Franchising is private business under a well-known brand, which is akin to a marriage of convenience. After all, in it each party acquires certain benefits.
Business creation tool
Franchising is not the purchase of a ready-made business, but a tool with which it can be created to generate profit and satisfy other needs of the franchisee, in combination with instructions for using this tool.
How do you know if a company's presentation matches its actual business format and is not just a cover story put together by an experienced professional consultant? To do this, it is important to find out the company and how long it has been operating on the market (including via the Internet and social networks), reviews former employees, staff turnover, branching of the network, product range and quality of service, reviews of entrepreneurs who have already purchased a franchise.
What is a franchise book?
The instructions for using franchising are called franchise books and, as a rule, contain instructions for conducting operations, a description of the product, goods, services, sales standards, and personnel management standards. At its core, this is a great intellectual treasure that is often underestimated.
It also includes single-use components: standard for opening with step by step description procedures, a brand book describing the use of visual brand elements in certain situations, a merchandising book for clothing stores and boutiques.
Franchising: franchising terms, lump sum and royalties in the franchise agreement
The relationship between the franchisor and franchisee in the Russian Federation regarding the acquisition is regulated by an agreement. It specifies the distribution of areas of responsibility and control between the parties, the conditions for granting a franchise as a mechanism for collecting payments, such as royalties and lump-sum fees. The entries drawn up by accounting specialists in accordance with paragraph 4 of PBU 14/2000 take into account the exclusive rights to use the trademark as part of the intangible assets of the enterprise.
The period for which the contract is concluded depends on the field of activity. For stores, this is typically the length of a standard lease agreement, which ranges from three to five years. When opening a business that requires significant investment, such as a fitness center, the period may be longer: 10-15 years. McDonald's enters into a 25-year contract.
Types of restrictions in a franchise agreement
In order to avoid possible future abuses on the part of the franchisee, contracts related to the provision of a franchise in the field or some services may legally include a restriction in the form of a prohibition to engage in this type of business for a certain period. The agreement may also contain restrictions on the repurchase of the outlet by the franchisor upon achievement of certain conditions, with a description of the scheme for calculating the amount of the repurchase.
Forms of payment for purchasing a franchise
When choosing a franchise various companies represented by grocery stores, clothing stores, establishments fast food or hotels, the potential franchisee's attention, among other things, is drawn to the size of the down payment, which largely determines the need for investment to implement a new project. Most often, a lump sum fee includes a component for the use of an intangible resource such as a brand, and a material component in the form of a sign and other elements.
There are two forms of payment for franchising:
- An entrance, or lump-sum, fee, called fixed.
- Royalty is a contribution in the form of regular payments.
What are lump sum fees and royalties? Since the implementation of a franchise entails certain costs, to compensate for them, companies resort to charging lump sum. It is paid one-time after the conclusion of the contract and is a kind of payment for entering into a system of relations called franchising.
Forms of payment for royalties
Royalty is a time-based payment for the use of a trademark and comes in two forms: as a percentage of turnover or profit and a fixed payment amount. The choice of royalty payment form depends on how much control the franchisor can control the franchisee companies.
So, for example, if companies are connected by a common database, as is the case when opening a clothing store, then the franchisor can tie the royalty amount to a percentage of turnover or profit, demonstrating its responsibility and interest in the development of the franchisee. Otherwise, a fixed amount of regular payments may be established.
Factors determining the size of the lump sum contribution
The size of the lump-sum contribution for each type of franchise may differ significantly depending on various factors, determining its value, namely:
- Costs associated with the design of retail and administrative areas of a new store.
- Expenses related to equipment and fittings of the sales area.
- Supply costs promotional materials.
- Costs associated with the implementation of sales standards and the need for training of administrative and management staff and line personnel. If a franchisor company sells a business format, then an essential part of it are sales standards that are embodied in people. Those franchisees whose staff follows sales standards and provides high-quality service create a sustainable franchise. That is why it is so important to train staff, especially in the field of service provision.
- The need to implement accounting systems and install computer programs.
- The amount of potential profit of the franchisee due to the acquisition of this type of franchise.
