Franchising is a private business under a well-known brand, which is akin to a marriage of convenience. Indeed, in it, each of the parties acquires certain benefits.
Business creation tool
Franchising is a purchase not of a ready-made business, but of a tool with which it can be created for profit and other needs of a franchisee, in combination with instructions for using this tool.
How do you know how the presentation of the company corresponds to its real business format, and is not a cover compiled by an experienced professional consultant? To do this, it is important to know the business reputation of the company and its duration in the market (including using the Internet and social networks), reviews of former employees, staff turnover, network branching, product range and quality of service, reviews of entrepreneurs who have already acquired a franchise.
What is a franchise book?
The instruction for the use of franchising is called a franchise book and, as a rule, contains instructions for conducting operations, a description of the product, goods, services, sales standards, and personnel management standards. At its core, it is a great intellectual treasure that is often underestimated.
It also includes single-use components: a standard for opening with a step-by-step description of the procedure, a brand book describing the use of visual elements of the brand in certain situations, a merchandising book for clothing stores and boutiques.
Franchising: franchising terms, lump-sum payment and royalties in a franchise agreement
The relations of the franchisor and franchisee in the Russian Federation regarding the acquisition of intellectual property are governed by a commercial concession agreement . It prescribes the distribution of areas of responsibility and control between the parties, the conditions for the provision of a franchise as an object of intellectual property, the mechanism for collecting payments such as royalties and lump-sum payments. Postings compiled by accounting specialists in accordance with paragraph 4 of PBU 14/2000 take into account the exclusive rights to use a trademark as part of the intangible assets of an enterprise.
The term for which the contract is concluded depends on the field of activity. For stores, this is usually the term of a standard lease, which is three to five years. When starting a business that requires significant investments, such as a fitness center, the period may be longer: 10-15 years. McDonald's concludes a term of 25 years.
Types of restrictions in a franchise agreement
In order to avoid future abuses by the franchisee in contracts related to the provision of a franchise in the field of catering or any services, a restriction may be included on the lawful grounds in the form of a ban on engaging in this type of business for a certain period of time. The contract may also contain restrictions on the buyback by the franchisor of a outlet when certain conditions are met with a description of the calculation scheme for the amount of the buyback.
Franchise Purchase Payment Forms
When choosing a franchise for various companies represented by grocery stores, clothing stores, fast food establishments or hotels, the attention of a potential franchisee, among other things, is drawn to the size of the down payment, which largely determines the need for investment for the implementation of a new project. Most often, a lump-sum payment includes a component for the use of such an intangible resource as a brand, and a material component in the form of a sign and other elements.
There are two forms of payment for franchising:
- The entry, or lump-sum, installment, called fixed.
- Royalty - a contribution in the form of regular payments.
What is lump-sum payment and royalties? Since the implementation of a franchise entails certain costs, companies resort to a lump-sum payment to compensate them. It is paid once after the conclusion of the contract and is a kind of payment for joining a system of relations called franchising.
Royalty Payment Forms
Royalty is a time-based payment for the use of a trademark, comes in two forms: as a percentage of turnover or profit and a fixed amount of payment. The choice of royalty payment method depends on how much the franchisor can control the cash flow of the franchisee company.
So, for example, if the companies are connected by a common database, as happens when opening a clothing store, the franchisor can link the amount of royalties to the percentage of turnover or profit, demonstrating its responsibility and interest in developing the franchisee. Otherwise, a fixed amount of regular payments may be set.
Factors determining the amount of lump-sum contribution
The lump-sum contribution for each type of franchise may differ significantly under the influence of various factors determining its size, namely:
- Costs associated with the design of retail and administrative space of a new store.
- Expenses due to equipment and packaging of the trading floor.
- The cost of supplying promotional materials.
- The costs associated with the implementation of sales standards and the need for training of administrative staff and line personnel. If a franchisor company sells a business format, its essential part is the sales standards that are embodied in people. Those franchisees, whose staff follows the standards of sales and provides high service, creates a sustainable competitive advantage. That is why it is so important to train staff, especially in the provision of services.
- The need for the implementation of accounting systems, installation of computer programs.
- The size of the 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 industry, where the size of a one-time payment for the right to purchase a franchise can range from 3 to 4 million rubles. For comparison: for a clothing store, this fee for joining this system of relations can be from 700 to 1.5 thousand rubles.
Franchise without royalties and lump-sum
Among the proposals, especially in the field of commercial franchising, you can find a significant number of franchises, lump-sum payment for the provision of which is not charged. The development plans of some companies, including the Pyaterochka grocery store chain, the Territory of Fashion multi-brand store, provide for a franchise without 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.
In the event that, under the terms of the trade franchise, the assortment of the new store will be presented exclusively by the franchisor's products, then the costs of its provision and other associated costs can be transferred and included in the price of the goods. Such a franchise, which does not have a lump-sum fee, allows, through the expansion of the network and the joint construction of a successful business, increase the popularity of the brand and ensure the growth of business profitability.