Burning with the desire to open my own business under the name famous brand, young entrepreneurs are beginning to learn the basics of franchising. And then they are faced with such concepts as royalties and lump sum.
While the lump sum fee is still more or less clear, the variety of ways to collect royalties often leads to confusion. So what are royalties? How does this payment differ from a lump sum payment? How do franchisors calculate the royalty amount? Why choose one or another calculation scheme?
What is royalty?
The Russian language borrowed the word royalty from English-speaking countries. In turn, in modern English word royalty comes from the Middle Ages. From medieval French, roialte can be translated as “royal, royal, state.” Then this word was used as a legal term. Today, the term “royalty” is used in franchising, copyright and a number of other industries.
In the most general sense, royalties are compensation for the right to use the subject of a license agreement
But what are royalties in a franchise? These are regular payments that the franchise buyer makes to the copyright holder for the use of the trademark, logo and other brand attributes that distinguish it from its competitors. For example, he pays a monthly royalty to the company for using the corporate red color, the slogan “I"m lovin" it" and other brand attributes.
Many people are puzzled by the question of how a royalty differs from a lump sum fee. It would seem that both the royalty and the lump sum payment - payments for a trademark and franchise technologies. In fact, franchisees pay a one-time lump-sum fee for the right to join a network with a well-known name.
But if the franchisee pays a lump sum fee for a trademark, then why pay royalties for the same thing again and again? The answer is simple: in the vast majority of cases, the money received from royalty payments is spent by the franchisor on brand development, its marketing promotion, and sometimes the development of new products. Depending on the magnitude of these costs, as well as other factors, the size of payments and royalty collection schemes vary greatly.
Types of royalties
Each franchisor sets the amount of royalty payments independently, as well as the payment scheme. At the same time, franchise authors have favorite techniques that are used in most cases, regardless of the type of business. The most commonly used types are: royalty payments:
- payment in the form of a certain percentage of sales volume
- payment in the form of a percentage of turnover or revenue
- fixed payment amount
In practice, these templates are modified by franchisors to make the franchise both effective and attractive to franchisees. The schemes depend on the industry in which the franchise operates.
Product franchises most often waive royalties altogether. The fact is that for product franchises it is more profitable for the franchisee to purchase more branded goods from them and sell them through their outlet. That's why most people work without royalties , or . Often, royalty payments are included in the purchase price of goods in the form of a markup.
Sometimes franchises that provide services also operate without royalties. In this case, royalties are replaced by purchases Supplies, as, for example, in the network providing thermal insulation services for premises. Olga Isachenko, head of the company’s wholesale sales department, explains:
“We decided to refuse royalties. Instead, franchisees are provided with a minimum volume of material purchases that they can use directly in their work. The monthly purchase amount is about 180,000 rubles. Every six months we check the purchasing schedule with our franchisees. If the conditions for it are not met, we, as a rule, do not renew the contract.”
Regardless of the scope of the franchise, one of the most popular types of royalties remains charging a percentage of the volume revenue received. 5% of revenue - this is the royalty rate in the company « » . Its head Alexey Frolov says:
At the same time, Techprint, like many other franchisors, give their franchisees time to to "get back on your feet". Launch own business and payment of a lump sum payment require fairly large cash injections. At first, any enterprise operates at a loss; it needs a certain time to break even. This is why many franchises provide for a deferral of royalty payments for several months. The period for which payments are deferred is set at the discretion of the franchisor.
In addition to deferring payments to reduce the initial financial burden on franchisees, some companies transfer part of the lump sum payment to royalties. This is what a credit brokerage franchise does.
During life cycle franchisees change and the royalty amounts they pay change. By paying a reduced lump-sum fee, the franchise buyer initially pays 50% of his revenue as a royalty. When the part of the lump sum included in these payments is paid, the royalty conditions change: the payment is already 10% of the commission received by the broker.
Even when using a percentage fee structure, some franchisors provide a minimum fixed royalty amount.
