What is a lump sum and roy alties

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

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 not a purchase of a ready-made business, but a tool with which it can be created for profit and to satisfy other needs of the franchisee, in combination with instructions for using this tool.

How do you know if a company's presentation corresponds to its real business format, and not a cover written by an experienced professional consultant? To do this, it is important to find out the business reputation of the company and the period of its work on the market (including with the help of 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?

Instructions for the use of franchising is called a franchising book and, as a rule, contains instructions for conducting operations, a description of the product, product, service, sales standards, standardspersonnel management. At its core, this is a great intellectual treasure that is often underestimated.

It also includes one-time use parts: a standard for opening with a step-by-step procedure, a brand book describing the use of brand visuals in certain situations, a merchandising book for clothing stores and boutiques.

Franchising: franchising conditions, lump-sum fee and roy alties in the franchise agreement

Relations between the franchisor and the 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 granting a franchise as an object of intellectual property, the mechanism for collecting payments, such as roy alties and a lump-sum fee. The entries 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 company's intangible assets.

The term for which the contract is concluded depends on the field of activity. For shops, this is usually the term of a standard lease, which is 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 term.

Types of restrictions in the franchise agreement

Woto avoid future possible abuse by the franchisee in contracts related to the provision of a franchise in the field of catering or some services, a restriction may be legally included in the form of a prohibition to engage in this type of business for a certain period. Also, the agreement may contain restrictions on the repurchase by the franchisor of the outlet when certain conditions are met, with a description of the scheme for calculating the repurchase amount.

Forms of payment for the purchase of a franchise

When choosing a franchise of 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 amount of the initial payment, which largely determines the need for investment for the implementation of a new project. Most often, a lump-sum fee 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:

• Introductory, or lump-sum, fee, called fixed.
• Roy alty is a contribution in the form of regular payments.

What are lump sums and roy alties? Since the implementation of the franchise entails certain costs, companies resort to collecting a lump-sum fee to compensate for them. It is paid once after the conclusion of the contract and is a kind of fee for joining the system of relations called franchising.

Roy alty payment forms

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

So, for example, if companies are linked by a common database, as is the case when opening a clothing store, then the franchisor can tie the roy alty amount to a percentage of turnover or profit, demonstrating his responsibility and interest in the development of the franchisee. Otherwise, a fixed amount of regular payments may be set.

Factors that determine the amount of the lump-sum contribution

The amount of the lump-sum fee for each type of franchise can vary significantly due to various factors that determine its amount, namely:

• Costs associated with designing retail and administrative space for the new store.
• Expenses due to equipment and equipment of the trading floor.
• Cost of supplying 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 an essential part of it is the sales standards that are embodied in people. Those franchisees whose personnel follow sales standards and provide high-quality service form a sustainable competitive advantage. Exactlythat's why it's so important to train staff, especially in service delivery.
• The need to introduce accounting systems, install 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 business, 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 range from 700 to 1.5 thousand rubles.

Roy alty-free and lump-sum franchise

Among the offers, especially in the field of retail franchising, you can find a significant number of franchises, the lump-sum fee for which is not charged. The development plans of some companies, including the Pyaterochka grocery store chain and the Fashion Territory 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 represented exclusively by the products of the franchisor, then the costs of providing them and other related costs can be transferred and included in the cost of goods. Suchthe franchise, which does not charge a lump-sum fee, allows you to expand the network and jointly build a successful business to increase the popularity of the brand and ensure the growth of business profitability.