Currently, the highest lump sum rates are observed in the hotel business, where the size of a one-time payment for the right to purchase a franchise can range from 3 to 4 million rubles. By comparison, for a clothing store, this entry fee this system relationship can range from 700 to 1.5 thousand rubles.
Franchise without royalty or lump sum
Among the offers, especially in the field of trade franchising, you can find a significant number of franchises for which no lump-sum fee is charged. The development plans of some companies, including the Pyaterochka grocery store chain and the Fashion Territory multi-brand store, involve granting a franchise without charging a lump-sum fee. The policy of such companies is aimed at expanding the network by attracting new partners and offering them favorable conditions from an economic point of view.
If, under the terms of a trade franchise, the assortment of a new store will be represented exclusively by the franchisor’s products, then the costs of providing them and other associated costs can be transferred and included in the cost of goods. Such a franchise, for which there is no lump-sum fee, allows, by expanding the network and jointly building successful business increase the popularity of the brand and ensure growth in business profitability.
The lump sum fee is the amount of initial capital that the franchisor receives from the franchisee (of course, under a franchise agreement).
A lot of questions immediately arise such as “What is this? Like this? and so on,” since the definition contains many incomprehensible words:
- Franchising is a certain form of business when the buyer receives full rights from the seller to use a working brand. But it is worth noting one more thing: the seller undertakes to provide full and free consultation to the buyer. Usually a franchise is also called “Turnkey Business”.
- Franchisor - This is the seller (the owner of the trademark).
- Franchisee is a legal or individual, which buys a turnkey business (Franchise).
In legislation Russian Federation A lump sum payment is understood as a fixed one-time transfer of a specific amount (payment).
It follows that it is paid once. It is worth noting that the amount of the contribution depends entirely on the effect of the business on the market.
This point is worth considering in detail, since the whole essence is not immediately understood in a nutshell:
The cost of a company's franchise can fluctuate significantly due to many factors. Firstly, this is the person who provides full rights to the franchise (as mentioned at the beginning of the article - the seller or franchisor).
Most often, they calculate fees in individual cases, that is, they have a catalog with prices, they are different for each situation. Despite all this, there is an exception; sometimes more profitable franchises are much cheaper than unprofitable and unprofitable ones.
What does the lump sum fee consist of?
A person who considers a lump-sum payment to be a regular payment is very much mistaken, since the Franchisor provides not only the necessary data on running a business, but also personally recruits staff and conducts individual consultations on solving problems in the business, since they have often arisen and will arise in the future. conditions of modern competition.
From the above, it should be said that by paying a lump sum, the entrepreneur completely deprives himself of expenses that he did not plan, since the franchisor will do everything “Turnkey” and without loss.
What is royalty?
With the concept of “lump sum” came such a well-known word as “ROYALTY”. This is also a certain amount of money, only it is paid not once, but monthly or regularly (depending on the drawn up agreement with the franchise seller). Often, such a contribution depends on the overall profit of the business.
How are royalties calculated?
It is clear that for the buyer (franchisee) the size of such a contribution is very important. This is due to the fact that if the contribution percentage is slightly increased, this will affect the profitability of the franchise itself. Also, the litter will decrease partnerships with some companies.
The royalty amount almost always ranges from one percent to five percent of the company’s total monthly income. It is also worth remembering that the percentage is influenced by the following important factors:
- Potential profit.
- The prestige of the brand in the global market (For example, the highest percentages of royalties have been observed in the hotel business for many years. All this is due to the fact that most hotels value their reputation and do not cooperate with unverified people);
- Loss of profit due to franchise costs;
- Large expenses for maintaining its own staff of workers (it is clear to anyone that one in big company It’s impossible to get everything done, so you have to hire staff).
Many entrepreneurs ask the question: “Is there even a royalty-free franchise?” Of course, anything can happen. IN modern world this is not uncommon (For example, the Milana store, which sells luxury shoes, attracts customers on more favorable terms, unlike competitors, so they do not have monthly investments).
Similarities and differences between lump sum and royalty
So, a lump-sum fee and royalty are such “Remuneration” to the copyright holder for transferring information rights.
These are similarities, but what are the differences?
Firstly, as mentioned above, royalties monthly payment, and the lump sum payment is one-time.
