Advertising Tips: How to Review Your Franchisor's Advertising Obligations

Bruce Shaefer of Franchise Valuations has a useful pre-purchase tip in his video which discusses how to evaluate the franchisor's ad campaigns. The video is short, but Bruce makes a number of important points -which I am going to expand on in this post.

My summary of his points is this:

1. a key element to a franchise system is that national advertising is available;
2. the costs of the advertising is available through a review of the franchise agreement, FDD, and other sources, but;
3. the effectiveness of the national advertising at the local level has to be judged and evaluated by the operator at that local level.

The local operator has to be able to judge this, otherwise the cost/benefit of this key element cannot be calculated.

Lawsuits over the advertising fund are common within franchise systems, and sometimes a franchisor will charge the advertising fund a substantial commission for placing the national ads.

The cost of the advertising must be throughly scrutinized, but the benefits at the local level are within the purview of the local operator.

Remember that the advertising fund is supposed to benefit both the franchisor, franchisees and the franchise network in general.

Let's examine some of these ideas, by looking at the some of the information concerning Arby's UFOC Filing, 2006, concentrating on Arby's advertising fund, from their 2006 UFOC.

This is a very nice filing because the relevant information from the UFOC is broken up into sections.

But, first, what does Arby's say on its own website about Arby's Franchise Support?

"Marketing Arby's® Marketing Department develops the marketing strategy and annual marketing calendar for the brand. To do this, the marketing team implements primary research, innovative product development, break-through advertising, national marketing, field marketing, impactful merchandising and packaging design. The Marketing Department is a membership corporation, AFA Service Corporation (AFA). Members include the Arby's operating companies and Arby's domestic licensees. While Arby's Restaurant Group provides general managerial responsibility for the day to day operations of AFA, the AFA Board of Directors, made up of Arby's domestic franchisees, approves the annual budget and the marketing plan. With this relationship, each franchise operator has a significant, mutually beneficial relationship with AFA. AFA recommends marketing and strategic direction based on critical input and guidance from each franchise operator. The result is innovative menu offerings, profitable sales, and brand growth".

The critical observation is that: While Arby's Restaurant Group provides general managerial responsibility for the day to day operations of AFA, the AFA Board of Directors, made up of Arby's domestic franchisees, approves the annual budget and the marketing plan. 

Minimally, this is what you need to ensure that the advertising fund is being properly used: an independent corporation with a Board of Directors which includes the franchise operators.

From the UFOC, we can pull out several additional items: Arby's Item 11, the Franchisor's Obligations, in which we learn more about the AFA and how much money they spent last year, 82 cents on the $1 went to advertising.

Arby's Item 6, Other Fees, from which we learn that the overall marketing hit could be as high as 9% or 10%.

Arby's Licensing Agreement, and article 10 spells out exactly what we can expect from Arby's and what we have to do.

News about Arby's Agreement with AFA, which reveals that "ARG has entered into a management agreement between ARG and the Arby's Franchise Association (AFA), Arby's marketing organization. Under the contract, ARG will provide general managerial responsibility for the day to day operations of AFA, and in consultation with the AFA Board, will develop the marketing strategy and annual marketing calendar for the Arby's brand.

Finally, we want to know Who Owns the AFA Website?, and we learn that the franchisor owns it.

How do we begin to analyze this information? Well, one starting point is the AAFD's Fair Franchising Standards, on Advertising.

STANDARD 10.1 USE OF ADVERTISING FUNDS All monies in the advertising fund should be treated as trust funds and must be segregated and kept in a separate account from monies of a franchisor. All monies paid into a franchise system's advertising fund should be used for promoting the brand name of the products and services offered by the businesses in the system to the customers of the business, and reasonably related expenses necessary to protect the integrity of the fund. When a franchisor accepts monies from its franchisees, it is obligated to administer the fund equitably. These funds should not be treated as income to, or as an asset of, a franchisor. Commentary: Because of the obligation to manage the fund, a franchisor remains accountable to its franchisees for the use of and expenditures made from the advertising fund. The committee is split on whether a franchisor should have the right to charge the fund for its direct administrative costs associated with administering the fund, but the committee is in agreement that in no event should any charge be in excess of the franchisors reasonable and direct costs. The existence and amount of any charges by the franchisor in administering the fund should be subject to specific negotiation between the franchisor and its franchisees.

Monies from the advertising fund should not be used to fund franchise sales activities but may be used for media, production and marketing research. A franchisor should provide each franchisee an annual accounting of the fund at the fund's expense. If a franchisor or any parent, subsidiary or affiliated entity of a franchisor operates similar businesses operating under the system and the marks (company-owned units), a franchisor and those related entities should make contributions to the advertising fund in the same proportion as franchisees are required to make.

It is not possible to tell from the public information about the AFA whether Arby's meets this standard or not - but using the Standard, the UFOC, and the Agreement, plus some public information now allows to you formulate and ask the correct questions of the AFA.

For example: does the AFA have audited statements, how many individuals working at Arby's are getting paid by the AFA, does the Board of Directors have access to its own staff or do they simply rubber stamp the marketing proposals?

This type of inquiry can done with a minimal amount of attorney oversight, as long as you are willing to read and think. Good luck!