This rule applies in the same way. If 10% of the franchisee’s commission turns out to be less than 500 USD, he will still have to pay this amount. The minimum amount is set depending on the size of the lump sum payment. For those who paid 600,000 rubles instead of 1,300,000 rubles to join the franchise, the minimum royalty payment is 1,000 USD.
Many franchises on payments fixed amounts are building their entire royalty system. This way the payment system becomes transparent for both the franchisee and the franchisor. Fixed royalty amounts are used by the franchise « » . CEO company Sofya Timofeeva explains:
“The established royalty amount allows franchisees to live a calm and planned life, and honestly show us their income. By analyzing income reports, we provide franchisees with advice on how to improve operations.”
Moreover, even by setting a fixed royalty amount, the franchisor can reduce the initial financial burden on the business of its franchisees. For this the company gradually increases size fixed payments. At first, a newly minted manager needs to understand the business itself, build business processes, which is why companies do not establish large amounts royalties immediately. Over time, the franchisee establishes the operation of his business, income from it grows, and with it the amount of royalties grows.
Most often, the fixed royalty amount is calculated in rubles, but franchisors can choose your own currency, in which the franchisee will pay them. International franchise networks may choose US dollars as their payment currency. For example, a royalty of $300 was set by a franchise whose roots go back to Korea. The general director of the company in Russia, Maria Veselova, says:
“The amount and currency of royalties is determined international rules, according to which we work"
Royalty is one of the main definitions in franchising.
At the beginning of the 16th century in Europe, taxes from subjects and coal miners in favor of Britain began to be called royalties. But in the 21st century, the term has somewhat expanded its meaning.
What is royalty?
Royalties, or regular interest payments– this is a payment to the franchisor for his services on a fixed basis in installments; franchisee pays for the provided franchisor services, technologies, brand, etc. in the form of a fixed interest rate.
Royalty can also mean:
- Duty.
- Rent.
- Tax.
- Payment for the license.
- The profit that the owner of the property will receive by transferring it to another private entity for management.
There are several structural types of royalties:
- margin payment(margin – the difference between indicators); designed for the production of goods of different costs and strict control over sales;
- payment from turnover- carried out to the franchisor as a percentage of wholesale or retail sales for a specific period;
- fixed payment– multiple constant payments for equal periods stipulated by the contract;
- copyright royalty– payments to the owner of copyright in a trademark, patents, land, works of art owned by another person for each time the above is distributed or used.
Concept of lump sum and royalty
A lump sum payment is somewhat different from a royalty, although it is used in the same area.
If royalties are regular payments, then a lump sum payment is a one-time payment. It is determined by the cost of using a franchise network by a trademark, enterprise, or services.
The amount of the lump-sum contribution is calculated by the total cost of creation effective system for the functioning of franchising, declared value, payment for partner services.
In some cases, the lump sum fee is just the cost of purchasing or registering franchises.
A one-time payment will include costs for:
- Registration of a franchised enterprise and start of its work;
- Rent of premises, office, warehouse;
- Payment of hired personnel;
- Development of an advertising campaign.
Each enterprise has its own individual economic calculation system.
Royalty rate
Royalty rate– these are fixed and regular payments, that is, a certain percentage of the transaction. The rate is determined by agreement between the parties.
It is worth noting: the value of the royalty rate is indicated in the business plan for some time (the immediate period or long-term action) indicating forecasts for the stability of work and its development. This forecast makes it possible to predetermine the percentages of current payments and in the future achieve the desired stable result.
Royalty amount - what is it and what does it depend on?
The amount of payments may depend on the following factors:
- number of enterprises;
- area of buildings;
- actual number of clients;
- name of the enterprise, structure; description of their operating principle; scope of application; characteristics; cost of a term license;
- mention of patents, indication of their data;
- intended countries where the license is sold;
- state of the license (assigned, being developed, there are only calculations);
- volume of use over the years of licensing;
- cost of the license agreement;
- the volume of documentation that describes the technology of operation of the service or product;
- non-exclusive or exclusive rights of the licensee;
- other conditions provided for in the royalty agreement.
