In addition to the initial franchise fee and to the royalty, the vast majority of franchisors require their franchisees to make a contribution (often calculated, like the royalty, on the basis of a percentage of the gross revenues of the franchised business) to a joint advertising fund.

As the name implies, this fund is primarily intended for the joint advertising and promotion of the franchise network and its franchisees on a regional, provincial or national basis.

For a long time, the question of expenses paid out of this joint advertising fund did not really arise: they were promotional and advertising expenses.

Over time, however, a number of questions have arisen in this regard, including:

  1. Can the franchisor charge a management fee for this fund?
  2. What about professional fees (e.g., accountants and tax specialists) incurred in the management of this fund?
  3. If there is a budget deficit in the joint advertising fund, can the franchisor make advances to the fund? If so, how can the franchisor reimburse itself for such advances and, more importantly, can it also claim interest on such advances?

    Subsequently, particularly with the rise of websites, social networking and e-commerce, other issues have arisen, including:
  4. Can the costs of designing, putting up, maintaining and managing the franchisor's website be allocated to the joint advertising fund (even though, to some extent, the website is also used to recruit new franchisees)?
  5. Can the costs of ensuring an appropriate social media presence for the network, as well as the costs of monitoring social media, be allocated to the joint advertising fund?
  6. What about the significant costs of setting up an e-commerce platform, as well as an entire e-commerce system (especially where the franchisor also profits from online sales)?

More recently, the whole question of expenses allocated to the joint advertising fund of several networks has become even more complex, particularly because the Internet and social networks know no boundaries.

As a result, the distinction between local advertising expenses (generally done by the franchisee at its own expense) and regional, provincial and national advertising expenses done by the franchisor out of the joint advertising fund is becoming less and less clear, particularly for online activities (e.g., on social networks) and for charitable or public relations activities (e.g., participation in a major charity).

Beyond all of the above, some franchisors have taken their reasoning for allocating expenses to the joint advertising fund a bit too far. As an example, let's imagine the case where the franchisor in charging its legal fees related to litigation against a franchisee to the joint advertising fund (on the basis that it helped to maintain the strength of the franchise network).

What to do?

Here are five practical tips on what expenses a franchisor can charge to a joint advertising fund:

  1. The first and most important tip is to ensure that the franchise agreement clearly and completely sets out the expenses that may be allocated by the franchisor to the joint advertising fund;
  2. In making a decision as to whether to allocate an expense to the joint advertising fund, the franchisor should be guided by the principle that expenditures from the advertising fund are an investment which, like any other investment, must produce a return on the sales or profits of the franchised businesses;
  3. The franchise agreement should also clearly state what fees and administrative costs are allocated to the joint advertising fund.

    In this regard, in order to avoid any questions or debates on the subject, many franchisors set these fees at a percentage (e.g., 15%) of the contributions to the joint advertising fund;
  4. The agreement should also address the advances that may be made by the franchisor to the joint advertising fund and the interest payable on such advances;
  5. The franchise agreement should clearly specify the information that the franchisor will provide to its franchisees regarding the management and use of the joint advertising fund.

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.