Thursday, 11 January 2018

Can Consultants Fees be paid out of a Franchise Marketing Fund

Under clause 15 of the Franchising Code of Conduct ("the Code"), where a Franchisor operates a Marketing Fund, the Franchisor is required to provide each of its Franchisees with an annual financial statement detailing all of the fund’s receipts and expenses.

This statement must be provided no later than 31/10/XX in each year and detail the previous financial year fund’s receipts and expenses.

There are also auditing obligations around the Marketing Fund, which may need to be met depending on voting, as further set out in the Code.

Clause 15 goes onto say that the statement must include sufficient detail of the fund’s receipts and expenses so as to give meaningful information about: 

(a) sources of income; and 
(b) items of expenditure, 

particularly with respect to advertising and marketing expenditure.

However, clause 15 itself does not go into any detail about what types of income and expenses need to be listed. The clause just says there needs to be sufficient detail.

Clause 31 (3) does state though that marketing fees or advertising fees may only be used to:

(a) meet expenses that:

(i) have been disclosed to franchisees in the Disclosure Document; or

(ii) are legitimate marketing or advertising expenses; or

(iii) have been agreed to by a majority of Franchisees (e.g. over 50%); or

(b) pay the reasonable costs of administering and auditing a Marketing Fund.

Based on the above, a question arises as to whether "wages" of "consulting fees" paid to an employed salesperson or a contracted salesperson (consultant) are a form of marketing or advertising expense ?

Looking at the Oxford Dictionary definitions:

(a) "Marketing" means - the action or business of promoting and selling products or services, including market research and advertising;
(b) "Advertising" means - the activity or profession of producing advertisements for commercial products or services; and

(c) "Expense" or "Expenses" means - the cost incurred in or required for something or the cost incurred in the performance of a person's job or a specific task.

Adopting the Oxford dictionary definitions it is arguable that an expense incurred (eg. wages or consulting fees of a salesperson) in order to provide services relating to promoting and selling the brand overall or products and services connected with the brand is a form of marketing expense, in terms of what is captured under the Code.

The next question to ask is:- what are legitimate marketing or advertising expenses ? This phrase is not defined in the Code. As a result, it is necessary in considering legitimacy of expenses to assess whether the expense is "reasonable" in the circumstances. That is, the question of reasonableness is an objective one, requiring a consideration of all relevant circumstances to determine the fairness of a decision or action.

From a practical perspective, if a Franchisor were to use the Marketing Fund proceeds toward engaging one or more salespeople it will be important to assess the reasonableness of that decision, taking into account factors, such as:

(a) how many salespeople are being engaged;

(b) what locations will the salespeople provide their services (eg. is it feasible that the salesperson can divide their time so that each Franchisee obtains an equal benefit from the salesperson's efforts);

(c) exactly what will be the scope of work that the salespeople will undertake;

(d) is there enough money in the Marketing Fund to pay for the salesperson's wages/or consulting fees ?

In summary,  (depending on the circumstances) the costs (wages/consulting fees) maybe a legitimate marketing/advertising expense and can be paid for out of the Marketing Fund.

It is important of course to obtain appropriate legal advice in relation to these types of issues.

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The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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