The royalty rate is typical for a large and well-established business, where it is difficult to constantly monitor the accuracy of the franchisor’s income.
Royalty waiver method
The method of exemption from royalties is based on the fact that the property in question is not the property of the real owner, but belongs to another legal entity. That is, the property is presented on behalf of the latter, but with a license and the condition of a specific type of royalty.
The real owner does not have a direct relationship with the property, the right to use it during the period provided for in the agreement with the franchisor, but receives royalties for it.
What are the advantages of a franchise?
A franchise can make a business successful without having absolutely anything to do with it. Company or any other entity purchases the rights to use a well-known trademark and manufacture products in accordance with the requirements of the actual owner.
For both the franchisor and the franchisee, the advantages are sufficient to consider active development:
- spreading the brand around the world– increasing the level of recognition and interest among consumers;
- promotion of an existing business without threat for its existence if the franchise fails; franchisees do not need to start from scratch, a competent business plan is enough;
- the franchisee acquires the necessary skills, abilities, and qualities to conduct business in a specific area. The franchisor provides training for franchisees in accordance with the agreement;
- franchisor(the one who grants the rights to use) receives a favorable financial offer for a long period, profitable raising your business to a new level.
How much do they pay for a franchise?
The advantages of the franchise are certainly enough to make it difficult to become interested in it. But there are also disadvantages. One of the most significant is the high cost. But if we take into account the size of the profit from it, then this disadvantage can be leveled out in a short period of time.
When registering a franchise, the franchisee is required to pay a lump sum fee as a guarantee of the right to use. The franchise also provides for monthly payments to the franchisor - a percentage of turnover (analogous to rent).
Buying a franchise is an investment in a business that is beneficial for both parties. The cost is provided by the franchisor, taking into account all services and rights provided and is regulated by the level of development of the business in question.
Taxation of royalties
Russian legislation provides for royalties as passive income both legal entities and individuals. When royalties are received by an individual (resident), the income is retained by the legal entity that pays the royalty interest. That is, royalties individual is not taxed because it is not included in the income from which the single tax is paid.
It is worth noting: If royalties are considered not as income, but as an expense, then the situation is somewhat different. In this case, the royalty must be economically justified and not exceed 4 percent of the total income from the sale of the business.
Who else pays royalties?
Royalties are paid by any entrepreneur who uses copyright or licensing rights to their author or owner, according to the agreement. The contract is drawn up personally by representatives of the owner and consumer or between the consumer and an organization that legally represents the interests of the author or owner.
Franchises without royalties and lump-sum fees
There is virtually no business without investment, and not a single area provides such a method of brand promotion.
Sometimes you can consider franchises without investments in the following options:
- Income for the franchisor in the regional market. The franchisor helps franchisees by opening points of sale of their property in financially. A new entrepreneur must gain a place in such a market. By purchasing rights (or goods) from the owner, the franchisee sells it at a premium, thus ensuring a constant income.
- Franchise for an employee. Large companies train staff and the highest results earn the right to purchase a franchise. The owner does not receive the costs of transferring the franchise immediately, but through periodic percentage payments from the income of the new franchisee.
- The franchisor can grant the rights to use the brand to new persons in the event that the brand trademark, the name has not been promoted until this time and has a weak hold on the market. The purpose of such franchises is to attract partners and promote business.
An individual or legal entity can receive not only active profit from a licensed or copyrighted property, but also passive profit, as royalties, by selling franchises.
Stanislav Matveev
Author of the bestselling book "Phenomenal Memory". Record holder of the Book of Records of Russia. Creator of the training center "Remember Everything". Owner of Internet portals in legal, business and fishing topics. Former owner of a franchise and online store.
Entrepreneurs who want to work as a franchise inevitably encounter the concepts of lump sum and royalty - what is it? in simple words we explain in this article. You will learn what these payments are for, what they consist of, and what options exist on the market.
General concepts of payments in franchising
Franchising is a popular way to open a small business by purchasing the right to use a famous brand. When purchasing a franchise, businessmen inevitably face two types of mandatory payments: one-time and regular.
