Advertising / Marketing Fees paid to Franchisor

Beginning a new franchise can be extremely challenging, making the professional advice of a franchise lawyer invaluable.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Advertising and marketing fees are a critical part of the financial structure of a franchise, with advertising / marketing fees providing a collective marketing fund that benefits the entire franchise system (are typically separate from the ongoing royalty fees).

• Average Advertising /Marketing Fee: The most common method for charging an advertising fee is as a percentage of the franchisee's gross sales. The typical range for this fee is 1% to 4% of gross sales.

• How the Advertising Fund Works:

  • Pooled Funds: The fees collected from all franchisees are pooled into a central advertising fund. This allows the franchise system to afford large-scale marketing campaigns—such as national or regional television, radio, or digital advertising—that would be too expensive for a single franchisee to undertake on their own.

  • Separation of Funds: A best practice for franchisors, and often a legal requirement, is to keep the advertising fund in a separate account from the franchisor's general revenue. This ensures the money is used for its intended purpose: marketing the brand.

  • Franchisor's Discretion: While the fund is for the benefit of all franchisees, the franchisor generally has the discretion to decide how the money is spent. This is often outlined in the Franchise Disclosure Document (FDD) and the franchise agreement. The franchisor's goal is to allocate funds in a way that maximizes the overall benefit to the brand, which may not always be in direct proportion to a single franchisee's contribution.

• Individual Franchisee Commitment: In addition to the pooled advertising / marketing fees, certain franchisors may require the franchisee to commit to a certain minimum expenditure on local advertising / marketing.

Prospective franchisees need to understand that there can be multiple layers to marketing obligations:

• National/Regional Advertising Fund Contribution: This is the most common fee, a percentage of sales paid into the collective fund.

• Local Marketing Obligation: Many franchise agreements also require franchisees to spend a certain amount of money on their own local marketing efforts. This is typically a percentage of sales (often 1% to 3%) that the franchisee must spend in their own territory on things like local sponsorships, flyers, or search engine optimization.

Before investing in any franchise, it is crucial to carefully review the Franchise Disclosure Document. The franchise disclosure document (and reiterated in the franchise agreement), which is a legal requirement in many Canadian provinces, provides a detailed breakdown of all fees, including initial costs, ongoing royalties, advertising / marketing fees, and other charges.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Key Aspects of a Franchise Disclosure Document: A Franchise Disclosure Document is a crucial legal document in Canada that provides a prospective franchisee with essential information about a franchise system. The franchise disclosure document is intended to help the potential franchisee make an informed investment decision. Read more.

 

Key Aspects of a Franchise Agreement: A franchise agreement is a legally binding contract that governs the relationship between a franchisor and a franchisee, which is drafted strongly in favour of the franchisor (as they are in a position to heavily dictate the franchise arrangement that they offer to prospective franchisees). While the specifics can vary, there are several key aspects that are almost always included. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.