Planning Joint Advertising and Promotions Before Franchising: From Consent to Cost Reconciliation

When turning a successful business into a franchise, joint advertising and discount campaigns are easy to overlook. In company-owned outlets, the owner can simply set the budget. In franchised outlets, these decisions also affect independent business owners’ money and profits. To build a healthy franchise network, you need to decide who makes decisions, who pays and what evidence must be provided before deciding what to promote. Here is how to prepare a joint advertising and promotions framework before recruiting your first franchisees.

1. Distinguish advertising from promotions and identify who actually pays

Start by listing all the marketing activities carried out in your existing outlets. Include smaller activities such as brand videos, local search advertising, discounts on delivery orders, loyalty stamp schemes and opening gifts. For each item, record its purpose, beneficiaries, contracting parties, actual cost bearers and supporting reconciliation documents. Even activities recorded under the same marketing expense account can affect franchisees differently.

Advertising raises awareness of a brand or product, while promotions directly encourage purchases through discounts, free gifts or similar incentives. However, the label alone does not determine the legal classification. Where both elements are involved, such as advertising a discount campaign, separate production costs, media costs and amounts used to fund discounts. If the classification is unclear, it is safer to seek a review from a Korean franchise transaction specialist or lawyer before proceeding.

Do not limit your cost review to amounts charged by the franchisor. Your profitability analysis should also include discounts funded by franchisees, free gifts, additional packaging and extra staffing costs for the campaign. However, costs included in an internal profitability analysis are not necessarily identical to those subject to statutory consent and disclosure requirements, so manage these categories separately.

For example, before planning a drinks discount campaign, answer the following questions:

• Who funds the customer discount: the franchisor or the franchisee?
• On what basis are order platform commissions and payment processing fees calculated?
• If a discounted order is cancelled, how will costs already recorded be reversed?
• If the campaign ends early, what happens to the remaining advertising budget and materials?

Adopt an internal rule that participation applications cannot open until these questions have been answered. A forecast of higher sales is no substitute for giving franchisees the information they need to assess their costs.

2. Build statutory consent into the timetable

Franchising in South Korea is governed by the Fair Transactions in Franchise Business Act. Article 12-6 of the Act and its Enforcement Decree set out rules on prior consent for advertising and promotional campaigns funded by franchisees, as well as notification of expenditure and access to relevant records. Paying the costs upfront and charging franchisees later does not allow the franchisor to bypass these requirements.

Where consent is sought for each campaign, the general rule is that advertising requires consent from at least 50% of all franchisees, while promotional campaigns require at least 70%. A promotional campaign may proceed even if it falls short of that threshold, provided it is limited to franchisees who have agreed to bear the costs. Do not assume that this rule for promotions also applies to advertising.

Another option is to enter into an advance agreement on advertising and promotions that meets the statutory requirements. Whether to seek consent for each campaign or use an advance agreement should therefore be considered alongside the contractual structure. Do not assume that a general clause requiring franchisees to ‘co-operate with all campaigns organised by the franchisor’ is sufficient. Check the specific terms and scope required for an advance agreement.

Build the operational timetable in this order: ‘finalise the campaign proposal → explain costs and conditions → obtain consent → check compliance → place orders and launch’. Asking for consent after advertising has already been commissioned can make franchisees feel unable to refuse, while cancellation costs may tempt the franchisor to press ahead regardless.

Consent records should include the version of the proposal circulated, the intended recipients, respondents, response times and the terms agreed to. Do not treat silence as agreement or automatically accept an outlet employee’s response as the franchisee’s consent. In more complex cases, such as one franchisee operating several outlets, separately verify who must be counted and how the consent rate is calculated under the statutory rules.

3. Make the participation guide a document for assessing costs

A participation guide should be different from a marketing proposal. Information that lets franchisees calculate their own financial commitment should come before attractive visuals. Set out the campaign name and dates, eligible products, participating channels, estimated total cost, franchisor and franchisee contributions, allocation basis and reconciliation method in one document.

Explain whether costs will be shared equally between franchisees or allocated according to actual usage, and why that approach suits the campaign’s purpose. Applying the same basis to national brand advertising and a local outlet opening campaign may create a mismatch between benefits and costs. Do not choose an allocation method solely because it is administratively convenient.

For campaigns with variable costs, a spending cap and a procedure for handling overruns are important. Decide who approves additional spending if coupon redemptions exceed expectations or advertising rates rise. For changes outside the scope of the original consent, assess whether further consent is needed. Do not increase franchisees’ contributions at the reconciliation stage without informing them.

A practical participation guide should include the following:

• Participation terms: application deadline, eligible participants, excluded products and order types
• Cost terms: calculation formula, contribution cap, tax treatment and billing date
• Change terms: approval procedures for extending the campaign, increasing the budget or stopping it
• Verification documents: how to check expenditure records, transaction evidence and order-level discount summaries

Cross-check this operating framework against the advertising and promotion cost provisions in the franchise disclosure document and franchise agreement. If you introduce a new cost-sharing structure, review its contractual basis and whether it requires registration or notification of changes to the disclosure document. Updating the campaign guide alone does not bring all the related documents into line.

4. Test expenditure records, reconciliation and dispute procedures

Before launching your first joint campaign, run a trial reconciliation using data from company-owned outlets. Assign a separate campaign reference number and link quotations, purchase orders, tax invoices, advertising delivery reports and discounted order records to it. An accountant should be able to arrive at the same figures even if the person managing the campaign changes.

In particular, prepare a reconciliation statement showing budgeted amounts alongside actual expenditure. Include refunds from advertising agencies, cancelled orders and unspent budget. If the franchisor charges a management fee, do not bury it within external advertising costs: make its contractual basis and calculation method clear.

The law requires franchisors to notify franchisees of expenditure on advertising and promotions they have funded and to respond to requests to inspect the relevant records. Manage the specific statutory notification deadlines and required information in line with the current Enforcement Decree. Even if your internal procedure is to send individual reconciliation statements promptly after a campaign ends, check the statutory notification obligations separately.

Provide a channel through which franchisees can raise calculation errors. Specify who receives queries, what documents will be checked, the target response date, and the procedures for correcting errors and issuing refunds. Keep a record of how each query is handled. You may set an internal deadline for submitting objections, but do not suggest that franchisees lose their legal rights simply because that deadline has passed.

Do not judge a campaign’s success by sales growth alone. Also review profit after discounts, any fall in existing full-price orders, additional workload and franchisee feedback. This evidence can help improve the terms of future campaigns and build trust in the franchisor’s explanations across the network.

Action points: Before recruiting your first franchisees, complete a campaign participation guide, a consent record template and a reconciliation statement template. If franchisees cannot calculate their contribution in advance and verify expenditure afterwards, you are not yet ready to launch joint advertising and promotions.