It is interesting that both concepts are not enshrined in Russian legislation, which does not prevent them from working in practice.
Lump sum and royalty are types of payments made by the franchisee(buyer of brand rights), for:
- the opportunity to work under a well-known name;
- opportunity to learn from entrepreneurial experience;
- assistance in purchasing equipment, recruiting and training employees;
- promotion services from the main company;
- other services and any assistance in running a business.
What is a lump sum payment
At the very beginning of cooperation, the buyer pays the franchisor a certain amount, one-time initial payment for the right to use the brand and count on the joint development of the trading network. Such a contribution is called a “lump sum”, its name comes from the French phrase “thick piece”.
The size of the lump-sum contribution varies from 15 thousand to several million rubles. average price is 300 thousand rubles. Typically, the size of a one-time payment is clearly fixed at a certain amount (or within certain limits), although some companies assign the amount of the down payment personally for each entrepreneur. The cost, as a rule, depends on the direction of the business, the fame of the copyright holder, manufacturability and his contribution to the opening of a new establishment. This fee is usually identified with the cost of the franchise.
Franchising is a popular way to open a small business
How does the lump sum amount work out?
The amount of the contribution is not determined by chance. It is calculated on the basis of the costs that the franchisor will incur for training franchisees and opening a new establishment in the chain. The more expenses, the higher the cost of the franchise. Among the expenses, as a rule, prevail:
- training of entrepreneurs and employees;
- preparation and printing methodological recommendations, strategies, rules and other documents;
- branded clothing for employees, packaging with logos, etc.
A lump sum payment should not be equated with all investments in a business. This one-time payment to the copyright holder does not include costs for equipment, rental of premises, repairs, or purchases of the first batches of goods. This is a payment for the opportunity to open an establishment with an already proven brand, learn professional skills and learn some parts of the trade secret.
By the way, some companies sell franchises without a lump sum fee at all. As a rule, these are companies that are interested in opening as large a number of retail outlets, for example, clothing and shoe stores.
Monthly franchise fee
The situation with monthly payments is somewhat more complicated. In franchising, they received the name “royalty”, which also comes from French. Literally it means “royal,” which translates as “principal’s share” of profits or property.
What is a “royalty” in a franchise? This monthly payment to the franchisor for the right to use the brand and make a profit from it, as well as other services. There are several approaches to calculating this type of payment.
- Percentage of turnover. Partners indicate in the agreement the percentage that the franchisee will pay monthly from the total sales volume. As a rule, the payment amount is set within the range of 2-5%. This is the most common type of royalty determination.
- Fixed amount. There is also a fairly popular type of royalty, when, regardless of profit, the franchisee pays the same amount every month.
- Margin percentage(that is, the difference between price and cost). It is rare, since it is not profitable for most franchisors and is more labor-intensive to calculate.
Royalty rates for a trademark are determined by the franchisor at the stage of franchise development through calculations, analytics and forecasting of the most profitable option. In rare cases, companies select personal conditions for their partners and use several methods for calculating royalties.
Royalty payments sometimes include payment for consumables, technical support, recommendations and retraining. The approach to calculating monthly contributions also differs by industry. Quite a lot of companies operate without royalties- individual beauty salons, optical stores, marketing agencies and other companies.
When purchasing a franchise, businessmen inevitably face two types of mandatory payments
How do franchisors earn money without royalties and lump-sum fees?
Often on franchise search exchanges you can see offers without an entrance fee and monthly payments (or with a symbolic amount of 1 ruble). What are the benefits of these companies? Obviously, no one will work at a loss, that is, such companies still make money on something.
As a rule, these are companies (manufacturers or intermediaries of manufacturers) that oblige franchisees to purchase batches of goods from them according to an agreed schedule. They are interested in selling goods through the franchise network as quickly as possible, so they do not burden their partners with additional payments. Although, strictly speaking, most often the royalty is simply included in the purchase price.