Secondly, the size of the investment varies greatly. For example, royalties are much less than a lump sum payment (the company will not give away such huge money every month “to no one knows where”).
Based on all this, it becomes clear that these contributions differ only in form, but the essence itself is the same.
Conclusion
In the end, it should be said that when buying a franchise, the risks are reduced to zero (this is understandable from the above, but it is worth mentioning directly).
Therefore, entrepreneurs, it is better to spend a little and then receive a stable profit from your enterprise than to disrupt your nervous system or, in the worst case, simply lose your money.
In fact, the lump sum fee is the cost of the franchise, which the franchisee must pay. IN in a broad sense The words lump sum may have a slightly greater significance. To understand this term more deeply and find out how it even appears, you should start from its basics.
The franchising market appeared in the USA, so the franchise fee there is designated as a franchise fee. More precisely, this term refers to a license fee. Consequently, franchisees in the United States pay rather for the right to operate under a specific brand.
In Russian legislation there is no term “lump sum”, just as there is no definition of the word “franchising”. It turns out that domestic laws do not protect the franchising sector in any way. True, on this moment There is a definition of a commercial concession agreement - usually on the basis of it the company and its partner regulate their relations. This agreement is described in detail in Article 1030 of the Civil Code of the Russian Federation - it states that under the agreement the copyright holder can receive payment. Based on this, it can be assumed that the amount of the lump sum fee is indicated in the commercial concession agreement. In this case, the franchisee, in turn, receives the right to use the brand, methodology, standards and products of the parent company.
However, it is worth understanding that the lump-sum fee may not be the only payment for a franchise business. As a rule, the partner has to pay separately for renting premises, purchasing goods and necessary equipment. In this regard, it is worth immediately discussing possible costs with the franchisor. At least, this is approximately the scheme used by most companies offering franchising.
We can say that paying a lump sum fee implies some services, often consulting. That is, the franchisor company provides legal and accounting assistance to the partner. Also, the lump-sum fee may include a visit to the site of opening a new point and further support on all issues that arise.
Lump sum in accountant language
If speak about accounting registration lump sum payment, then it falls under the Regulations on accounting“Accounting for intangible assets” (document No. 153n dated December 27, 2007). Let's look at how exactly this happens using an example.
Let's assume that a certain company has one hundred franchisees. At the same time, the lump-sum contribution has long been a fixed amount. Naturally, the number of partners increases over time and selling a franchise for such a company is the main means of earning money. In this regard, all lump-sum contributions from partners are shown in the accounting report as income from sales. If we talk about companies for which franchising is not the main means of earning money, then the lump-sum contribution is reflected in the form of operating income.
If we talk about taxation when receiving a lump sum contribution, then it is designated as a service provided. Tax on the amount of such payment is accrued from the moment the franchise agreement comes into force.
What determines the size of the lump sum contribution?
Analyzing the franchise market, you can see that the size of the lump sum fee varies greatly among different companies. For some it looks like a nominal fee, for others it looks like a fortune. And sometimes the lump sum fee is not charged to the partner at all. Last case more relevant for those enterprises that themselves produce the offered product. Or a lump sum payment simply means the first batch, the size of the initial purchase, or, more simply, the threshold for entering the business. That is, in principle there may not be a lump sum contribution, but the franchisee will still have to spend this or that amount. Often this fee may not be charged if there is a strong desire to increase brand awareness, as well as to influence competitors. Profitable terms for partners they help solve many problems of the parent company.
We said above that a lump sum fee often includes a whole range of services, for example, assistance in opening a point, providing advertising materials and employee training. All this is not free for the franchisor, so he needs to at least recoup the costs. In most cases, the lump sum contribution is not the net profit of the company owner and, as a rule, a lot of money is spent on paying the franchisor’s employees, because they also spend a lot of time preparing the business and further assistance. Based on this, the franchisor makes a certain markup in order to make at least a little money on the sale of the franchise.
It is extremely important that the lump sum payment is reasonable. That is, so that its size suits the franchisor, and at the same time is accessible to potential partners. Often this indicator is a key factor in the development of a company. Acceptable conditions for both parties are known to be an excellent opportunity to scale a business.
