Managing Franchise Promotion Funds Transparently in Malaysia

When an established business grows into a franchise network, marketing no longer involves only the brand owner’s money. Franchisee contributions must be managed with clear purposes, records and accountability. Before charging a promotion fee, establish fund procedures that distinguish spending for the network’s shared benefit from the company’s own costs. This clarity helps prevent disputes when an outlet feels its contribution has not delivered a proportionate benefit.

1. Distinguish the promotion fund from the franchisor’s income

Royalties and promotion contributions serve different purposes. Royalties are generally payments relating to franchise rights and system support, as set out in the agreement. A promotion fund, by contrast, is collected for specified promotional purposes. Do not treat them as a single pool of money that can be used without separation.

In Malaysia, the Franchise Act 1998 (Act 590) governs franchise relationships. Section 22 requires a franchisor that charges franchisees a promotion fee to establish a promotion fund. The fund must be managed through a separate account and used solely to promote the franchise’s products.

This means promotion contributions are more than just an extra line on an invoice. The business needs to establish an account, transaction categories and an approval process before collections begin. Have a lawyer and an accountant review the arrangements to ensure that the structure meets the relevant legal obligations.

Prepare a straightforward statement of purpose, such as funding consumer campaigns for products offered through the franchise network. Avoid overly broad purposes such as “any expenditure supporting company growth”, as these can blur the boundaries of how the fund may be used.

2. Define which expenses the fund can cover

List spending categories before planning campaigns. Subject to the fund’s purpose and the franchise documents, possible categories include buying advertising space, producing product campaign materials and commissioning product photography for shared use.

Separate these expenses from franchisee recruitment advertising, the cost of opening the franchisor’s offices or marketing other businesses owned by shareholders. Do not automatically use the promotion fund to finance corporate growth. An activity that helps the company does not necessarily fulfil the fund’s purpose.

For mixed costs, establish an allocation method that can be substantiated. For example, if a supplier produces both product promotion materials and franchisee recruitment materials within the same project, request separate quotations and invoices. These are easier to review than an estimated allocation made after payment.

Prepare an internal table with four columns:

• Cost category: what is being purchased.
• Purpose: how it relates to promoting the franchise’s products.
• Evidence: quotations, work orders and campaign outputs.
• Approver: the person responsible for reviewing the use of the fund.

If a related company is appointed as a supplier, record the relationship and the reasons for selecting it. Comparing quotations and setting out the scope of work in writing helps demonstrate that the decision serves the fund’s interests, rather than simply those of the related party.

3. Explain shared benefits and local responsibilities

A shared promotion fund does not necessarily replace each outlet’s local marketing. Before the agreement is signed, explain who pays for opening advertisements, neighbourhood promotions, printed materials and customer discounts.

The franchise agreement should clearly explain payment obligations and the scope of the fund’s use. The disclosure document should also explain the ongoing fees charged to franchisees. Under the Franchise Act 1998, the disclosure document and a copy of the agreement must be provided at least 10 days before the agreement is signed. Use this process to explain the fund, rather than merely listing its name.

Also establish how campaigns will be selected when outlets have different needs. A food delivery campaign, for example, may not suit outlets that do not yet offer that service. Explain the rationale for targeting particular outlets, the participation requirements and how other outlets can benefit through different activities.

Do not promise that each franchisee will receive advertising expenditure equal to its contribution unless that is a genuine commitment you can fulfil. A shared fund can support broader brand awareness, but the basis for distributing benefits should be reasonable and explained in advance.

Create a channel for franchisee suggestions. Consultation does not necessarily give franchisees a veto over every campaign; decision-making roles should be clearly defined.

4. Put controls and reporting in place from the first collection

Appoint one person to maintain the fund’s records and another to approve expenditure. If the team is small, at least ensure that someone else regularly reviews payments and account reconciliations. Avoid allowing one person to control requests, approvals and payments without oversight.

As a management practice, provide franchisees with regular reports showing the opening balance, contributions collected, expenditure by category, unpaid commitments and the closing balance. Distinguish this transparency recommendation from statutory reporting obligations, which should be reviewed separately with your advisers.

Include a summary of activities and relevant measures, such as customer enquiries or offer redemptions. Do not equate advertising impressions with outlet profits. Explain the limitations of the data so that reports do not create misleading expectations.

The relevant documents should also specify how surpluses, shortfalls and cancelled campaigns will be handled. Do not assume that a remaining balance can be transferred to company income or that additional contributions can be charged without a valid contractual basis.

Practical step: before collecting the first promotion fee, finalise the rules on use, establish a separate account, set up an approval workflow and prepare a sample report. A transparent fund helps build trust across the franchise network from the outset.