Conclusion
Franchising in Russia is actively developing. An entrepreneur who wants to start a business in this way must have a good command of a specific conceptual apparatus and determine which approach to calculating royalties and what size of the lump-sum contribution will be more profitable in his situation.
Opening your own business is always a good idea. To achieve this goal, three scenarios can be considered:
- – you can open your own business from scratch;
- – you can buy it already ready business;
- – you can buy an already successfully operating franchise.
In order to open your own business from scratch, you will have to put a lot of effort and time into developing an individual plan and program of action, brand advertising, searching for investors, etc. and so on. This option of starting your own business is very problematic and brings a lot of trouble, unlike an already established business.
Buying a franchise includes many nuances and terms that will be difficult for a novice businessman to understand. In this article you will find answers to questions such as the concept of lump sum and royalty, royalty rate and payments, what is the amount of royalty payment and what methods of royalty relief exist.
Concept of lump sum and royalty
Opening your own business by purchasing a franchise is one of the most profitable and popular options for building a business today. Together with a franchise, a businessman receives a well-known brand or type of service that is recognizable to customers, has constant support from partners in all areas of business, trained personnel by highly qualified franchisors, and at the same time a low purchase price for the goods necessary for the business.
To successfully implement a business based on a franchise, you must have a sufficient amount of lump sum and royalties, which are also called “the key to the success of your franchising system.”
When purchasing a franchise, you pay a certain cost for it, a significant part of which is a lump sum fee. In practice, a lump sum fee is the purchase of the right to trade under the licensor's brand. At the same time, the one who bought his franchise receives the licensor’s own developments and goods.
The lump sum fee, in terms of the size of the payment, is the actual price of the license, which is compiled in accordance with the forecast of the economic effect of the future project.
The lump sum contribution is made once and can be paid either in one sum or in installments. But, as a rule, licensors require payment as quickly as possible.
The concept of royalty is introduced to determine several other payments that a future entrepreneur who has acquired a franchise must make.
Royalty refers to regular payments that a businessman must pay to the franchise owner. The royalty can be a percentage of the businessman's gross profit, or a fixed amount that is agreed upon in the contract.
Starting your own business with a high-quality online store franchise is The best decision for beginners:
For the effective operation of a new business with a franchise, select optimal size royalty, which will be beneficial to each of the parties to the agreement. If, when taking into account royalties, its size is overestimated, then the profitability of the franchise may be somewhat underestimated, which is why the meaning of the business may be lost. The same applies to the lump sum payment.
Therefore, when buying a franchise to open your own business, you need to pay attention to indicators such as lump sum and royalties in order to determine how profitable this franchise is for you and whether it is worth starting a business with it.
Lump-sum payment, royalties, and taxation are taken into account when maintaining accounting records and when calculating the economic profitability of an enterprise that uses a license to produce goods or provide services.
The optimal option for concluding an agreement for the purchase of a franchise is an agreement in which a lump sum fee, payments under a royalty agreement and minimum deductions in favor of the franchise owner are applied.
Royalty rate
Royalty waiver method
The royalty relief method is used by the franchisor to determine the value of the patent and license. Typically, a franchise owner grants a potential franchise buyer the right to use their intellectual property for a fee (royalty).
Royalty in in this case expressed as a percentage of the total revenue that an entrepreneur receives from the sale of goods or provision of services that are produced on the basis of a patent. According to the time-limit method, the price of intellectual property is a certain (usually current, minimum) value of a stream of planned royalty payments over the life of the license or patent.
The royalty free amount is calculated in accordance with market analysis. This method is designed for both income and market approaches to calculating royalties.
INTERESTING VIDEO: Franchise. Collection of royalties from franchisees
In this material:
IN modern business There are trends that allow you to open your own business with minimal risks using a franchise. When calculating future income and expenses, an entrepreneur has to evaluate a variety of circumstances and trends. First, you should master market terminology and clearly understand what royalties are and under what conditions this type of payment is used. When starting your own business, you always need so-called start-up capital. The size of this capital can reach impressive sizes. The specific amount is determined by the field of activity and many other circumstances.
