Franchising in Hong Kong: Managing Advertising Funds and Marketing Fees

In a company-owned outlet, the owner usually decides the marketing budget. Once a business starts franchising, however, every shared marketing expense affects the interests of different operators. An advertising fund is not income that head office can spend as it pleases, nor should it be presented as a guarantee of business success. To build trust across a franchise network, brands should establish four things before collecting fees: who pays, what the money pays for, who approves spending and how franchisees can check the records.

1. Distinguish shared marketing from individual outlet expenses

Do not simply state in the franchise agreement that “franchisees must pay advertising fees”. First divide marketing activities into three categories: brand-wide advertising, joint local campaigns and promotions for individual outlets. Then decide who pays for each.

Brand-wide advertising might include brand photography, website content and shared advertising materials. Local campaigns may benefit only designated participating outlets, while opening-day leaflet distribution or in-store displays could be the responsibility of individual franchisees. There is no single correct way to classify these costs. What matters is explaining the arrangements before collecting payment, rather than leaving head office to justify them afterwards.

Draw up a schedule of permitted uses, specifying:

• Eligible expenses: media placements, production costs, event venues and performance analysis, for example.
• Expenses requiring additional approval: head office staff time, fees charged by related companies and campaigns that exceed their budgets.
• Excluded expenses: head office costs unrelated to consumer marketing, such as advertising to recruit new franchisees.

If company-owned outlets also benefit, specify how they will contribute. It is not reasonable to require franchisees to pool their money while assuming that company-owned outlets need not bear any costs. Shared marketing does not mean every outlet will receive exactly the same exposure, either, so explain the allocation principles in advance.

2. Put fee calculations, adjustments and balance arrangements in the agreement

Marketing fees may be fixed, calculated as a percentage of turnover or based on a combination of the two. When choosing a method, the question is not just how high the fee is, but whether franchisees can check their bills themselves.

If fees are based on turnover, define how refunds, discounts, delivery-platform commissions, and gift voucher sales and redemptions will be treated, so that the same transaction is not charged twice. Also specify sales-reporting dates, payment deadlines, correction procedures and the scope of head office’s right to inspect relevant records.

The agreement should also answer the following questions:

• What conditions, notice periods and consent procedures apply to changes in the fee rate?
• Can an additional levy be charged for a one-off major campaign? Can franchisees opt out?
• Will any year-end surplus be carried forward? Who will cover a shortfall?
• What happens to contributions already paid when a franchisee leaves or the fund ceases to operate?

Avoid relying solely on wording such as “head office reserves the right to make the final decision”. Management discretion should have limits: for example, specify the authority to reallocate spending within an approved budget, with fresh approval required beyond those limits. When recruiting franchisees, do not promise that marketing fees will necessarily deliver a particular turnover or payback period.

3. Establish traceable approval and reporting procedures

At a minimum, use separate accounting codes so that the fund’s income and expenditure can be distinguished from general operating expenses. If a separate bank account is used, explain how it will be managed. Separate bookkeeping or a separate account does not automatically create a trust. Before making any commitment about safeguarding funds, ask a lawyer to confirm the legal arrangements.

Keep budgets, quotations, approval records, invoices and evidence that advertising ran for each campaign. Where head office or a related company provides services, disclose the relationship, the basis of the charges and who approves them. Avoid having the same person propose expenditure, authorise payment and confirm completion.

Regular reports to franchisees should include, at a minimum, the opening balance, amounts due and actually received, expenditure by category, committed but unpaid expenditure and the closing balance. Campaign performance can be reported through enquiries, offer redemptions or conversions into outlet visits, but explain the data sources and their limitations. Advertising impressions must not be presented as sales growth.

A franchisee advisory group can help gather views, but distinguish clearly between consultation and approval rights. Set out procedures for inspecting supporting documents, raising objections and responding to them. If an external audit is promised, specify its frequency and scope, and who will pay for it.

4. Align marketing arrangements with Hong Kong law

Hong Kong currently has no legislation specifically regulating general commercial franchising. Nor does it have a generally applicable franchise filing system, statutory franchise disclosure period or mandatory franchise code. The filing and disclosure requirements under mainland China’s Regulations on the Administration of Commercial Franchises cannot simply be applied to purely Hong Kong franchise arrangements.

The absence of franchise-specific regulation does not, however, mean advertising funds are outside the law. The parties’ rights and obligations are governed primarily by common law contract principles and applicable legislation, including the Misrepresentation Ordinance (Cap. 284). Statements made when recruiting franchisees about the fund’s uses, head office’s contributions and marketing support should match both the agreement and actual practice.

Shared marketing must also take account of the Competition Ordinance (Cap. 619). Do not assume that maintaining brand consistency permits a franchisor to require franchisees to adopt fixed or minimum resale prices. Obtain competition law advice before introducing arrangements involving uniform selling prices, restrictions on discounts or the sharing of future pricing information.

Consumer-facing promotional advertising must comply with the applicable provisions of the Trade Descriptions Ordinance (Cap. 362). Campaigns that collect customer data or use it for direct marketing must also comply with the Personal Data (Privacy) Ordinance (Cap. 486). Operating under the same brand does not mean outlets can freely share customer lists.

Practical takeaway: Before collecting the first marketing fee, prepare a schedule of permitted uses, fee calculation rules, approval procedures and an income and expenditure reporting template. Then have a Hong Kong lawyer review the agreement. Arrangements that franchisees can understand and verify will do more to build trust than a simple promise of “centralised marketing by head office”.