Buying a franchise is easy! Choosing is a pleasure! There are several online franchise catalogs on the Internet, where everyone can find out the details of buying a franchise for a particular brand. Convenient search engines for the given parameters in a few seconds will select the best offers for you, and through the site’s message system you can ask questions directly to the franchisor’s representative
Text: Rimma Mustafina, FRANSH Consultant Growth Strategy
More recently, printed catalogs of franchises began to appear, which you can view with no less pleasure than catalogs of expensive accessories or cars. Glossy paper, color illustrations, smiling faces of project managers and such, at first glance, transparent and understandable conditions for buying a franchise: from 28 000 euro a souvenir or accessories store, 60 000 euro - a clothing store, closer to 100 000 euro - the cost of a shoe franchise, and cosmetics and perfumes will cost less - from 5000 euros.
However, the very first meeting with a representative of the franchisor may unpleasantly surprise you, and possibly disappoint you, up to the refusal to acquire a franchise. The amount of real expenses is likely to be much higher than stated in the presentation materials.
So what to expect, what does the concept of "franchise cost" and "initial investment" include, and what else do you have to pay for? Entrepreneurs must make sure to do their best to estimate how much a franchise will cost, as franchisors often do not tell all the costs right away.
A franchisor representative may say, for example: “All you need is 20 euros to buy a franchise”. But, most likely, 000 euros will only cover the costs of the right to use the franchisor's brand name and work standards. Hidden costs may be such costs as the cost of equipment, rental and design of premises, search and selection of personnel, inventory and other costs required to open an enterprise.
The volume of necessary (initial) investments has a wide range - from several thousand to several hundred thousand. e. (for cu. different companies accept both euro, and dollars, and their rates) depending on the type of franchise. The potential franchisee spends initial investments on paying for services such as choosing an office, a trading floor, a warehouse, market research, staff recruitment and training, and technical support. In addition, this amount covers the costs of building or renting a building, finishing a building, purchasing raw materials and managing an enterprise during the first 6 - 12 months.
Also, the cost of the franchise itself is usually included in a commercial proposal.
The franchise cost consists of two parts. A lump-sum payment, which is paid once upon conclusion of a contract of commercial concession (franchising), and royalties paid periodically (month, quarter, year).
The classic franchise scheme provides for both payments.
The initial (lump-sum) payment (eng. Initial payment) has a spread from 0 to 500 000 y. e. The most common lump-sum contribution is in the range from 15 000 to 30 000 y. e. for one franchise (shop, kiosk). For this money, for example, you will receive
the right to open a store for the Tervolina footwear chain ($ 10) or the CenterObuv company ($ 000).
Almost all systems have a lump-sum payment. However, commodity franchising is characterized by the fact that there may not be a lump-sum fee. Firstly, when the basis of the initial relationship is the obligation of the franchisee to purchase equipment, finishing materials, etc. through the franchisor or designated suppliers. At the same time, the lump-sum payment is still present, but in a hidden form - in the form of a surcharge for the services provided or the equipment supplied. Second, there may be no lump-sum fee if the company wants to quickly capture the market by opening many stores at once under the same brand name. And those who want to get as much market share as possible are willing to go for such costs as giving out a franchise “for free”. Currently, many Russian companies do not take a lump-sum contribution precisely because they want to actively move into the regions.
Zali Casa (a network of Italian footwear stores), as well as the new Foot & Fruit shoe project launched by Sela in 2008 and many other companies, does not take a lump sum from the franchisee.
How do franchisors calculate the lump-sum fee? All costs that the franchisor will incur during the launch of the franchisee are considered. For example, designing a trading floor, purchasing trading equipment, staff training, marketing, advertising, POS materials - all these costs have a market price. The share for the development of a CRM system or an accounting system is taken into account. These expenditure indicators are summarized, and the approximate amount of a lump-sum payment is obtained.
Royalty is the regular payments that the franchisee pays to the right holder (franchisor) for the use of his rights, trademark and operating systems for doing business for commercial purposes. The frequency of royalty payments depends on the agreement - month, quarter, half year, year. Royalty can be in the form of a fixed amount, or as a percentage of profit, usually 4 -15%.
The collection of royalties is justified. The franchisor must constantly develop and improve its system, strive to increase the number of franchisees, train franchisee employees, maintain personnel to service the entire system, and, ultimately, monitor the network. In exchange for paying royalties, franchisees can receive services such as advertising, financial reporting, and management advice.
In international practice, the amount of royalties is determined empirically - for various industries, average amounts of (so-called standard) royalties are established. There is also an international principle on the “reasonableness of royalties” calculated for the use of intellectual property. In Russian practice, such statistics are not kept. In our country, the current legislative acts lack methods of calculation and assessment and recommendations for pricing.
Therefore, the issue of setting a royalty rate remains with the franchisor and depends on how he assesses the prospects for business development and the value of his intellectual property rights. It looks something like this: all the costs of securing obligations under a contract of commercial concession (franchising) are calculated. As a rule, this is the content of centralized support services, supplies, marketing, accounting. AND
the planned income is added to them. The amount received is compared with the estimated profit of the franchisee and a percentage is allocated.
As far as the franchisee’s revenue forecast is correct, the franchisor will benefit from the development of the franchise program.
There are royalties open and hidden. The use of the type of royalty depends on the goals of the copyright holder. If the offer does not indicate royalty, it doesn’t mean at all that the franchisor decided to do charity work. The franchisor on the sale of franchises earns additional investment, expands its distribution paths,
increases turnover, increases brand awareness. The absence of certain payments indicates only that they are hidden in other expenses.
When franchisors set themselves the goal of making money by providing a correct and working business model, then open royalties are applied, which are of a fixed nature or are expressed as a percentage of the franchisee's profit. If franchisors develop franchising only for the purpose of obtaining quick benefits from increasing sales, hidden royalties are most often used, which are included in the price of the goods. Plus, hidden royalties are easier to control for the franchisor.
You should not count on the loyalty of the franchisor and a decrease in the lump-sum fee or royalties. The maximum that is permissible is a "discount" of up to 10-20%, but only for beginners of inexpensive Russian franchises with investments of no more than $ 100. e. Also, Russian franchisors will not be a guarantor or pledger for a loan for start-up capital.
Financial assistance from the franchisor is possible in the form of installment payments for a lump-sum payment, for the first commodity filling, in the first periods of the organization of work, a delay in the payment of royalties is possible. Product franchises offer the option of replacing unsold items at the end of the season (10 - 30% of the balance). Sometimes, franchisors are ready to take on part of the services for creating and organizing the work of a company salon for free or at preferential prices, which saves the franchisee financial resources.
Ideally, a well-developed franchise program involves the provision of an approximate business plan. That is, at the stage of negotiations, representatives of the franchisor should offer you preliminary calculations. Specify what indicator in the business plan the franchisor takes for calculation. Perhaps the franchisor focuses on the average revenue indicator, while in the first months of the enterprise’s operations, revenues, as a rule, are lower than estimated. The result is a financial failure that threatens to close the newly-launched company.
Do not forget to include in your expenses the services of representatives that you may need: a realtor to select a room for rent or purchase, a lawyer to evaluate the contractual design, an economist or accountant to evaluate economic indicators, an insurance agent if premises or property insurance is intended, etc.
Of course, it is better to turn to franchising consultants who are oriented both in the market situation and in the legal field of franchising. Consulting companies will be able to provide comprehensive support when choosing and buying a franchise. Turning to consultants most often reduces the risk of being cheated (companies with seniority value their reputation and are responsible for the quality of work) and minimize the cost of representative services (package services are always cheaper).
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