It is also necessary to take into account that the franchising market is also sometimes very competitive. Often, franchisors in the same area seriously compete with each other, and therefore their working conditions may differ significantly. Naturally, with high competition, some offers sometimes seem more interesting than others. It is important here not to give in to emotions and choose exactly what will suit you and will allow you to successfully develop your franchise business.
Sometimes it happens that the lump sum fee is indicated in dollars or euros - this is typical for foreign companies wishing to open their branches in Russia. At the same time, part of the money from the lump sum fee goes to the domestic intermediary company, which is the main representative office of the parent company. This approach is very convenient for foreign enterprises, because in this case they are already protected from currency exchange rate fluctuations in our country. Naturally, all the standard services needed to start a business are also provided here. It turns out, and here the lump-sum contribution does not go in the form of net profit to the owner - most of the expenses are sometimes made up of payment for the work of employees and all supplied materials. As a rule, opening a branch of a foreign company is more expensive, especially if we are talking about a world-famous brand.
Sometimes, when determining the lump sum amount, the cost of the technologies themselves is also taken into account. Let's assume that the franchisor has some special secret, for example, he knows the peculiarities of preparing dishes. Naturally, with proper demand, this is also valued quite dearly.
Thus, the size of the lump-sum contribution depends on the specifics specific business and on the principles of the organization. In some places it has practically no meaning at all, but in others it is the main income of the company. In any case, the parent company will always calculate all the risks and costs when calculating the lump sum payment.
Is it possible to find a franchise without a lump sum fee?
Perhaps someone will think about the question: why do we need a lump sum contribution at all? Surely many entrepreneurs do not want to pay money “just like that” to the parent company and want to save money. There really is a way out, and if you wish, you can find a franchise that does not charge a lump sum fee. As a rule, this is often found in trade, but it is possible to find similar things in other types of business. An entrepreneur should first decide what type of business he wants to engage in, and then all that remains is to choose from the existing options. This is not so difficult to do, however, you need to take into account the specifics of the business. To confirm this, below are examples of franchises for which such a fee does not need to be paid.
Be sure to check out the franchises without a down payment in our catalog (OVER 100 OFFERS!) -
Firefly
The company intends to sell unique coloring books and postcards. The first outlet under this brand opened in 2016. Since 2018, the company provides a franchise to everyone.
The starting investment volume starts from 50 thousand rubles. It is assumed that the partner’s monthly profit will be about 60 thousand rubles per month. Therefore, you can recoup all investments here literally in one to two months after purchasing a franchise. Any other payments, other than payment for goods, in in this case not required. That is, everything is quite easy and simple. The parent company, in turn, provides all related consultations and ensures uninterrupted supply of goods.
Cooperation here requires an area of one to two square meters(a small stand with goods is displayed in the retail area). Moreover, the products of this company can be successfully sold at an existing retail outlet.
Gerry Weber
The German brand Gerry Weber plans to open a fashion store women's clothing. The company appeared in 1973, and has been cooperating under the franchising system since 1999.
Estimated investment volume: 6 million rubles. Payback time: about one year. Based on this, we can say that a partner can earn approximately 500 thousand rubles per month.
The partner is provided with comprehensive support and training for sellers. A store business plan is developed individually and assistance is provided in purchasing a suitable product range. In addition, the franchisor company helps you choose the most suitable premises for work. Also, after purchasing a franchise, the entrepreneur is provided with direct assistance in opening a store.
To open a Gerry Weber franchise business, a premises with an area of one hundred to two hundred square meters is required. It is important that it is in a modern mall, or on the main street of the city. Naturally, the franchisee’s profit seriously depends on the location of the outlet, so this factor also needs to be taken into account when purchasing said franchise.
Upside Down House
The Upside Down House franchise is a business based on the organization of a unique art object. As the name suggests, the structure is a house standing on the roof (more precisely, at an angle of about ten degrees). From the outside it seems as if the house is about to fall, but inside the person feels quite unusual.
Similar houses already exist in different cities and have been successfully tested as a place for mass visits. They are photographed against their background, and at the same time they look quite suitable as a local landmark. The information about the franchise notes that in cities with a population of two hundred thousand or more they have increased demand. Obviously, this is best suited for communities that have good tourist traffic. The company itself has been operating since 2015 and currently eleven similar houses have been opened under this franchise.
