Show Me the Money: Marketing Fund Compliance and the 31 October Deadline

The ACCC has once again reminded franchisors that marketing fund compliance is not simply an administrative box-ticking exercise.

Earlier this month, Venue Smart Pty Ltd reportedly paid penalties totalling $59,400 after the ACCC issued three infringement notices for alleged breaches of the Franchising Code of Conduct. Two related to its marketing fund—an alleged failure to prepare the required annual financial statement and an alleged failure to maintain a separate bank account for franchisee contributions.

The third related to an alleged failure to provide the required information for inclusion on the Franchise Disclosure Register before entering into a franchise agreement.

Payment of an infringement notice is not an admission that the Code was breached. Still, the message for franchisors is fairly clear: the ACCC is paying attention to these obligations.

If your financial year ended on 30 June, your annual specific purpose fund financial statement must generally be prepared by 31 October.

That may sound comfortably far away. It really is not.

It may not just be your “marketing fund”

The current Code regulates specific purpose funds, which is broader than the traditional marketing or advertising fund.

Broadly, a specific purpose fund is a fund:

• controlled or administered by or for a franchisor or master franchisor;
• to which franchisees are required to contribute under their franchise agreements; and
• which must be used for a specified common purpose connected with the operation of the franchised business.

Depending on your system, this may include funds for marketing, technology, training, refurbishments, sustainability initiatives or other common projects.

The first step is therefore to identify every fee or contribution you collect from franchisees for a common purpose—not simply the account you happen to call the “marketing fund”.

What does section 31 require?

Under section 31 of the Franchising Code, the fund administrator must prepare an annual financial statement for each applicable specific purpose fund within four months after the end of the financial year.

For franchisors operating on a standard 30 June financial year, the deadline is 31 October.

The statement needs to detail all receipts and expenses of the fund and provide franchisees with meaningful information about:

• where the fund’s income came from;
• what the money was spent on, particularly expenditure relating to the fund’s specified purpose;
• the percentage of the fund’s total income spent on permitted fund expenses; and
• the percentage spent on administering and auditing the fund.

“Meaningful” is important here. A short list of broad categories may not be enough.

For example, if a significant portion of the fund was spent on “social media”, “advertising” or “administration”, the statement should give franchisees enough information to understand what that expenditure actually involved.

The fund administrator must then:

• give a copy of the annual financial statement to each franchisee required to contribute to the fund within 30 days after it is prepared;
• have the statement audited by a registered company auditor within four months after the end of the financial year; and
• give a copy of the auditor’s report to each contributing franchisee within 30 days after receiving it.

The audit is not required if at least 75% of the franchisees in Australia who contributed to the fund during the relevant financial year vote that the fund administrator does not need to have the statement audited.

Importantly, that vote must occur within three months after the end of the financial year. For franchisors with a 30 June year end, the vote must therefore take place by 30 September.

The vote must also occur annually. A vote from a previous year cannot simply be rolled forward.

So, if you plan to seek a vote dispensing with the audit, do not leave it until October. By then, it will be too late.

What does section 61 require?

Section 61 of the Code deals with how money is paid into, held and spent from a specific purpose fund.

In practical terms, there are three main requirements.

Keep the money in a separate account

The fund administrator must maintain a separate account with a financial institution for payments into the fund.

In other words, franchisee contributions should not simply disappear into the franchisor’s general operating account or be mixed with its ordinary business revenue.

Corporate units must contribute too

If the franchisor or master franchisor operates one or more units of the franchised business, it must contribute to the fund for each of those units on the same basis as franchisees.

Corporate stores should not receive the benefit of system-wide marketing or other expenditure without making the same contribution required from franchisees.

Only spend the money on permitted purposes

Regardless of what the franchise agreement says, fund money may only be used to:

• meet expenses of a kind disclosed to franchisees in the disclosure document;
• meet legitimate expenses relating to the fund’s specified purpose;
• meet expenses agreed to by a majority of contributing franchisees; or
• pay the reasonable costs of administering and auditing the fund.

The fact that an expense may generally benefit the franchise system does not automatically mean it can be paid from the fund.

Before allocating an expense to a specific purpose fund, check the purpose of the fund, the terms of the franchise agreement and what you have actually disclosed to franchisees.

Do not forget the disclosure document

The fund statement does not stand alone.

Your disclosure document must accurately describe each specific purpose fund, including:

• its purpose;
• who controls or administers it;
• who contributes;
• how much franchisees must contribute;
• the types of expenses for which it may be used;
• how its annual financial statements are prepared and audited; and
• whether the franchisor, master franchisor or an associate supplies goods or services paid for by the fund.

Prospective franchisees must also be given the most recently prepared annual financial statement for the fund as part of the disclosure process.

The annual statement is therefore a good opportunity to compare what the documents say with what is happening in practice.

The figures and descriptions in the statement should be checked against:

• the franchise agreement;
• Item 15 of the disclosure document;
• the fund’s bank records;
• the franchisor’s actual expenditure; and
• any goods or services supplied by the franchisor or its associates.

If those things do not line up, it is better to identify and address the issue now.

What should you be doing?

If your financial year ended on 30 June, now is the time to:

1. identify each specific purpose fund operated within your system;
2. confirm that each fund has a separate bank account;
3. check that corporate units contributed on the same basis as franchisees;
4. reconcile all contributions, receipts and expenditure;
5. check that each expense falls within a permitted category;
6. gather the invoices, contracts and records supporting that expenditure;
7. decide whether the statement will be audited or a franchisee vote will be sought by 30 September;
8. engage your accountant and, if required, a registered company auditor;
9. prepare a sufficiently detailed financial statement by 31 October;
10. distribute the statement and audit report to contributing franchisees within the applicable 30-day periods; and
11. check your franchise agreement and disclosure document against how the fund actually operates.

This process takes time—particularly if contributions have been mixed with general revenue, expenses have been recorded under broad categories, or the franchise documents no longer reflect what happens in practice.

Sections 31 and 61 are also civil penalty provisions, with penalties of up to 600 penalty units applying to relevant contraventions. As the recent enforcement action shows, getting the paperwork wrong can have very real consequences.

The short version? 31 October is the deadline, not the date to start.

Magnolia Legal assists franchisors with annual Code compliance, disclosure document updates and reviews of specific purpose fund arrangements. If you would like assistance getting everything in order, please get in touch—preferably before the October rush.

This article contains general information only and does not constitute legal advice. Advice should be obtained about your particular circumstances