Buying a franchise: scrutinise the marketing fee

Shared marketing can be a major strength of a franchise network. But a compulsory marketing fee does not automatically guarantee campaigns that benefit your particular business. Before buying a franchise, you need to understand how the fee is calculated, what the money can be used for and what access to information the agreement gives you. Here is a practical checklist to work through before signing.

1. Map out the full marketing cost

Start by distinguishing the marketing fee from other payments. It may be charged on top of royalties, system fees and local advertising costs. Ask the franchisor to provide a written summary of all marketing-related obligations, with references to the agreement and its schedules.

Pay particular attention to:

• The calculation basis: Is the fee calculated on turnover including or excluding VAT? How are returns, discounts, gift cards and sales through third-party platforms treated?
• The minimum charge: Is there a fixed minimum fee, even when sales are low or the business is temporarily closed?
• The local budget: Must you also spend a specified amount on your own advertising?
• Additional charges: Are there extra costs for campaign materials, photography, agency work or compulsory local activities?
• The right to make changes: Who can increase the fee, on what grounds and with how much notice?

Ask for a sample calculation for one month, based on the sales items in your budget. Have the franchisor show you exactly which items are included. This can reveal ambiguities hidden behind a simple percentage.

Include both shared and local costs in your profit and loss and cash flow forecasts. Check payment dates too: a fee may fall due before you have received payment for the sales on which it is based.

2. Find out what the shared budget funds

The term “shared marketing fund” does not, in itself, tell you how the money is managed. Ask whether the fees are held separately, recorded separately in the accounts or absorbed into the franchisor’s general operations. Do not assume that calling it a fund gives the money any special legal protection.

Request the latest available budget and a report on actual expenditure against it. If the franchise concept is new to Sweden, ask instead for a clear plan setting out how the money will be used and how actual expenditure will be reported.

Investigate which expenses can be charged to the budget. Paid advertising is one thing; the franchisor’s staff costs, internal administration and payments to related companies are another. Such expenses are not necessarily inappropriate, but they should be clearly defined.

Ask specifically whether the money can be used to recruit new franchisees or establish the network in new markets. This may support the network’s development, but it is not the same as promoting your business to customers.

Also clarify what happens to any surplus. Is it carried forward to the following year, does it affect future fees, or can it be used for other purposes? Check whether the franchisor can require additional payments if the budget is exceeded.

3. Make transparency and influence contractual matters

Sweden has an Act on Franchisors’ Duty to Provide Information (2006:484). It requires franchisors to provide clear, understandable written information well before an agreement is concluded. Among other things, this information must cover the fees you will have to pay and other financial terms. A compulsory marketing fee therefore needs to be described.

However, the Act does not, in itself, give you a general right to direct the marketing budget on an ongoing basis or access all supporting records. Those rights need to be secured in the agreement. The Swedish Contracts Act is also relevant to contractual terms; the information disclosure legislation does not comprehensively regulate the relationship.

Ask for specific provisions covering:

• how often budgets and actual expenditure will be reported,
• which cost categories the reports must show,
• who may review the accounts and how,
• how significant budget variances will be explained,
• what influence franchisees have over priorities.

A marketing council can provide a valuable way to get involved, but check whether it makes decisions or merely offers advice. Also ask how representatives are chosen. Verbal promises of “full transparency” should be replaced with clear contractual terms that a specialist franchise lawyer can assess.

4. Check how campaigns work locally

Speak to several existing franchisees, ideally in locations of different sizes. Ask whether campaign plans arrive in good time, whether materials can be adapted and whether reports show what was actually delivered. Distinguish between dissatisfaction with the results of a single campaign and recurring shortcomings in planning or reporting.

Then ask the franchisor to walk you through a completed campaign: which central costs were covered by the fee, and which costs fell to the local business owner? Check requirements relating to staffing, materials and discounts, for example. The marketing fee may not cover these associated costs.

Finally, document who approves local initiatives and how long approval takes. A local marketing budget is less useful if approval arrives after the event you wanted to advertise around.

Practical takeaway: Do not sign until you can explain the full marketing cost, which expenses it funds and what reporting you are entitled to receive. Make sure the answers are reflected in the agreement and your financial projections, not just in meeting notes.