What are royalties? Types of royalties. Royalty agreement. Accounting and taxation of royalties How royalties differ from royalties

Franchising is one of the most popular and profitable forms of organizing modern business. Its basic tools, franchise and royalties, are a constant source of income for the owner. With the right approach to business, the desire to make millions from one brand name becomes a reality.

The term royalty: what does it mean?

What are royalties? This term comes from the English word “royalty” (royal privileges) and means periodic payments for the right to use the name of the trademark, logo, and in a broader sense - the subject of the license agreement (computer programs, inventions, phonograms, trade secrets, etc.). ). It can also mean royalties, rent payments for the right to develop natural resources or use by an entrepreneur of land and its subsoil.

An exception

The concept does not apply to such objects of intellectual property as:

information bases;
programs of broadcasting organizations;
marks for goods and services that are generally known or have an international registration;
invention (not a way to create it, but a result);
layout of integrated circuits;
animal breeds;
plant varieties.

Payout rate calculation

The calculation of the payout rate can vary by year of the license agreement or every month depending on the volume of production, sales - a sliding rate. The higher the level of sale or production, the lower the royalties. This stimulates the franchisee to successfully create and sell products. Often, a license agreement is not signed without a special clause on the payment of the minimum amount of remuneration, which must be transferred by the licensee in any case.

The royalty percentage depends on the number of sales for a certain period of time or is determined per unit of output. As a rule, it fluctuates in the range of 1-12%, most often the range of 2-6% is used. But some industries use an empirical scale of average royalties (also called the market license price). It should be borne in mind that for different countries of the world, the average royalty price is very different. For example, for the US pharmaceutical industry it is 3-10%, France - 4-5%, Russia - 10-15%.

License agreement: royalties. Franchise as a tool for creating a new business

To understand the place of royalty in economic relations, it is important to understand the meaning of some concepts. The development of the modern business sphere largely depends on the trends in franchising. This is the name of entrepreneurial activity, which consists in transferring to a new business partner the rights to use the brand name, selling brand products - a franchise. Both parties conclude a franchise agreement, where they fix the purpose of the activity, rights and obligations, the amount of investment.

Each franchisor (brand owner) offers its own format of cooperation. But in any case, he must give the partner the right to use his brand, contribute to the growth of his business, and he, in turn, is obliged to make investments. As a rule, this is a lump-sum fee and royalties. Although in some cases the franchisee pays for the cost of commercial equipment, rental of premises, advertising media costs without the support of the franchisor as a start-up investment.

Royalty is essentially the ultimate goal of the franchise. If it provides for the creation of cooperation, then regular payments for the right to use a successful brand for the development of its business are its ultimate goal, which brings profit to the franchisor.

During the signing of the contract, the franchisee must carefully study all of its points and pay special attention to the amount and frequency of royalty payments. The document must clearly indicate the subject of the agreement, the duration of cooperation, the territory where the business will be carried out.

The place of franchising in the world of business

Many people will have a question: "Why has franchising become so popular?" The answer is simple: "Because it is beneficial for both parties." The owner of a well-known chain of stores, brand, trade mark has a thriving business. What else can he earn on, in addition to expanding the network of his retail outlets, enterprises (which requires significant investment and loss of time)? He can sell the right to use his brand name to a person who wants to create a successful business. That is, to provide him with a franchise. And the entrepreneur, in turn, will be able to sell, for example, things of a well-known brand without spending on advertising, he will have contacts of suppliers, support in work and purchases.

The answer to the question "what is royalty?" will help a beginner franchisee to correctly analyze the "risk-benefit" ratio.

Partners' rights and obligations

The franchisor undertakes to give the right to use his trademark, sell products, promises to train staff, provide advertising materials, and help in the design of the premises. In return, the franchisee contributes a certain amount of money as an investment in starting a business or a one-time lump-sum fee (payment for joining a trading network). What are royalties? These are periodic payments from sales, which are made already in the process. Their size is necessarily fixed in the contract.

Royalty classification

Sometimes they use the average royalty rate, focusing on the global indicator of a fixed value of payments for a given business area. A franchise agreement can even approve a zero royalty level or a period during which you will not have to pay anything (in the case when the return on investment is long-term).

Various types of royalties allow you to effectively settle financial relations between the franchisor and the partner, guaranteeing the owner a stable income.

Franchise taxes and recurring payments

Many entrepreneurs are concerned about the taxation of royalties. Taxes can be counted in different sizes and are governed by conceptually different codes. It all depends on the country's legislative policy. In most cases, the provisions of laws intended to regulate the taxation of such payments are based on distrust of the taxpayer.

But not a single amendment to their articles will be able to completely neutralize the optimization schemes for royalty payments. The state is always interested in replenishing tax revenues in the context of franchising operations and, in particular, royalty payments. And one of the most popular ways to minimize costs for an entrepreneur is to optimize income tax through recurring franchise payments. Income from the use of intellectual property is taxed at 20% (Article 309 of the Tax Code of the Russian Federation). The amount must be transferred by the tax agent to the federal budget no later than the day following the day the income is paid.

The franchise agreement gives the franchisee the right to use the copyright to the intellectual property object in their own interests. What are royalties? These are regular recurring payments for this service. Knowing the importance and effectiveness of franchising tools will greatly increase the chances of building a successful business.

Entrepreneurs who want to work on a franchise are inevitably faced with the concepts of a lump-sum fee and royalty - we explain what it is in simple terms in this article. You will learn what these payments are for, what they consist of and what options exist on the market.