Required investment amount: from 2 million 300 thousand rubles. Approximate earnings: 300 thousand rubles monthly. Approximate payback period: from three to eight months. It is noteworthy that the franchisor company gives an official guarantee for this. The main profit comes from ticket sales (on average, about thirty thousand people visit this place every year). Possible sale of photographic services, souvenir products, drinks and snacks. In fact, in such a place you can offer almost any service related to organizing leisure time, for example, renting bicycles or hoverboards.
By purchasing this franchise, a partner receives a business plan and all instructions for selecting a suitable place to work. All accompanying documentation is also provided, allowing you to conduct activities according to the law.
To open an Upside Down House franchise business, you need a plot of land ranging from twenty-three to thirty square meters.
My Brilliant Smile
The My Brilliant Smile franchise is a business for those who want to make money from teeth whitening. The company was founded in 2013 and launched the franchising system in 2014. Now the firm has about one hundred and twenty partners. It currently has five branches.
The information about the franchise indicates that an entrepreneur can earn about 70 thousand rubles per month, and the average bill here is three thousand five hundred rubles. At the same time, you can get from thirty to sixty clients on average per month. Volume of investments in this business is about 100 thousand rubles. It turns out that in one to two months an entrepreneur can recoup all his investments.
The partner is provided with assistance in promoting through social networks and is provided Personal Area and curriculum. Necessary advertising and information materials, sets of company contracts are provided. The CRM system and the ability to register clients online are being configured. A competitor analysis is carried out and a one-page website is provided. In addition to standard procedures, clients are offered products for whitening at home.
The area of the room here must be at least ten square meters. To work under this franchise, no licenses or qualified health workers are required. Literally one or two employees are enough to fully conduct business. It turns out that absolutely any entrepreneur can start cooperation under this franchise and, it should be noted, with a relatively low investment.
Dreamline
The Dreamline franchise is the sale of mattresses, beds and other related furniture. The company's production capacity reaches thirty thousand units per month. The company itself appeared in 2007 and currently has fourteen branches.
The initial investment amount here is 400 thousand rubles, and the partner’s monthly profit can reach up to 350 thousand rubles. Consequently, the franchisee’s investment can pay off in one to two months.
Representatives of the franchisor, in turn, travel to the partner’s city for marketing analysis and assistance in selecting suitable premises. The profitability of the future store is also assessed. Samples of manufactured products are also provided to the partner. It is also noteworthy that the first exhibition of furniture is provided to the partner in installments. An individual project is developed in accordance with the selected retail space. The store is provided advertising posters, catalogs and other branded materials. The selection and training of store personnel is carried out. Information about the partner is posted on the company's official website.
To cooperate under this franchise, the store area must be at least forty square meters. It is important to place the point in specialized furniture centers, or in places with good targeted traffic. By correctly choosing a suitable place to work, you can talk about quick payback investments.
Smart Vision
The Smart Vision franchise is a means of making money from a medical optics salon. The first store under this brand opened in 2009, and a total of fifteen similar outlets are currently operating.
Investments here start from 400 thousand rubles, and the payback period takes about five months. Based on this, we can say that a partner’s monthly earnings can be about 80 thousand rubles.
When purchasing a franchise, an entrepreneur receives a design project for the salon and a package of documents that reflects all the nuances for full-fledged work. Step-by-step instructions are also provided. marketing plan, allowing you to successfully launch a store. During cooperation, modern software products are used, with which you can control your business from anywhere in the world. A personal website is also provided along with social networks. Assistance is provided in hiring and training staff. The franchisee is assigned a personal manager, who subsequently supervises all his work. The necessary medical equipment is provided for rent and this allows you to save a significant amount.
Depending on the available investments, the partner can choose the appropriate format of cooperation. The area of the future store will also depend on this choice: the minimum option should have an area of twenty, and the maximum – sixty square meters. It is noteworthy that to cooperate under this franchise you do not need to have experience in business or medical activities.
