Franchise advertising funds: what to assess before buying

A well-known brand can help attract customers, but that does not mean all advertising for your future outlet will be covered. In franchising, contributions towards advertising often sit alongside local expenditure and campaign-specific costs. Before buying, establish exactly what you will have to fund, who decides how the money is spent and how you can monitor its use.

1. Identify the fee and its contractual basis

Brazil’s current Franchise Law, Law No. 13,966/2019, replaced Law No. 8,955/1994. Article 2 requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to clearly state the recurring fees and other amounts payable to the franchisor or third parties it designates, detailing how they are calculated and what they cover or are intended to fund. Advertising fees and similar charges are expressly included in this requirement.

It is therefore not enough to see the term ‘advertising fund’ in a sales presentation. Check the COF and the contract for:

• Who must contribute and who receives the payment.
• Whether the charge is fixed, percentage-based or combines different criteria.
• The basis for calculating it and how cancellations, returns and discounts are treated.
• When payment is due and which rules allow adjustments.
• Whether there are minimum payments or extraordinary contributions.

Advertising fees and royalties are not the same charge. The former fund promotional activity; royalties are paid in connection with the rights and obligations set out in the franchise relationship. Even if both appear on the same payment slip, ask for an itemised breakdown.

The law does not set a standard advertising percentage. Prospective franchisees need to assess the terms actually offered by the brand, rather than assume that a particular charge is compulsory across all networks.

2. Separate network-wide advertising from local spending

The fund may pay for activities that benefit the brand as a whole, without providing a dedicated campaign for each outlet. Contributing therefore does not mean that exactly the amount you pay will be spent on advertising in your town or city.

Ask for a description of the permitted expenditure. Depending on the network’s documents, this may include campaign development, agency services, production of materials, digital media and other activities. Also ask whether administrative costs are paid from the fund and how they are identified.

Next, list what will remain the outlet’s responsibility: a launch event, printing materials, local advertising, content production or services approved by the franchisor. Do not assume these examples apply to every franchise; confirm which are relevant to yours.

Create a table with three columns: expense, party responsible for payment and document establishing the obligation. This helps identify overlaps and charges mentioned only during sales discussions.

If there is a minimum local spending requirement, clarify whether it is additional to the collective contribution and what evidence of spending you must provide. Also check who pays for discounts, giveaways and promotional campaign materials. A campaign financed by the fund may still require the outlet to incur additional costs to deliver it.

3. Examine management and financial reporting

The legal obligation to disclose the charge is no substitute for clear monitoring procedures. Ask for the fund’s rules, where these exist, and check that they are consistent with the COF and the contract.

The Franchise Law also requires the COF to state whether there is a franchisee council or association, describe its responsibilities and explain how franchisees are represented in dealings with the franchisor. This includes detailing its powers to manage and oversee the use of money in any existing funds. It does not mean that every network must establish a council.

To assess transparency, request a sample income and expenditure report, with sensitive information protected where necessary. Ask:

• How often are reports made available?
• Is expenditure broken down by campaign, supplier or category?
• Who approves the budget and any changes?
• How are discrepancies raised by franchisees addressed?
• What happens to unspent balances and expenditure above budget?

Do not assume there will be an independent audit, a dedicated bank account or a vote on every campaign. If these safeguards matter to your decision, check that they are expressly provided for. Assess transparency through verifiable procedures, not simply assurances of trust.

4. Use the answers to inform your buying decision

Before signing, calculate the total compulsory advertising cost: the collective contribution, minimum local spending and any other specified expenses. Do this even if the outlet has not yet made any sales, as fixed charges may begin before there is enough revenue to cover them.

Request written clarification of any gaps and have a lawyer you trust review the documents. If a launch campaign or specific benefit has been promised, check its scope, timing, responsible party and conditions in the relevant documents.

Treat provisions allowing additional charges without clear criteria with caution. Equally, do not confuse advertising spending with a guarantee of customers or turnover: your contribution funds activities, not guaranteed commercial results.

In practice: proceed only when you can explain how much you will pay, what that payment funds, which expenses will remain yours and how you will monitor the use of the money.