It's not illegal to advertise to kids, else comics and kids TV channels would die overnight.
Indeed the witless artsgrads at OfCom gave into that sort of argument and thus didn't really ban junk food adverts all that much.
As for it being a business, the LEA has limited effective power, except to ban things. If you do a deal with the LEA for which the school gets nothing, then the lefalets simply won't get delivered to kids. Putting them in bags, etc is effort for the staff, and I don't see them doing that. Although I'm sure cowmad's friend is honest, my assumption would be that at best it was being done as a favour for a golfing chum of a senior bloke at the LEA, or more probably straight bungs.
That means lots of little deals, or if Cowmads friend is smart, some sort of deal wherer the LEA sets u pa master agreement for a cut, and the schools get the bulk of the money.
That's easy to say, but you will be dealing with local council officials, and that's like negotiating with people who failed the entrance exam to the communist party.
Also one has to be clear whether the target is kids or their parents.
I think advertising could be a good revenue source, and it's not that hard to filter out undesirable garbage.