Advertising Fund Fraud

Advertising Fund Fraud

Who's Money Is It Anyway?...

The Ad Fund is Held In Trust, But Fraud Is Common.

One of the most common types of franchisor fraud is wrongful use of the advertising funds they collect from franchisees. This kind of theft or conversion happens often when franchisors get into desperate financial straits. The pool of ad money is simply too tempting, and the franchisors embezzle it to pay their own operating bills, hoping to repay the 'loan' when times improve. This kind of fraud is easily identifiable, since franchisors are trustees of the advertising funds and must provide an accounting for their use of the funds. It is a sticky business and if ad funds are mishandled, the franchise can find itself facing suit by virtually every franchisee in its system.

Non-use Is Rarely Misuse.

Accumulating the ad funds for years without spending them is rarely fraudulent, however, as most franchise agreements expressly permit the franchisor to do just this. Ad funds can be accumulated for a few years and then spent all at once, and this is a popular way for franchisors to undertake their first television or national ad campaigns. Remember, the advertising funds must be used to promote the franchise, but they need not usually be used right away.

Remote Use Is Frequent.

Legal complaints about where a franchisor aims the advertising rarely succeed. We are cynics when it comes to the true use of the advertising funds. Franchisors must use it to promote the trademarks and the franchise system, but in our opinion, they are more likely to direct these ad dollars at markets where they want to gain new franchisees than in old markets where you or the other franchisees mainly operate. The reason is simple, some franchisors make more money on the initial franchise fee than on subsequent royalties. If you need a franchise lawyer relating to a Denver, Colorado franchisor aiming the ad monies at inappropriate markets, do give us a call. But keep in mind that most uses will be permitted so long as they generally promote the trademarks, even though they do not directly help franchisees.

If You Suspect Ad Fund Fraud, Call Us.

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