another, whose territory or trading location may also be within the circulation area of the same newspaper, may receive a much smaller response for different reasons, but may benefit from a better customer response than his or her neighbour from an entry in a trade directory.

Other cases are not so simple. For example, a franchisee may experience a downturn in trade because of the arrival of local competition, and in those circumstances many franchisors consider it their duty to help boost that franchisee's turnover by increasing advertising and marketing activity in his area, the cost of some of which might be paid out of the advertising fund, bearing in mind that such increased activity will have the wider effect of raising the profile of the brand generally.

The purpose behind an arrangement of centralised advertising, marketing and promotions funded by contributions from franchisees has never been that each franchisee should receive precisely in terms of advertising spend or value the equivalent of his or her contribution. What most franchisees are (and should be) concerned with is that money in such a fund is not used for any purpose other than that intended, such as entertaining business associates, suppliers, etc. As in most things there are grey areas, for example should a franchisor use the advertising budget to pay for a stand at a franchise exhibition where the main purpose of the franchisor is usually to recruit franchisees?

Some franchisors would argue that this is a legitimate expenditure because the presence of the franchisor is enhancing the reputation of the brand. Theoretically franchisees will ultimately benefit not only from the exposure of the brand but also from the fact that a successful recruiting programme makes for a bigger network, which in turn benefits the franchisees. Others would argue vociferously that the funds for such a venture should come out of the franchisor's pocket because whatever benefit created for the franchisee is essentially going to be a spin-off from the main objective.

If there is any doubt in its mind that its motives may be questioned, franchisors should sound out franchisees prior to making any large capital expenditure out of the advertising fund.

A straw poll recently conducted by the writer of a range of franchisors of various sizes, from small businesses to those quoted on the London Stock Exchange, revealed that with the exception of one franchisor, all the others subsidised their advertising, marketing and promotions fund, in many cases by sums well into five figures. In these circumstances questions such as who should bear the cost of a website would seem to be academic.
What is absolutely clear is that when it comes to dealing with advertising money, 'transparency is the key'.