Have no fear

How to ensure your marketing budget doesn't run away with you. Manzoor Ishani reports

 

It is accepted practice in franchising that the responsibility for advertising, marketing and promoting the franchisor's brand and concept rests with the franchisor. Much depends on the type of business, but generally the franchisor does this in return for payment from the franchisee on a regular basis. This is usually a specified sum or an ongoing fee on a royalty basis. Typically if a franchisee was required to pay 10 per cent of its gross turnover as an ongoing franchise fee, the requirement for making a contribution to the fund would be in the region of one to 2.5 per cent.

An ethical franchisor will ensure that the money received is placed in an account, which is kept separate from all its other business accounts, and the money in any such account is used only for the purposes of advertising, and promoting the franchisor's brand and concept.

This can include the establishing and maintening a website and the printing of point of sale material, brochures, product catalogues, all of which franchisees can either receive without further charge (in certain minimum quantities) or purchase from the franchisor. The fund should not constitute a pool of money into which a franchisor can dip from time to time to solve its cash flow problems, or indeed for the purpose of recruiting new franchisees!

In theory, over a short-term cycle of two to three years the cost of advertising, etc, would be covered by the fund. In some years there would be a surplus and in other years there might be a small over-spend. In some cases a franchisor will purposely accumulate a surplus in order to finance an expensive promotion in the near future, say to pay for a radio commercial.

However, in practice, few franchisors find that there is enough money in the fund to pay for the things that they genuinely feel they need to do to promote the brand and the concept. Indeed a straw poll (conducted by the writer) of 10 franchisors of various sizes and stages in their development, from a franchisor whose shares are quoted on the London Stock Exchange to one who has been operating a job franchise for no more than three years, only one franchisor said there was a surplus in the advertising fund and that surplus was generally very small, indeed far too small to create any accounting or taxation problems.

The other nine, without exception, have in every year hugely overspent their fund and as a consequence have been subsidising the fund so that whenever the money ran out, the franchisor made good the deficit out of its own resources.
In two cases the franchisors admitted they had hoped to recover the overspend from future contributions, but this had yet to happen. It was their belief that as the network grew, the fund would also grow, but in their experience so does the advertising spend with a result that there is never really any catching up!
It has to be said that not all franchisors follow this route. Some franchisors leave the question of advertising entirely to their franchisees, either giving them a free hand in terms of expenditure or alternatively agreeing with them a marketing plan with a legal obligation on the part of the franchisee to follow it.

Some franchisors have a system of sharing the burden, so that the franchisor is under an obligation to undertake certain basic advertising (again to be paid by franchisees making contributions to a fund) but there is also an obligation on franchisees to expend certain amounts on local advertising to promote their own businesses.

There is no hard and fast rule and each franchisor must examine its business closely to see the degree to which the success of its franchisees is dependent upon advertising and to try to find a structure, which suits both franchisor and franchisee. There is no doubt that the conducting of advertising, marketing and promotions centrally can bring enormous benefits in terms of economies of scale and franchisees certainly get a bigger bang for their bucks than if they were to go it alone.

The writer knows of at least two franchisors who have gone back to franchisees and have agreed with them an entirely different structure. In other cases franchisors have asked franchisees to make one-off payments to pay for one-off promotions or campaigns.

Where there is a consistent overspend, the franchisor needs to decide whether returns on advertising are such that it should continue to subsidise its franchisees, whether it can cut back on its advertising to an acceptable level or meet its franchisees, explain its dilemma and reach some sort of accommodation with them. It may be that it will be a combination of one or more of these, but the lesson to be learned is that it is essential to spend time planning this side of the business in order to get the figures right at the outset.

In the current climate, businesses should be increasing their advertising and marketing spend rather than shrinking it.