Franchise Advertising and Promotion Costs: Checking Consent Procedures and Cost Accounting Before You Sign

A brand’s heavy advertising does not necessarily mean higher profits for its franchisees. Even at the same level of sales, what you keep depends on who pays for discount vouchers, delivery promotions and free gifts. When choosing a franchise brand in South Korea, look first at the costs borne by franchisees and how decisions are made, rather than the scale of its advertising. This article focuses on checking advertising and promotion costs before you sign.

1. Create a cost schedule that separates advertising from promotions

Start by comparing the franchisee cost items in the disclosure document with the advertising and promotion clauses in the franchise agreement. The disclosure document is a registered public document, but registration does not guarantee that individual charges are reasonable or that your investment will be profitable. If the two documents describe costs differently, or an additional charge appears in only one, ask the franchisor for a written explanation.

Advertising raises awareness of a brand or product, while promotions encourage purchases through measures such as discounts or giveaways. In practice, campaigns may combine both, so check what they actually involve rather than relying on their labels. If a single ‘joint marketing fee’ covers advertising production, voucher discounts and the purchase of free gifts, ask for each component to be explained separately.

Include the following in your cost schedule:

• Regular advertising contributions: Are these fixed, linked to sales or subject to a separate minimum charge?
• Additional campaign charges: Who shares the cost of discounts, giveaways and promotional materials?
• External service costs: Are delivery platform campaign charges or advertising agency fees included?
• Payment and reconciliation timing: Are charges paid in advance, billed alongside supplies or deducted from sales proceeds?

If contributions are linked to sales, check how the calculation treats VAT, cancelled orders, refunds and sales values before or after vouchers are applied. The same percentage can produce different charges depending on the calculation basis. Be sure to flag any arrangement under which you pay both regular contributions and additional charges for individual campaigns.

2. Check how statutory prior consent requirements relate to the contract

Franchise dealings in South Korea are governed by the Fair Transactions in Franchise Business Act. Article 12-6 of the Act and its Enforcement Decree set out requirements for prior consent to advertising and promotional campaigns funded by franchisees, as well as notification of expenditure and related matters. Distinguish between activities funded entirely by the franchisor and those whose costs are shared with franchisees.

As a general rule, advertising that involves charges to franchisees requires prior consent from at least 50 per cent of all franchisees, while promotional campaigns require at least 70 per cent. There is, however, an exception allowing promotional campaigns to be run only for franchisees who have agreed to bear the costs. You should therefore not assume either that ‘I objected, so I never have to pay’ or that ‘It is a head-office campaign, so participation is compulsory’.

An advance agreement covering the matters prescribed by law for advertising or promotional campaigns may provide an exception to the separate prior consent procedure. What matters is not simply whether you signed a contract. Check whether it properly specifies the necessary details, such as the campaign name and duration, cost-sharing proportions and the cap on franchisee contributions.

If the contract contains only a broad statement such as ‘The franchisee shall participate in all advertising and campaigns and bear the costs determined by the franchisor’, do not automatically accept this as a sufficient advance agreement. Ask the franchisor to explain the legal basis and procedure for imposing charges. If the applicability of an exception is unclear, it is safer to have the terms reviewed by a qualified Korean franchise transaction specialist or solicitor.

3. Look beyond the consent form to how costs are actually allocated

Ask the franchisor for documents from a representative, recently completed campaign and a copy of the consent form actually used. You do not automatically have a right to receive every internal document before signing, so you could instead request examples with commercially sensitive information removed or a sample cost reconciliation. Whatever information is provided, you should be able to understand how your contribution is calculated.

In particular, obtain specific answers to these questions:

• Which outlets are covered by the campaign, and which franchisees are included when calculating the consent percentage?
• Does each outlet pay the same amount, or are contributions proportional to sales or order numbers?
• Do the franchisor and company-owned outlets also contribute, and on what basis?
• What procedure applies if the budget increases or the campaign is extended?
• How are unused budgets and the costs of cancelled campaigns handled?

Check whether national advertising and local campaigns use the same allocation rules. It also matters whether a new outlet must contribute towards advertising carried out before it opened, and what rules apply to outlets joining partway through a campaign. The prominence of an advertising campaign does not, by itself, establish that its cost-sharing arrangements are reasonable.

If a consent request gives only the total budget, without estimating your contribution, ask for the per-outlet formula and an estimated range. Even when giving consent electronically, retain the screen showing the campaign terms and the response you submitted. You need to be able to check whether the terms changed after you agreed.

4. Calculate what you retain after a discount campaign and how much cash you need

When assessing a campaign, distinguish between increased sales and increased profit. Factor in not only the discount funded by the franchisee, but also the ingredients or materials, packaging, payment and delivery fees, and extra labour needed to fulfil additional orders. Even if sales rise, working capital may become tighter if the amount retained per order falls.

Start by separating full-price orders from promotional orders. Work out how much you actually receive for each promotional order, then deduct the costs that increase with each order. Take care not to deduct a discount or fee again if it has already been taken out of the amount paid to you.

If the franchisor offers financial support, check eligibility, limits, payment conditions and the payment date. If you must pay suppliers first but receive the support later, you will need enough cash to bridge the gap. Do not treat a promise of support as equivalent to sales revenue or cash received.

For a conservative assessment, assume that some promotional orders replace orders that would otherwise have been placed at full price. Also compare scenarios in which extra staff are needed with those in which existing staff can manage. When comparing brands, focus less on which has the lowest contribution and more on whether you can predict your costs and verify the results.

5. Establish procedures for reviewing expenditure and raising objections

The Franchise Business Act imposes duties concerning notification of expenditure on advertising and promotional campaigns funded by franchisees, and requests to inspect the relevant records. Before signing, check what format the franchisor actually uses for these notifications, which department handles them and how to request access to records. Keep statutory duties separate from any additional operating arrangements you negotiate.

The cost reconciliation records should let you trace the relationship between the amounts collected from franchisees, actual expenditure and each outlet’s contribution. A notice simply stating ‘marketing completed’ makes it difficult to assess whether the accounting is adequate. Keeping invoices, campaign notices, consent records and cost statements together for each campaign makes discrepancies easier to identify.

If a charge differs from your expectations, first submit a written enquiry identifying the calculation formula and the basis on which consent was obtained. If the issue remains unresolved, you can consider options such as franchise dispute mediation through the Korea Fair Trade Mediation Agency. Be cautious, however: unilaterally stopping other contractual payments because a dispute has arisen may create separate problems.

Action summary: Before signing, consolidate advertising and promotion charges into one cost schedule, and obtain written details of the consent procedure, per-outlet contribution limits and how to verify expenditure. Effective joint marketing starts with predictable costs and transparent explanations, not simply large advertising campaigns.