Are Your Advertising Fund Provisions Complete? A Checklist – Advertising, Marketing & Branding | #cybersecurity | #conferences



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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:

  1. What is the rate, or amount, of the contribution required from
    each franchisee?

  2. What are the terms and conditions of payment for this
    contribution?

  3. 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?

  4. 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?

  5. 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?

  6. What can the advertising fund be used for? With the 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:

    1. Design and maintain one or several websites?

    2. Build and maintain technology applications?

    3. Advertise on computer platforms or social networks?

    4. Participate in trade shows, exhibitions, conferences and
      promotional or public relations events?

    5. Design, produce and distribute various tools, and participate
      in activities and events for the purpose of recruiting new
      franchisees?

    6. Develop online sales tools?

    7. Conduct market studies and various marketing or new product or
      service development research?

    8. Donate to or sponsor charitable or community
      organizations?

    9. Establish and maintain a central ordering or customer service
      system (by telephone or computer)?

  7. 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?

  8. 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?

  9. May the franchisor withdraw from the advertising fund various
    costs and expenses of an administrative nature, such as:

    1. Fees or charges for the management of the advertising fund? If
      so, at what rate or in what amount?

    2. Costs for the preparation of any statement or accounting report
      of the advertising fund?

    3. Legal fees for drafting or negotiating any agreement related to
      the activities of the advertising fund?

    4. Legal fees for the collection of any amounts owed to the
      advertising fund?

  10. Can the franchisor make advances to the advertising fund? If
    so:

    1. Who makes the decision to make such advances and in what
      amount?

    2. Do such advances bear interest and, if so, at what rate?

    3. When are such advances, and the interest thereon, to be
      repaid?

  11. 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?

  12. Is the franchisor required to maintain a separate bank account
    for the advertising fund?

  13. Is the franchisor required to report to the franchisees the
    income and expenses of the advertising fund? If so :

    1. How often and when?

    2. In what manner?

    3. In what form?

    4. What is the required content of each report?

    5. What information does not have to be disclosed to the
      franchisees?

  14. Do franchisees need to be consulted on decisions regarding the
    advertising fund? If so, when and how (e.g., through an advertising
    advisory committee)?

  15. Is the approval of the franchisees required for certain
    decisions relating to the advertising fund (e.g., for any increase
    in the required contribution or any special contribution)? If so:

    1. How is this approval to be obtained?

    2. What is the process to be followed to obtain this
      approval?

    3. What proportion of the franchisees is required to obtain this
      approval?

    4. How is this proportion calculated: by franchisee, by location,
      by amount of contributions, or in some other way?

    5. Are businesses operated by the franchisor or an affiliate of
      the franchisor counted in this proportion?

  16. 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?

  17. 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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