Managing and Disclosing Marketing Fees Before Launching a Franchise in China

When businesses prepare to turn an existing operation into a franchise network, they often discuss marketing budgets first and overlook how the money will be managed once collected. Shared marketing does not give head office unrestricted discretion over the funds. This guide focuses on the use, accounting and disclosure of marketing fees, helping businesses establish practical, verifiable procedures before their first franchisees join.

1. Turn legal duties into clear spending boundaries

Article 17 of China’s Regulations on the Administration of Commercial Franchising requires franchisors to use marketing and advertising fees collected from franchisees for the purposes agreed in the contract, and to disclose their use to franchisees in a timely manner. Management therefore needs to focus not just on the fee level, but also on whether actual spending matches the agreement and whether franchisees can see where the money has gone.

The contract should do more than state that the fees are “for brand building”. Head office should first list the activities it intends to undertake, then specify which costs the fees may cover. Consumer advertising, the production of shared marketing materials and joint promotions across franchised outlets could each have their own category. Advertising to recruit franchisees, shareholder events and routine expenses unrelated to the agreed marketing purposes should not be mixed into the shared marketing accounts.

If the fees are intended to cover in-house design staff, campaign management charges or payments to related-party service providers, the agreement should establish in advance whether these costs are included, how they are calculated and how they can be verified. They should not be justified after payment simply as something “the brand needed”.

Prepare a schedule of permitted uses showing each spending category, its scope, the person authorised to approve it and the supporting documents required. The contract sets the spending boundaries; the schedule applies those boundaries to each payment.

2. Agree cost-sharing rules for joint marketing and individual outlet campaigns

National campaigns will not necessarily generate the same customer footfall for every outlet, while local promotions may cover only some franchisees. Before launching a campaign, distinguish between network-wide brand marketing, joint regional campaigns and optional marketing for individual outlets. This helps prevent the same pool of money from funding projects with different purposes.

Prepare a short budget sheet for each campaign, covering at least:

• The campaign’s purpose, timing and participating outlets;
• The budget ceiling, funding sources and method of allocating costs;
• Who will bear the cost of vouchers, discount subsidies and platform fees;
• What happens if the campaign is cancelled, exceeds its budget or leaves unspent funds.

The cost-sharing method should comply with the contract and be understandable to the relevant franchisees before they participate. Do not run a local campaign and then ask outlets that did not participate to contribute afterwards. Nor should discount commitments made by head office simply become deductions from payments due to franchisees.

Article 11 of the Regulations requires written franchise agreements to include key provisions on matters such as product or service promotions and advertising. Detailed cost-sharing rules can be attached as a schedule to the contract, but the schedule must be consistent with the main agreement. Any change to the agreed purposes of the fees should follow the contract and applicable law; an internal notice alone cannot expand the permitted scope of spending.

3. Keep marketing records that allow every transaction to be traced

Do not wait until the network grows to introduce proper accounting. Even with only the first group of franchisees, marketing fees should have separately identifiable accounting entries or a supporting ledger, so that receipts, expenditure, refunds and balances can be reconciled.

It is important to distinguish legal requirements from management recommendations here. Article 17 expressly requires funds to be used as agreed and their use to be disclosed promptly, but it does not impose a blanket requirement for every franchisor to open a dedicated bank account. Whether to use a separate account can depend on contractual commitments and practical management needs. Whatever approach is chosen, unexplained mixing of funds should not become routine.

For each expense, retain budget approvals, service contracts, invoices, payment records and evidence of delivery. Advertising expenditure can be supported by platform statements and campaign reports; the production of marketing materials can be supported by acceptance records and distribution lists. An invoice alone will not usually allow franchisees to judge whether a service was actually delivered.

Where related-party service providers are involved, record the relationship, the reasons for selecting the provider and the basis for price comparisons. Anyone with a conflict of interest should step back from the approval process. After a campaign, operational staff should confirm delivery and finance staff should check the amounts, rather than allowing one person to select suppliers, confirm performance and approve payment.

4. Make timely disclosure a routine task

Head office should agree a regular disclosure schedule, communication channels and responsibility for reporting, while also providing timely updates as campaigns progress. Article 17 does not prescribe a universal monthly or quarterly reporting cycle, so the contract can set specific arrangements. However, a fixed cycle should not be used to delay explanations of significant overspending, campaign cancellations or departures from the agreed use of funds.

A useful report should show the opening balance, fees received during the period, expenditure by campaign, refunds and the closing balance. It should also explain differences between budgeted and actual spending. Contracted costs that have not yet been paid can be listed separately as outstanding commitments, so franchisees do not assume that the entire recorded balance is available to spend.

Disclosure should not consist solely of promotional claims such as “increased exposure”. Explaining where the fees went is essential. Campaign results can provide additional context, but reports should explain how the figures were measured and their limitations. Head office should not present brand exposure as though it were revenue generated for franchised outlets.

Provide a channel for enquiries as well. Explain how franchisees can raise concerns, who at head office will respond and how necessary supporting documents can be shared while protecting personal information and commercial confidentiality. If incorrect entries, duplicate cost allocations or spending outside the agreement are discovered, retain a record of the correction and arrange refunds or adjustments in line with the contract and the circumstances.

Practical takeaway: Before receiving the first marketing fee, have a permitted-use schedule, campaign budget sheet, income and expenditure ledger, and disclosure template ready. Making every shared expense understandable to franchisees is a practical way to maintain trust across the network.