Conclusion
So, we figured out that a lump sum fee is, as a rule, a payment for a range of services provided by the franchisor. This usually means comprehensive assistance in organizing and conducting activities, as well as the provision of all letterheads and advertising materials.
By paying a lump sum fee, an entrepreneur immediately buys a franchise and saves himself from many organizational problems. Taking into account the cost of the lump sum fee, you can already find out the specific price of a particular type of activity. Again, this helps to calculate all sorts of risks. In general, we can say that a lump sum fee is a kind of threshold for entering a business. Often it is more symbolic and does not represent the main means of income for the franchisor. Moreover, it is more profitable for many companies to simply sell their goods in bulk and provide all possible support to the entrepreneur.
Some companies may not charge a lump sum fee at all, but then the franchisee should find out what possible expenses are involved when starting a business. Naturally, they can be quite large without a lump sum fee. Moreover, expenses may be unexpected, but with a lump sum payment, many of them can be eliminated completely. At the same time, if an entrepreneur fundamentally does not want to pay it when opening a branch of the company, then he can easily find offers without a lump sum contribution - there are no problems with this either today, and above we have given only the smallest part of such examples.
A lump-sum (one-time) payment is used in itself quite rarely. It is used mainly in cases where the buyer of the license is a company unknown on the market, and there is doubt whether it will be able to successfully release and commercialize the development. Only lump sum payment can be used if it is extremely difficult to control the volume of products released under a license. In this case, the licensor may simply not receive the data necessary for the calculation.
Lump sum payments(fixed amounts paid at a time or in installments) is recommended to be used if all rights to the subject of the license are transferred to the licensee, or the agreement is concluded with a little-known licensee, control over whose activities is difficult. This form of payment is particularly beneficial to the licensor. It significantly reduces its risk, eliminates the need to control the activities of the licensee, and provides the licensor with enough a large amount(although with royalties the total volume of payments may be higher). The size of lump sum payments varies quite widely: 5-25% of the total amount.
Due to the need to pay significant amounts before receiving profit (income), more high degree risk the licensee does not always agree to a lump sum payment.
It is impossible to accurately calculate the size of a lump sum payment by simply adding the amounts determined on the basis of royalties due to changes in the value of cash and inflationary processes. With a lump sum payment, the licensee acts as a lender, and the licensor acts as a loan recipient. This determines their behavior WHEN concluding a license agreement. The licensor must strive to receive such an amount that, if invested in the bank, would provide him with a profit, in amount and time of receipt (together with the amount invested in the bank) equal to payments in the form of royalties. In turn, it is beneficial for the licensee to reduce the settlement price to such a value that the difference between the royalty and the lump-sum payment is equal to the cost of the loan. The reduction (discounting) factor is calculated using the compound interest formula:
where A i is the discount factor for the amount of royalties received in the i-th year;
i - the number of years following the accounting year (the accounting year is considered zero);
r - discount rate (%).
The discount rate should not be lower than the commercial loan rate for long-term credit transactions, otherwise it would be more profitable to place money in the bank. The value of the discount factor should be determined in advance for the most common discount rates and terms of licensing agreements. Discounting method, i.e. bringing cost indicators different years to a comparable form, allows you to recalculate current payments in the form of royalties into lump sum payments and vice versa:
,
where C pi - royalties that must be paid in the i-th year;
C ri - net discounted revenues for the license in the i -year;
i is the year of payment in the form of royalties.
The estimated price of a license for lump sum payments is determined by the formula:
To encourage the use of facilities intellectual property licensee, the payment of fees should be closely linked to this fact. Thus, when paying a lump sum payment in two or three installments, it is advisable to time the transfer of the first part to coincide with the conclusion of the contract, the second - to the development of the facility by the licensee, and the third - to the production reaching its design capacity. The initial payment, as a rule, must reimburse the licensor for its costs of marketing, concluding an agreement, transferring technical documentation, and, under certain conditions, the costs of developing a scientific and technical achievement. If a lump sum payment is transferred at a time, it is recommended to associate it with the development of the facility.
A lump sum payment is present in most licensing agreements not as the only type of payment, but as a kind of advance payment paid to the licensor after the transfer of documentation. The lump sum payment usually accounts for 10-20% of total price licenses.