Optimal size of all payments related to a franchised business provides for interest of a trademark owner to develop franchising projects and at the same time for interest of a franchisee buying a license to have a long-term cooperation within a franchising project. Size of payments or payment procedure may be settled at the stage of forming a proposition on buying the franchise, or it may be resolved by separate parts at the stage of agreement with a potential buyer.
License fee (flat payment, enrolment fee) — is a flat remuneration to a franchiser in the form of settled amount, stated by an agreement sum, which is calculated according to valuations of possible economic effect and expected profits. In simple language, this is how much a franchiser estimates the cost of conducting business under his trade name. This sum includes expenses on organization of franchise sales. As a rule, license fee depends on a size of the first investment, which a franchisee should put in for the business organization (equipment, furniture, materials, filling out licensing documentation, etc.) The rate of license fee is acceptable when it equals 10% of the first investment sum (without considering the cost of rent or purchase of space).
Often, after a franchisee has paid the first investment, he gets some equipment, materials (goods) or services necessary for starting work within a franchising project. In this case the rate of license fee may increase.
Royalty is a remuneration in form of periodic deduction of flat fees which are calculated by a franchiser on the base of own evaluation of the cost for a right to use the trade name, which franchisee pays to franchiser.
The size of royalty depends on many factors, the main of which are:
- Volume of transferred rights, documents, material;
- Volume and nature of support provided by a franchiser to a franchisee by offering trainings, consulting, other services or material resources;
- Business profitability (planned or empiric);
- Generally accepted level of royalty rates for this kind of business
Considering the discontinuity of conditions in which different business entities work, sizes of royalty may vary and be calculated according to following techniques:
- Fixed percent of franchisee’s turnover. According to operational results over a certain period, a franchisee pays to franchiser an amount equal to fixed percentage of total turnover. Fees may vary from 0.5% up to 15%.
- Fixed percent from franchisee’s profit. Similarly to the above case, according to operational results, a franchisee pays to franchiser certain share of profits instead of total turnover. Obviously, interest rate for royalty from profits will be higher than that from total turnover. However, in our country this particular method is uncommon.
- Fixed interest rate. Unlike previous methods, in this one a fixed interest rate is established (in hryvnas or any other currency) according to franchiser’s operational results forecast. As above, predicted total turnover or profit are used as royalty calculation basis, multiplied by fixed interest rate thereafter. Not only monetary, but also estimated values of other available holdings could be taken into account in the process of forecasting.
- Averaged interest rate according to common practice for this particular type of business. This method is often used by large players of global franchising system. Franchises which have long period of payback may even offer zero-level royalty rate or afford some «zero» period, and during this period franchisee is freed from royalty payments.
Unlike royalty, which are completely under franchiser’s control, advertisement payments are strictly aimed for TM advancement. Interest rate calculation methodology is similar to one for royalty calculation. Depending on the type of business, interest rate for advertisement payments can be fixed or calculated as a percentage from financial gains. Its rates usually range between 0.5% and 6%. Some franchisees set their future partners free from these payments, therefore relying on increase of local marketing activity (driven by their own resources).