What is a lump-sum fee and royalties?

Franchising is a private business under a well-known brand, which is akin to a marriage of convenience. After all, in it, each of the parties acquires certain benefits.

Business creation tool

Franchising is the purchase of an unfinished business, but an instrument through which it can be created to generate profit and meet other needs of the franchisee, in conjunction with instructions for the use of this tool.

How do you know if the presentation of the company corresponds to its actual 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 the term of its work in the market (including using the Internet and social networks), feedback from former employees, staff turnover, network branching, product range and quality of service, feedback from entrepreneurs who have already acquired a franchise.

What is franchising beech?

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, personnel management standards. At its core, it is a great intellectual treasure, which is often underestimated.

It also includes the components used once: the opening standard with a step-by-step description of the procedure, a brand-book that describes the use of visual elements of the brand in certain situations, merchandising-beech for clothing stores and boutiques.

Franchising: terms of franchising, lump-sum and royalties in a franchise agreement

Relations franchiser and franchise in the Russian Federation in terms of acquiring intellectual property are regulated by the contract of commercial concession. It prescribes the distribution of areas of responsibility and control between the parties, the conditions for granting the franchise as an object of intellectual property, a mechanism for charging payments, such as royalties and a lump-sum contribution. Postings compiled 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 term, on which the contract is concluded, depends on the scope of activity. For stores, this is usually the term of a standard lease, 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" concludes a period of 25 years.

Types of restrictions in the franchise agreement

In order to avoid possible abuse by franchisees in contracts related to the provision of a franchise in the field of public catering or any services in the future, a restriction on the prohibition of engaging in such a business for a certain period may be legally included. Also, the contract may contain restrictions on the buy-back by the franchisor of the outlet when certain conditions are reached with a description of the scheme for calculating the amount of repurchase.

Forms of payment for the purchase of a franchise

When choosing the franchise of various companies represented by grocery stores, clothing stores, fast food establishments or hotels, the attention of the potential franchisee, among other things, is drawn to the amount of the initial payment, which largely determines the need for investments for the implementation of the new project. Most often, a lump-sum contribution includes a component for using such an intangible resource as a brand, and a material component in the form of a signboard and other elements.

There are two forms of payment for franchising:

• An introductory, or lump-sum, contribution, called fixed.
• Royalties - a contribution in the form of regular payments.

What is a lump-sum fee and royalties? Since the implementation of the franchise entails certain costs, companies are recruited to pay a lump-sum contribution to compensate them. It is paid once, after the conclusion of the contract, and is a kind of payment for joining the system of relations, called franchising.

Forms of payment of royalties

Royalty is time-based payment for the use of a trademark, acts in two forms: as a percentage of turnover or profit and a fixed amount of payment. The choice of the form of payment of royalties depends on how much the franchisor can control the monetary turnover of the franchisee.

So, for example, if companies are connected by a common database, as is the case with the opening of a clothing store, the franchisor can tie the amount of royalties to the percentage of turnover or profit, demonstrating their responsibility and interest in developing the franchisee. Otherwise, a fixed amount of regular payments can be established.

Factors determining the size of a lump-sum contribution

The amount of a lump-sum contribution for each type of franchise can differ significantly under the influence of various factors that determine its magnitude, namely:

• The costs associated with the design of commercial and administrative areas of the new store.
• Expenses, caused by the equipment and the complete set of the trading floor.
• The cost of supply of promotional materials.
• Costs associated with the implementation of sales standards and the need for training of administrative and managerial staff and line staff. If a franchisor sells a business format, then a significant part of it is the sales standards that are embodied in people. Those franchisees, whose staff follows the standards of sales and provides high-level service, forms a stable competitive advantage. That's why it's so important to train staff, especially in the provision of services.
• Necessity of introduction 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.

At present, the highest lump-sum rates are observed in the hotel business, where the amount 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 royalty and a lump-sum contribution

Among the proposals, especially in the area of commercial franchising, you can find a significant number of franchises, a lump-sum contribution for which no fee is charged. The development plans of some companies, including the chain of grocery stores "Pyaterochka", multi-brand store "Territory of Fashion", presuppose the granting of a franchise without levying a lump-sum contribution. The policy of such companies is aimed at expanding the network by attracting new partners and offering them an economically advantageous environment.

In the event that, under the conditions of a trade franchise, the assortment of a new store will be represented exclusively by the products of the franchisor, the costs of its provision and other associated costs may be transferred and included in the cost of the goods. Such a franchise, a lump-sum contribution at which is not charged, allows for the expansion of the network and the joint construction of a successful business to increase the popularity of the brand and ensure the growth of business profitability.