Recent updates to the Franchising Code of Conduct (‘the Code’) bring welcomed clarity and structure to how specific purpose funds must be managed and disclosed. Previously dealt with under Section 15 – Marketing Fund or Other Cooperative Funds, the revised Code focuses on transparency, accountability, and proper governance of these significant collective resources.
So, what is a Specific Purpose Fund?
Under the Code, a specific purpose fund is a fund:
- Controlled or administered by a franchisor or master franchisor, or by an associate on their behalf;
- Funded by mandatory payments from franchisees (or sub-franchisees) under a franchise agreement; and
- Required to be used for a clearly defined common purpose that supports the operation of the franchised business.
Think of these funds as pooled resources to drive network-wide benefits, where common examples include marketing or advertising funds, technology or system upgrade cooperatives, and training programs.
What Must Franchisors Disclose?
Franchisors are now required to provide detailed disclosure for each specific purpose fund to which a franchisee contributes. This is where things get specific and where franchisees can better understand how their money is being used. The Code mandates that franchisors disclose:
- A clear statement of the fund’s common purpose (e.g., national advertising or group software systems);
- The types of contributors (franchisees, franchisors, associates, or external suppliers);
- The contribution requirements, including how much a franchisee must contribute and whether other franchisees contribute at different rates (such as based on sales or location);
- Who controls and administers the fund, usually the franchisor or an associate to ensure transparency in decision-making;
- A list of permissible expenses, which must align strictly with the fund’s intended purpose.
Under section 31(2), fund administrators must prepare annual financial statements for each financial year, provide a copy of the statement to franchisees within 30 days of preparation and have the statement audited by a registered company auditor, unless exempt under subsection 31(4), and provide the audit report to franchisees within 30 days of receipt.
Clear Reporting, Confident Franchisees!
Franchisees must also be given access to the most recently prepared financial statement for the fund, ensuring ongoing visibility of how their contributions are being used. If the franchisor, master franchisor, or their associate supplies goods or services paid for by the fund, this must be disclosed, including details of the goods or services involved. Finally, franchisors must indicate whether any part of the fund must be spent specifically for the benefit of an individual franchisee’s business or if it is used solely for general network-wide initiatives.