Royalty - etymology of the term
People began to engage in financial and economic activities from the very first day of the creation of the world. Many terms and concepts were born in certain historical conditions, and have reached our time, practically without distortion. Today, not every businessman knows that royalties can be called rent for using an office. Every inventor dreams of royalties for a patent. In other words, royalties are regular payments for the provision of services. Or a trademark. Although this definition conveys only part full meaning this term. In order to imagine the versatility of this concept, we need to pay attention to its historical roots.
Royalties are regular payments (usually monthly) that the franchisee (buyer of the franchise) pays to the franchisor (seller of the franchise) for the use of their brand and technology.
The term royalty comes from in English. This word in English transcription meant payment to the king for deigning to grant one of his subjects the right to use the land and the resources that exist in its depths. This simplified example brings the modern entrepreneur closer to understanding the processes that make up a business. The concept of royalty is used in the following circumstances:
- when paying rent;
- when collecting duties;
- when paying for the use of subsoil;
- when withdrawing a share of profit for the use of someone else's property.
In everyday practice, businessmen are well aware of the royalty franchise, which is paid for the provision of a trademark or brand.
What are royalties paid for?
Russian civil law built on models taken from the experience of civilized countries. All business entities, regardless of their form of ownership, must strictly comply with established rules when paying for the right to use licenses for inventions, film rentals, book releases, goods, patents, innovations. The payment amount is calculated in accordance with a bilateral agreement. Long-term practice shows that choosing a base in order to determine the amount of deductions is not so simple. As a result of many years of practice, a certain system has developed that can be used as an example when concluding a contract.
Percentage of profit or turnover
Calculating royalties based on the profit received by the enterprise has certain disadvantages. The amount of profit received is influenced by many different factors. As an example, experts cite an unsuccessful advertising campaign. According to all forecasts, the volume of products sold should have increased, but the inaccurately targeted campaign brought only losses. As a result, instead of profit, the company suffered significant losses. In fact, a franchise buyer can always overestimate his expenses for salaries, rent and other expenses and always show a loss, although in fact he will work in profit. Therefore, royalties are often paid from the company's turnover.
Margin percentage
In this case, the franchisee pays a percentage of the trade margin. With this option, the franchise seller can usually set or control the wholesale and retail prices of the products or services provided.
Fixed amount
There are franchise options with a clearly fixed monthly or annual amount.
Advertising payments
Often in franchise presentations you can see an additional payment in the form of advertising royalties. This is the fee the franchise buyer pays for the promotion and advertising of the brand under which he works. Usually these deductions are already included in the royalty percentage, but sometimes they are taken out separately.
By the way, some companies sell franchises without a lump sum fee or royalties. They make money only by supplying products to their franchisees.
Intellectual Property License
Every educated person has an idea of intellectual property. As an example of this type of property, the following objects can be cited:
- literary work;
- musical composition;
- computer software.
For each publication of his book, the writer receives a fee. Just like the composer. In order to perform a piece of music legally, the composer is paid a free royalty. In this case, it is a one-time fee for use. In the intellectual sphere, a complex mechanism of relationships operates between users and copyright holders. There is no general formula for calculating the amount of deductions.
IN Everyday life Internet users are faced with the need to pay free payments when using software. A striking example Moreover, the acquisition antivirus programs. The overwhelming number of users believe that the fees for licensed software packages are too high. Copyright holders, on the contrary, are convinced that the fee is unreasonably low. Each party has its own calculations and evaluation criteria. Copyright today is considered the most difficult to implement in practice. When a person receives a patent for an invention, he can show it to a limited circle of people. It is impossible to hide a new poem or melody in this way.
By obtaining a patent for the intellectual property created by one’s mind, a person expects to improve his financial situation. The calculation in this case is simple and clear. However, the amount of the fee received does not always satisfy the copyright holder. In order to balance your needs and capabilities, you need to navigate the current legislation and know the real market conditions. When citing precedents from foreign practice, one must always make adjustments to local conditions and circumstances.
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