Hong Kong Franchise Advertising Funds: Check Spending, Fees and Inspection Rights Before Signing

When joining a franchise network in Hong Kong, you may be required to make regular contributions to an advertising fund, in addition to the initial franchise fee and ongoing royalties. Joint marketing can help build a brand, but “network-wide promotion” does not guarantee equal exposure for every outlet. Before signing, scrutinise this fee as an ongoing commitment: who collects it, how it is calculated, what it can be spent on and how franchisees can check the figures.

1. Put all marketing costs on one list

Do not simply ask what percentage is charged for the advertising fund. Request a complete fee schedule that distinguishes between contributions to the shared fund, launch marketing fees, minimum spending on your outlet’s own marketing and additional contributions towards individual campaigns. Also check whether your own advertising expenditure can be offset against fund contributions, so that you do not face multiple charges for the same purpose.

If contributions are based on turnover, the agreement should define “turnover”: how are refunds, discounts, gift voucher sales and redemptions, and delivery platform commissions treated? For example, if a customer receives a full refund after paying, does that transaction still count towards the contribution calculation? Vague definitions should not result in gift vouchers being counted twice, once when sold and again when redeemed.

Before signing, request:

• The current fee schedule, worked examples and payment dates.
• The circumstances that trigger additional levies, the notice period and any cap.
• Confirmation of whether the brand can increase fees unilaterally, and the procedure it must follow.
• Details of who bears the cost of discounts, production and platform fees for promotional offers.

List regular contributions, minimum local marketing expenditure and potential additional levies separately in your cash-flow forecast. The agreement may require you to keep paying even if your outlet is not profitable.

2. Check whether the fund is genuinely used for shared marketing

Ask to see a summary of the fund’s income and expenditure for the most recent complete year, the current year’s budget and records of major campaigns. If the brand has not yet established a fund, request its proposed budget, management policy and sample reports. A lack of records should not be treated as a reason to provide no explanation.

The key is not simply how much advertising appears, but how costs are classified. Will the fund pay for head-office salaries, agency commissions, website maintenance, photography and filming, or even advertising to recruit new franchisees? These uses should not be bundled under a vague label such as “brand development expenditure”. Ask for a list of permitted expenses, prohibited uses and the calculation method or cap for administrative charges.

Cross-border brands should explain in particular whether Hong Kong contributions will pay for marketing in other markets, and how the cost of global marketing materials will be allocated. If advertising work is handled by a company related to the brand, the relationship, pricing basis and approval process should be disclosed.

Also establish whether company-owned outlets contribute on the same basis, and whether new or temporarily closed outlets receive exemptions. Contributions need not be identical, but any differences should have a clear basis. When speaking to existing franchisees, ask whether reports arrive on time and campaigns actually take place, rather than simply asking whether the advertising works.

3. Make reporting, account inspection and remedies contractual rights

Separate accounts for the fund do not necessarily mean that the money is held in a separate bank account. Nor does a separate bank account mean that a trust or protection against insolvency is in place. Ask a lawyer to check the entity collecting the money, the banking arrangements and the legal status of the funds. Do not assume that contributions receive special protection.

Consider requesting the following contractual provisions:

• Regular reporting: Set submission deadlines and require reports showing the opening balance, contribution income, expenditure by category and closing balance.
• Inspection rights: Allow franchisees or their accountants to inspect relevant accounts and supporting documents, subject to reasonable notice and confidentiality requirements.
• Independent review: Specify who appoints the auditor or accountant, the scope of the review and who pays for it.
• Remedies for irregularities: Set a deadline for correcting unauthorised expenditure, arrangements for restoring money to the fund and a dispute resolution procedure.

The agreement should also address unspent balances: whether they carry forward to the following year, what happens if the fund ceases to operate, and whether departing franchisees can obtain reports covering the period during which they contributed. Leaving the franchise does not automatically entitle you to recover past contributions. Any right to a refund depends on the agreement and the specific legal circumstances.

A brand may be unwilling to guarantee exposure or sales results for every outlet, but it can commit to budgeting procedures, consultation arrangements and campaign reports. These are usually easier to verify than a broad promise to “fully support marketing”.

4. Hong Kong has no franchise-specific disclosure regime, so keep written records

Hong Kong currently has no legislation specifically regulating franchising, nor a generally applicable statutory franchise disclosure document, franchise registration system or mandatory franchise-specific code of conduct. Ordinary business registration does not certify the quality of a brand or its fund management. Voluntary codes adopted by industry or community organisations are not equivalent to statutory protection either.

Obligations to contribute to and manage an advertising fund are governed primarily by the agreement and common-law principles of contract. If a brand makes a false representation before signing that induces a franchisee to enter into the agreement, common law and the Misrepresentation Ordinance (Cap. 284) may apply. Whether the agreement can be rescinded or compensation claimed depends on the facts and applicable law.

Hong Kong also has the Competition Ordinance (Cap. 619). If a joint promotion requires franchise outlets to follow fixed or minimum resale prices, it should undergo a separate competition-law review. Calling it a “network-wide campaign” does not make it lawful.

Keep brochures, emails, budgets and meeting records, and incorporate important promises into the formal agreement. If you have concerns about income or expenditure, first raise a written enquiry under the agreement. Avoid withholding payments on your own initiative, as this could put you in breach of contract.

Practical takeaway: Before paying, obtain the fee schedule, fund accounts and management terms, and have them reviewed by an independent lawyer and accountant. Trust in an advertising fund should rest not merely on the brand’s reputation, but on clearly defined uses, accounts that can be checked and remedies when problems arise.