Can a franchise company invoice its own marketing fund for funds loaned to address a financial shortfall that could hamper marketing activities?
This interesting query came through FASA’s online help-desk and we asked Ian Jacobsberg, Director, Corporate & Commercial, Tabacks for his expert opinion.
In general, the marketing fund is simply a sum of money accumulated by the franchisor from marketing contributions paid by franchisees in terms of their franchise agreements, often augmented by contributions by the franchisor itself.
In terms of the regulations under the CPA, these funds (or at least those collected from franchisees) must be deposited into a separate bank account and used only for marketing purposes. If the franchisor contributes to the fund, that fact must, in terms of the regulations, be disclosed to the franchisees.
However, the bank account and therefore the funds in it, whether contributed by franchisees or the franchisor belong to the franchisor. If the franchisor chooses to contribute to the marketing fund, it would simply be allocating some of its own funds for that purpose. In practice, this would be given effect to by the franchisor’s transferring those funds from another of its own bank accounts to the marketing fund account, which is also its own account.
This cannot be described as a “loan” as only one party – the franchisor – is involved and funds are simply being transferred “from one pocket to another”. If the franchisor subsequently transfers the amount of its original contribution from the marketing fund account to the account from which it was initially transferred, it would not be entitled to add an additional amount in respect of “interest” as the initial contribution was, for reasons set out above, not a loan. What the franchisor is in effect doing is taking funds from the franchisees’ contributions and using them for a purpose other than marketing the brand. This would seem to be in contravention of the regulations.
It is possible that in some cases the marketing fund account is held by an independent, separately administered company, and the franchisee’s contributions are paid to that company. In such cases, it would be theoretically possible for the franchisor to lend money to that company and to charge interest on it. However, this might be problematic in terms of the regulations, which require that the franchisor and/or franchisor associated businesses may not enjoy any direct or indirect benefit from the marketing fund that is not afforded to independent franchisees. Therefore, if the franchisor agrees with the entity that holds the marketing fund account that all of its contributions, whenever made, will bear interest, while the franchisees’ contributions do not, that would appear to be a contravention of the regulation.
An exception may be made where, at any given time, there is insufficient money in the marketing fund account (taking into account both the franchisees’ and the franchisor’s contributions) to finance a particular campaign or initiative. In those circumstances, in order for the campaign or initiative to go ahead, and in the absence of other sources of funding, it might be necessary for the marketing fund account to be overdrawn.
In such a case, the bank at which the marketing fund account is held will inevitably levy interest on the overdrawn amount. If the franchisor in those circumstances contributes the funds that would have had to be borrowed from the bank, and, when the credit balance of the marketing fund allows, recovers interest on the excess amount that it has paid, at a rate not more than the rate at which the bank would have levied it, that would not be in contravention of the regulation. This is because the franchisor is simply recovering an expense that it has covered, for which an interest-bearing loan would have been necessary, and the fund itself is not reduced by any amount more than it would have been had the interest in question been levied by the bank.