How is a Franchisee Involved in a Franchisor’s Marketing Fund?

The funds collected to market or advertise a franchise are important to business growth, but are often a controversial subject between franchisees and franchisors. While marketing efforts, such as TV, social media, radio, and mail, are often decided by the franchisor, franchisees don’t always agree with those chosen strategies. And since franchise agreements are often vague regarding provisions to marketing funds, franchisors have the ability to use funds in a variety of ways.

Both parties have a vested interest in marketing the franchise successfully. Franchisors may feel like brand experts. They know which customers to target, and they have the research and experience to target them. On the other hand, franchisees know their specific clientele very well and have expertise in their particular business and specific geographic location. While both have helpful insight to contribute to marketing and advertising efforts, they don’t always see eye to eye.

Below, we’ll discuss a franchisee’s involvement in a franchisor’s marketing or advertising fund and their role in how marketing funds are spent.

The Role of the Franchisee in a Franchisor’s Marketing or Advertising Fund

Typically, franchisors own the trademarks essential to the brand, and this means that they often control the advertising and marketing funds. How much or how little input franchisors seek from franchisees varies greatly. Both parties are motivated for the franchise to succeed. Still, while it’s valuable to listen to franchisees as they often interact with clients daily, the collaboration between the franchisee and franchisor can often be one-sided. This is why it’s essential to make sure any disclosure documents and the franchise agreement clearly lays out details concerning the decision-making process in relation to marketing and advertising.

A few examples of how the franchisee’s role can vary drastically can be found in the following examples:

• AAMCO: This example leans in the franchisee’s favor. Franchisees in the AAMCO system select 15 people out of an 18-member National Creative Committee, which decides the amount of money contributed to the National Creative Advertising Fund. This fund picks the ad agency and approves commercials.
• KFC: The KFC National Council and Advertising Cooperative, Inc. administer national advertising. KFC Franchisees have the benefit of a 13-to-4 advantage in this committee. Out of 17 voting members, twelve are elected by franchisees. However, there is also a sub-committee that favors the franchisor and gives them the right to approve matters relating to national advertising and marketing. This sub-committee is comprised of three franchisor members and only two franchisee members.
• Hardee’s: This franchisor-friendly model is more common than the above two examples. Here, a franchisor has sole discretion regarding the use of marketing and advertising funds. Hardee’s National Advertising Fund is able to use the money any way they see fit. There is no franchisee council that advises the franchisor on any marketing policies.

While the above examples are very specific, many franchisors will maintain control of marketing and advertising funds but allow and welcome the franchisee’s input. Often, this is set up through a franchisee advisory committee or council. In this instance, membership and duties will be detailed in the franchise agreement.

Franchise Cooperatives, Committees and Councils Managing Marketing Funds

It’s important to note that franchise laws and regulations specific to each state may require state-specific advertising. And what might work for one franchise in New York may not work for a related franchise in Los Angeles. For example, an ad highlighting the cold winter season on the east coast wouldn’t hit the same in sunny southern California. Money spent on advertising needs to adapt to legal and environmental factors, which is why cooperative, committees and councils are formed at the regional and local level.

A great example of this is Massage Envy. Each franchisee of Massage Envy is required to give 2 percent of their gross sales to Massage Envy’s Marketing Fund. The franchisor has complete control of this fund, but franchisees (in 2017) created a national advertising cooperative, governed by a committee with 12 members—six appointed by the franchisor and six appointed by the franchisee. This equal committee requires the approval of nine members for any and all annual marketing plans which involve finances above the mandatory 2 percent required for the Marking Fund. And since these franchisees are required to spend at least six percent of yearly gross sales on marketing and advertising, the franchisees have found a way to influence how a majority of that money is spent.

Hardee’s system (mentioned above), relies on heavy franchisor control when it comes to the franchisee’s involvement in marketing funds. But while the 2018 franchise agreement states that Hardee’s franchisees were required to spend a minimum of 1.25 percent of annual gross sales on local marketing, those franchisees have flexibility regarding how they spend money for local marketing.

As you can see, a franchisee’s involvement in a franchisor’s marketing plan can vary greatly, especially when considering cooperative, committees and councils.

Structure of Councils, Committees, and Cooperatives Managing Marketing Funds

While the structure of franchise entities can vary, it’s important that any group making decisions about marketing remains diverse.

Franchise systems spread throughout the U.S. should choose representatives from different geographic regions. Within those geographic regions, individuals should be picked in order to represent different urban, suburban, and rural markets.

Similarly, franchisees with a sizeable financial investment will want to be involved in marketing and advertising decisions, especially if they are backed by private equity. That being said, franchisees with single businesses who have invested personal wealth should also not be ignored.

These franchisees often have very valuable information as they are on location and have unique insight as they interact with customers on a daily basis.

The bottom line is that a diverse group will reflect the opinions of a greater audience.

Work with an Experienced Franchise Attorney

Both franchisees and franchisors have a vested interest in funds used for marketing and advertising. In some cases, this shared interest may cause conflict. Hiring an experienced franchise attorney can help you understand the role of a franchisee’s involvement in a franchisor’s marketing and advertising fund and provide useful insight into the complexity of franchise law. Contact us to schedule a consultation.