Specific purpose funds

About specific purpose funds

Franchisors often require franchisees to pay money into a specific purpose fund operated by the franchisor.

A specific purpose fund is money set aside for a specific common purpose related to running the franchised business. A common type of specific purpose fund is a marketing fund.

There are rules about how money paid into a specific purpose fund can be kept and used.

If a franchisee pays fees into a fund, the franchisor must keep the money in a dedicated or separate account and use the money allocated to this fund for the specified purpose.

Unless it says so in the franchise agreement, franchisees usually don’t get a say on how money paid to a specific purpose fund is spent. The franchisor decides this. For example, although a franchisee may pay fees to a marketing fund, this does not mean that the franchisee’s individual business must be promoted or advertised using money from the fund.

Franchisors operating a specific purpose fund, or their fund administrators, must follow rules in the franchising code about:

• who pays into the fund
• how the money can be used
• telling franchisees about how the money was collected and spent every financial year.

Information given to franchisees must not be misleading or deceptive. Penalties may apply to franchisors who don't follow these laws.

Details to include in the disclosure document

If a franchisee must pay money to a specific purpose fund, the franchisor's disclosure document must include details about:

• the specified common purpose of the fund
• who controls or administers the fund
• who else contributes to the fund
• the kind of expenses that the fund can be used for
• how much the franchisee must contribute to the fund and whether some franchisees contribute more or less
• if the franchisor or master franchisor must spend part of the fund to benefit the franchisee’s business.

The disclosure document must also include further information about:

• preparing the annual financial statement on the fund’s contributions, spending and activity
• auditing the financial statement
• if the franchisor, master franchisor or an associate supplies the goods or services that the fund pays for.

The franchisor must also provide potential franchisees with a copy of the most recently prepared annual financial statement for the fund.

How specific purpose funds can be used

A specific purpose fund can only be used to pay for:

• costs that the franchisor has told franchisees about in the disclosure document
• legitimate expenses related to the specific purpose fund
• expenses that most franchisees contributing to the fund have agreed to pay
• the reasonable costs of administering or auditing the fund.

If a franchisee has concerns about how funds are spent, they should speak to their franchisor first. The franchisor must give a fund statement to franchisees each year. This statement should tell franchisees how funds are being used.

Who pays into the fund

The disclosure document must say who contributes to the fund. If the franchisor or master franchisor operates a franchised business, they must also contribute to the fund like their franchisees.

Specific purpose fund statements

If franchisees pay into a specific purpose fund, the fund administrator must prepare an annual financial statement. This statement must be given to franchisees.

The fund administrator could be the franchisor, master franchisor or a person they authorise to administer the fund. The disclosure document lists who the fund administrator is.

Statements must be audited

Financial statements must be independently audited. Franchisors must give a copy of the audit report to franchisees.

The only time a statement doesn't have to be independently audited is if 75% of the franchisees in Australia who contribute to the fund vote that an audit isn't necessary. This vote should happen each year within 3 months after the end of the financial year, before the fund financial statement is due.

The franchisor can pay for the cost of the audit using the specific purpose fund.

The statement must provide meaningful information

The financial statement must:

• make sense to an ordinary reader, and not just an accounting professional
• include enough detail to give franchisees meaningful information about the fund’s income and expenses
• include the percentage of the total income spent on meeting the fund administrator’s expenses of administering and auditing the fund

Meaningful information allows franchisees to see, just by looking at the statement, how, when, and on what the money from the fund was spent. This helps franchisees to understand whether the fund is being used appropriately.

For example, ‘50% spend’ under a line item of ‘Advertising - Television’ in a statement is unlikely to give enough detail. More information is needed, such as which television channels the advertising appeared on and when.

Different items or types of expenditure may need different levels of detail. Generally, larger expenses will be more important to franchisees and need more detail.