Accounting for marketing contributions as a new franchisor

Your existing business probably already has a marketing budget. Once franchisees start contributing, your responsibilities change: you are spending money they have paid for an agreed purpose. A shared marketing fund therefore needs clear agreements, identifiable accounting records and an explanation of how the money is spent. Put these in place before your first franchisee starts, so that trust does not depend on a successful campaign.

1. Define the purpose of the shared contribution

Start with the purpose, not the amount. What will you organise centrally for the franchise network, and which marketing activities will remain each business owner's responsibility? This article is not about how much to charge, but about making spending accountable.

Create a spending framework with three categories:

• Shared marketing: for example, brand campaigns, a shared website and photography that all outlets can use.
• Local marketing: for example, an advert for a single outlet or a local launch promotion.
• Franchisor costs: for example, campaigns to recruit new franchisees.

Do not let these categories blur unnoticed. A campaign to recruit franchisees serves a different purpose from one designed to attract customers to existing outlets. If you want to fund these different purposes through the same contribution, make that explicit in advance and have the arrangements reviewed to check that they are sufficiently clear.

Also explain how you will handle staff time, software and external agencies. Can the employee managing campaigns charge their time to the marketing fund? Which tasks would this cover? Without clear boundaries, the same activity could inadvertently be charged through both the general franchise fee and the marketing contribution.

2. Turn the Dutch Franchise Act into practical agreements

The Netherlands has specific franchise legislation: the Dutch Franchise Act (Wet franchise), incorporated into Book 7 of the Dutch Civil Code. In force since 1 January 2021, it sets requirements for matters including the information provided before and during the franchise relationship.

Before entering into the agreement, you must inform the prospective franchisee about the fees, mark-ups and other financial contributions you require. This information must also cover the required investments and relevant explanations. Make clear what the marketing contribution is intended to fund and what additional local spending you expect. The legally required information must be provided at least four weeks before the franchise agreement is concluded.

Article 7:916 of the Dutch Civil Code is particularly relevant to spending. Each year, the franchisor must explain the extent to which the mark-ups or other financial contributions paid by the franchisee cover the costs or investments for which they were intended. You therefore need to be able to link marketing contributions to the corresponding expenditure. A report showing only reach and visitor numbers is not enough.

Set out in the agreement:

• which expenses the contribution covers;
• who decides how the money is spent;
• when and how you will account for it;
• what happens to surpluses and shortfalls;
• how shared costs are allocated.

A separate bank account may be useful, but it is not, in itself, a general requirement under the Dutch Franchise Act. Keeping separately identifiable accounting records is, however, a sensible way to support your reporting.

3. Make the flow of money traceable from the first invoice

Set up separate categories in your accounts for marketing contributions received and the associated costs. For each expense, retain the invoice and record its purpose and the basis used to allocate the cost. Ask a bookkeeper for advice on the accounting and VAT treatment.

Suppose a campaign supports both your company-owned outlet and franchised outlets. Agree in advance how you will allocate the costs and whether your own outlet will contribute. Otherwise, franchisees risk subsidising your existing business without a clear agreement.

Prepare an annual reconciliation showing the opening balance, contributions received, expenditure and closing balance. Explain which amounts have already been committed to an agency but have not yet been paid. This prevents the bank balance from being mistaken for a budget that is freely available to spend.

Also agree how any surplus will be treated. Will you reserve it for a future campaign, offset it against contributions or use it for another agreed purpose? A shortfall does not automatically entitle you to collect additional contributions. That depends on the contractual arrangements and any applicable statutory consent requirements.

4. Discuss spending and results separately

Make the financial explanation a standing item at the annual franchise meeting. The Dutch Franchise Act requires consultation between franchisor and franchisee at least once a year. Send the report in advance so that franchisees can ask specific questions.

First, discuss whether the funds were used for their agreed purpose: was the money spent as agreed? Then assess effectiveness: which campaigns generated enquiries, shop visits or sales? A properly spent contribution does not guarantee revenue growth. Equally, a successful campaign does not justify every vaguely defined expense.

Allow for local differences. A national promotion may work differently for a new outlet than for an established location. Record the lessons you will take into the next marketing plan, without treating every local result as proof of success or failure.

Practical takeaway: before issuing your first marketing invoice, create a spending framework and an annual reporting template. Being able to link every euro received to an agreed purpose helps you build a transparent franchise network.