Franchising's Sinister Side: Vanishing Ad Dollars

On the surface, franchise expansion means it's time to pop the champagne.

But this is often when things turn ugly for the company's frachisees.

Franchisers love their national advertising funds. In theory, each franchisee pays about 2% of gross revenue to this national pool with the assurance that they will reap the benefits.

In a perfect world, this means equal and effective marketing for all.

In reality, you sometimes get sticky scenarios. The money might be funneled toward new franchisees rather than to those who contributed to the ad budget in the first place.

Richard Solomon has seen this repeatedly in his 45 years as a franchise attorney.

Growing Pains

Usually, says Solomon, franchisees don't have a contract specifying how an advertising fund should be managed, leaving it up to the franchiser. When expansion happens, allocation issues may arise.

A franchiser may, in some cases, use ad resources -- already paid for by existing franchisees -- to support new or potential franchisees. This happened with Jiffy Lube when its franchisees claimed their resources were being used by parent company Pennzoil to support new business-expansion projects such as Wal-Mart's(WMT Quote) Tire & Lube Express.

In extreme cases, franchisers have been accused of using part of the advertising fund for management perks.