While the systemwide fund to which franchisees are required to make regular contributions is often referred to as an advertising fund, we encourage you to call it a brand fund as the brand fund is less confusing and broader than advertising. The brand fund is not just advertising but anything involving brand awareness. This includes website development, sponsorships of certain events that use brand monies, public relations, and non-profit fundraising events. For most emerging franchise systems, the brand fund money “creates the creative” on behalf of all franchisees. Each franchisee is responsible for spending their local marketing dollars to push that creative out to the customers in their territory.
Financial Statements
Whether your franchisees have access to the financial statements of the brand fund or not, we recommend that you provide an unaudited statement to any franchisees that request them. This will force you to keep good records and a reminder not to do anything questionable with your brand fund expenditures. Even if you decide not to allow franchisees to see how the fund is spent, at some point, an unhappy franchisee could hire an attorney and force you to produce documentation of where you used the money. Lack of transparency is a sure way to stunt the growth of your system. Instead, get into the habit of being an open book and having the franchisees understand why you are making decisions, where you are spending the brand fund money, and how it will benefit them.
Each year when you update your FDD, you are required to disclose, by percentage, how brand fund monies were spent in the previous fiscal year. You must disclose the percentage spent on production, the percentage spent on media placement, the percentage spent on administrative expenses, and the percentage spent on other use(s) and describe the other use(s).
Waive the Fee?
We hear from new franchisors a common question, “We’re not doing much, so can we just waive the fee for now?” Our advice is to always charge from the beginning. If you wait a few years, franchisees are going to push back and say, “Why should I start paying into the brand fund now? I don’t want to spend money, nor do I see the benefit.”
Remember the long-term value of building the $20 million enterprise. This is one of those areas that’s incredibly important, as it’s challenging to get franchisees who are used to not paying to start paying. If you parked for free for years, how would you feel when you finally had to pay for parking? Even if you knew you were obligated to at some point, human nature says you won’t be happy about it.
See Tom Spadea’s article in the Franchise Dictionary Magazine on “When Should You Start Your Franchise Brand Fund.”
Best Practices
While you may think you don’t have any branding expenditures, in reality, you most likely do. Keep track of all the money spent on creating your brand from day one. This includes developing the logo, building the website, etc. All of this can and should be recouped. In fact, if franchisors really accounted for this, they could show deficit spending in the brand fund for the year, meaning they are going out of pocket to support the brand in the early years. This changes the narrative, from the franchisees not getting value to them getting more value than they are paying for. You should always be making the case of why being part of your system is good for the franchisees, and the brand fund is a great place to get into that habit on day one.
Pay careful attention; if you pay yourself or your employees for conducting advertising, the FDD must specifically state that you can use brand fund money for staff salaries related to advertising. This is an area that we can work on together. Let us know, as your franchise attorneys, what you are doing, where the money is going, and we can help give you the guardrails so you don’t create a problem for yourself down the road.