How Chinese Businesses Can Set Up Separate Accounting and Reporting for Franchise Marketing Fees

When developing an existing business into a franchise network, the franchisor may wish to collect brand marketing fees centrally to fund joint promotional activity. The questions to resolve in advance go beyond how much to charge: which costs can the money cover, who approves spending, and how will its use be explained to franchisees? Establishing verifiable controls while the business still operates company-owned outlets can reduce disputes over spending after expansion.

1. Define the legal and contractual boundaries of marketing fees

China has specific rules governing commercial franchising. Article 17 of the Regulations on the Administration of Commercial Franchises requires franchisors to use marketing and publicity fees collected from franchisees for the purposes agreed in the contract, and to disclose their use to franchisees in a timely manner. Marketing fees should therefore not be treated as general revenue that head office can spend at its discretion.

Here, ‘separate accounting’ refers to a recommended internal accounting arrangement. It does not mean that Article 17 universally requires a separate bank account, a trust or an annual audit specifically of these funds. Businesses can decide whether to open a separate collection account according to their scale, but whichever approach they choose, the accounts should allow funds to be traced to specific uses.

Marketing fees should be included in pre-contract fee disclosures. The Regulations require the relevant information and contract text to be provided in writing at least 30 days before signing. The purposes of the fee should not be left to verbal explanations by franchise recruitment staff, nor described simply as ‘brand building and related expenditure’. The contract should specify the main spending categories, management arrangements and reporting procedures so applicants understand their obligations.

2. Create a clear list of permitted uses

Start by dividing planned expenditure into three categories: permitted, permitted subject to conditions, and prohibited. Then check each item against the contract. Classification should reflect the agreed purposes of the fee, not the budget needs of existing head-office departments.

• Permitted expenditure: For example, consumer-facing brand advertising, production of shared promotional materials and media placements expressly covered by the contract.
• Expenditure permitted subject to conditions: For example, campaigns serving only one city or an allocated share of head-office marketing staff costs. The applicable conditions, calculation basis and approval requirements must be specified.
• Prohibited expenditure: Routine head-office overheads unrelated to the agreed purposes, and other items added unilaterally without agreement.

It is particularly important to distinguish consumer marketing from franchise recruitment. Advertising aimed at entrepreneurs considering a franchise should not automatically fall within the shared consumer marketing budget simply because it uses the same brand name.

For example, if a filming contract covers both a consumer promotional video and a franchise recruitment video, the deliverables and prices should be itemised in advance. This avoids charging the full production cost to the marketing fund afterwards. Where a supplier is a related party, it is advisable to retain a record of the relationship, comparative quotations and the reasons for selection so the transaction can be explained.

3. Create an audit trail from collection through approval to delivery checks

The finance team should maintain separate accounting records for marketing fees, recording each outlet’s payments and the periods they cover, alongside each marketing project’s budget, actual expenditure and remaining balance. Separate accounting means more than creating another spreadsheet: its figures must reconcile with contracts, bank statements, invoices and evidence of delivery.

The following process can be used:

1. The marketing lead proposes a project, setting out its target audience, geographical coverage, budget and expected deliverables.
2. Finance checks the available balance, spending category and cost allocation basis, confirming that the proposed use complies with the contract.
3. Procurement proceeds after approval under the internal authorisation rules. The person proposing the project should not be solely responsible for every approval and delivery check.
4. Once the advertising or production work is complete, retain publication records, delivered files and acceptance records before settling payment.

These are recommended management controls, not procedures individually prescribed by the Regulations. Businesses should simplify implementation to suit their size, but should not omit checks on permitted uses or supporting evidence for expenditure.

For projects spanning reporting periods, distinguish between amounts paid, costs incurred and amounts committed but not yet paid. Paying a full year’s media costs in advance does not mean all the advertising has been delivered. Equally, a supplier refund that has not yet been received should not simply be counted as available funds.

4. Make spending reports answer franchisees’ practical questions

The Regulations require timely disclosure of how fees are used, but Article 17 does not prescribe a standard reporting interval. Franchisors can agree regular reporting in the contract and provide separate explanations for events such as the cancellation of a major project or a substantial budget overrun. An agreed reporting schedule should not become a reason to delay disclosure of important developments.

A useful report should include, at a minimum, the opening balance, fees collected during the period, expenditure by category, outstanding project commitments and the closing balance. For regional campaigns, it should also explain which outlets are covered and how costs are allocated, rather than presenting only a nationwide total.

Reporting on marketing results can include the channels actually used, the number of creative assets produced, and verifiable reach or store-visit data, with an explanation of how the figures were measured. Do not attribute all growth in outlet sales directly to advertising, or confuse poor campaign performance with improper use of funds: the former calls for a review; the latter requires investigation and correction.

The contract should also address how surplus funds are carried forward, how accounts are settled when an outlet leaves the network, and how franchisees can raise accounting queries, including response deadlines. For sensitive documents such as third-party quotations, appropriate inspection arrangements can be provided rather than refusing all explanation on grounds of commercial confidentiality.

Practical takeaway: Before formally collecting marketing fees, test the permitted-use list, project approval records and spending report on a real campaign involving company-owned outlets. The system is ready to roll out across the franchise network only when every item of expenditure has a clear basis, supporting evidence and an explanation of which outlets it benefits.