Franchising in Hong Kong: Defining Advertising Fund Use and Financial Reporting

An established business preparing to offer franchises in Hong Kong may charge contributions towards shared marketing alongside franchise and management fees. The question is not simply how much to charge, but what the money may be spent on, who approves expenditure and how franchisees can check the figures. Clear advertising fund arrangements help avoid a situation in which the franchisor believes it is building the brand while franchisees feel they are subsidising head office costs.

1. Define what advertising fees pay for

The Hong Kong Trade and Industry Department’s business start-up guidance notes that franchise arrangements may involve ongoing costs such as advertising fees. Businesses preparing to recruit franchisees should distinguish shared marketing from individual outlet promotions and head office’s own expenses, rather than grouping every use under the heading of ‘brand development’.

Start by drawing up a list of permitted uses and setting these out in a schedule to the franchise agreement:

• Shared marketing: Examples include brand advertising, the production of shared promotional materials and network-wide campaigns.
• Costs paid by individual outlets: Examples include a franchise outlet’s opening event, local leaflets and additional photography services.
• Items requiring separate agreement: Examples include head office marketing staff salaries, website maintenance, agency fees and administrative expenses.
• Items normally excluded: Examples include advertising to recruit franchisees, publicity for head office fundraising and expenditure unrelated to customer-facing marketing.

A campaign may benefit both company-owned and franchised outlets. The agreement should explain whether company-owned outlets contribute, how costs are apportioned and whether resources supplied free of charge by head office will be charged to the fund. Franchisees should not discover only when they receive a report that head office applies a different basis for sharing costs.

2. Set out the fees and their legal status in the agreement

Hong Kong currently has no franchise-specific legislation, nor any general mandatory disclosure or registration regime or statutory code of conduct specifically for franchising. Mainland China’s franchise filing and related market-entry requirements should not be applied directly to local franchise arrangements in Hong Kong.

However, the absence of dedicated legislation does not mean fees can be handled without constraints. Both parties remain subject to general contract law. False statements about the use of advertising fees made during franchise recruitment may give rise to issues under common law and the Misrepresentation Ordinance. Promotional content must also comply, where applicable, with general laws such as the Trade Descriptions Ordinance. A Hong Kong solicitor should review the agreement and external communications.

At a minimum, the advertising fee provisions should specify the calculation basis, payment deadlines, the date charging begins and the procedure for changing the rate. If fees are calculated as a percentage of turnover, refer directly to the agreement’s existing definition of turnover rather than introducing a separate, potentially confusing measure. If a fixed amount is charged, explain how periods of closure and part-months will be treated.

It is particularly important to clarify the nature of the money: is it a fee collected by the franchisor with a commitment to spend it on marketing, or money administered on behalf of others under a specific arrangement? Calling it an ‘advertising fund’ does not itself create a trust, nor does it automatically mean the money is ring-fenced if the franchisor goes into liquidation. A separate bank account helps with checking income and expenditure, but it is no substitute for a properly designed legal structure.

3. Establish rules for budgets, approvals and conflicts of interest

Before offering franchises, businesses can pilot fund management procedures through marketing campaigns at company-owned outlets. Record production, advertising placement, agency and internal staffing costs to establish which expenses can reasonably be attributed to shared marketing. This tests whether the system is workable; the sales performance of a single campaign is not a guarantee of future returns for franchisees.

The annual budget should be broken down by purpose, showing planned spending on brand awareness, attracting customers and shared promotional materials. The agreement should also define the franchisor’s discretion to reallocate funds: which changes it can make independently, which require advance notice and whether new spending categories require franchisee consent. Avoid setting out detailed permitted uses only to undermine them with a broad clause allowing unrestricted reallocation.

If a company connected to the franchisor supplies design or advertising services, disclose the relationship, the pricing basis and who approves the expenditure. Keep comparative quotations or other evidence supporting reasonable pricing. There should also be consistent rules for recording agency commissions, media refunds and discounts, rather than recording expenditure while overlooking money returned.

Franchisees may raise local needs through an advisory group, but its role must be clear: does it merely make recommendations, or does it have approval powers? A shared fund will not necessarily give every outlet identical exposure. The franchisor should explain its principles for allocating resources rather than promise that each outlet will receive orders of equivalent value.

4. Make financial reports genuinely verifiable

A report should say more than ‘this period’s marketing budget has been spent’. At the intervals specified in the agreement, provide the opening balance, contributions due and received, expenditure by category, committed but unpaid expenditure and the closing balance. Show outstanding contributions and advances from head office separately so franchisees do not misjudge the resources available.

For each major campaign, include the campaign period, scope of coverage and available performance data, such as enquiry numbers or offer redemption records. Explain the limitations of the data too: clicks do not equal visits, and changes in sales are not necessarily caused entirely by advertising. Financial accountability and marketing performance assessment should run alongside one another; neither can replace the other.

The agreement can set out procedures for franchisees to inspect summaries and supporting documents. These should cover how to arrange access, confidentiality requirements, the reasonable redaction of third-party information and arrangements for an independent accountant to check the records if a dispute arises. If an annual independent review is offered, specify its scope and who bears the cost. Do not describe routine preparation of income and expenditure statements as an audit.

Finally, settle the treatment of unspent balances in advance: whether they can be carried forward, when refunds may be made, whether departing franchisees are entitled to a share and how committed expenses will be paid if the fund ceases to operate. These matters should be agreed before fees are collected, not left for negotiation when the relationship ends.

Practical takeaway: Before formally recruiting franchisees, prepare a list of permitted uses, a set of income and expenditure reports and a set of fund provisions, then test them through campaigns at company-owned outlets. Only start charging franchisees for shared advertising once you can clearly explain how every contribution is collected, approved, spent and accounted for.