Franchising is a popular way to start a small business by purchasing the right to use the famous brand. When buying a franchise, businessmen are inevitably faced with two types of compulsory payments: one-time and regular.

It is interesting that both concepts are not enshrined in Russian legislation, which in no way prevents them from working in practice.

Lump-sum fees and royalties are the types of payments made by the franchisee (buyer of the rights to the brand), for:

the ability to work under a well-known name;
the opportunity to adopt entrepreneurial experience;
assistance in purchasing equipment, recruiting and training employees;
promotion services from the main company;
other services and any help in doing business.

What is a lump sum

At the very beginning of cooperation, the buyer pays a certain amount to the franchisor, one-time down payment for the right to use the brand and count on the joint development of the trading network. This contribution is called "lump-sum", its name comes from the French phrase "thick piece".

The lump-sum contribution varies from 15 thousand to several million rubles. The average price is 300 thousand rubles. Usually, the size of a one-time payment is clearly fixed by a certain amount (or within certain limits), although some companies assign the amount of the first installment personally for each entrepreneur. The cost, as a rule, depends on the direction in the business, the popularity of the copyright holder, manufacturability and his contribution to the opening of a new establishment. Usually this contribution is equated with the cost of the franchise.

Franchising is a popular way to start a small business

How is the lump-sum contribution calculated?

The amount of the contribution is not determined by chance. It is calculated based on the costs incurred by the franchisor for training the franchisee and opening a new network establishment. The higher the costs, the higher the cost of the franchise. Among the costs, as a rule, prevail:

training of entrepreneurs and employees;
preparation and printing of guidelines, strategies, rules and other documents;
branded clothing for employees, packaging with logos, etc.

One should not equate a lump-sum payment with all business investments. This one-time payment to the copyright holder does not include the cost of equipment, rental of premises, repairs, purchases of the first consignments of goods. This is a payment for the opportunity to open an institution with an already proven brand, learn professional skills and learn some parts of the trade secret.

By the way, some firms sell franchises without a lump-sum payment at all... As a rule, these are companies that are interested in opening as many retail outlets as possible, for example, clothing and footwear stores.

Monthly Franchise Payment

The situation with monthly payments is somewhat more complicated. In franchising, they are called "royalties", which also comes from the French language. Literally, it means "royal", which translates as "share of the main" from profit or property.

What are “royalties” in a franchise? This is a monthly payment to the franchisor for the right to use the brand and make a profit from this, as well as other services. There are several approaches to calculating this type of payment.

Percentage of turnover... The partners indicate in the agreement the percentage that the franchisee will pay monthly from the total sales. As a rule, the amount of payment is set in the range of 2-5%. This is the most common form of royalty definition.
Fixed amount... It is also a fairly popular form of royalty when, regardless of the profit, the franchisee pays the same amount every month.
Percentage of margin (that is, from the difference between price and cost). It is rare, since it is not profitable for most franchisors and is more time consuming to calculate.

Royalty rates for a trademark are determined by the franchisor at the stage of developing a franchise by means of calculations, analytics and forecasting the most profitable option. In rare cases, companies select personal conditions for their partners and use several methods of calculating royalties.

Royalty payments sometimes include consumables, technical support, referrals, and retraining. The approach to calculating monthly contributions also differs across industries. Quite a few companies operate royalty-free - individual beauty salons, optics stores, marketing agencies and other companies.

When buying a franchise, businessmen inevitably face two types of mandatory payments

How do franchisors earn without royalties and lump-sum payments?

Often on the 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 firms still make money on something.

As a rule, these are companies (manufacturers or intermediaries of manufacturers) that oblige franchisees to purchase consignments 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 partners with additional payments. Although, strictly speaking, most often royalties are 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 the 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.

It turns out to be not so easy to open your own business. Not everyone has a large start-up capital and then aspiring businessmen turn to franchises. And all would be fine, but in this matter you need to understand something. The basics of franchising begin with a term like royalty. What are franchise royalties? This is the issue that our article is devoted to. Many people confuse the definition of royalty with a flat-rate contribution, but these are two different concepts. In addition, there are several types of royalty. More on all this below.

Definition of the concept

The term came to our language from English. In turn, the English royalty appeared in the Middle Ages. Literal translation: royal, state. In today's world, royalty is understood as a fixed payment on a regular basis. What is the payment for?

For any intellectual property: a piece of music, a company logo, a plot, etc. As part of a franchise, a businessman leases a brand and pays a fee for its use.

What does it look like in practice? You open your own establishment under a franchise. For example, you are cooperating with CFS. In return for your funds, you get access to the restaurant's recipe, slogan, corporate design and other attributes. In return, you pay a one-time lump-sum fee and you are assigned royalties. According to it, you agree to pay the sums in due time. Royalties are assigned as a percentage of income or as a fixed payment that does not depend on profits.

Where does royalty go?

Many do not understand the essence of royalty and what they pay for. So: royalties are fees for the rental of a brand. The entrepreneur rents it, not purchases it. It is very important to understand the difference, as in the case of a rental, you have the right to use the brand and its concept, but you cannot make changes. Of course, you can try to talk with the franchisor and make some adjustments specifically to the work of your establishment or store. But not the fact that they will agree with you. Therefore, you must have a strong case.
Judging by the reviews of the franchisee, in this case the size of the brand plays a role. Large brands go their own way and do not like it when the franchisor interferes with their personal opinion in the established work. But small businesses make good contact. The royalty amount also includes the cost of advertising TM and payment for advertising goods. However, all this is on a global scale. But advertising specifically for your point can fall on the shoulders of the franchisee. This point should be touched upon in advance.

Types of royalty

The royalty amount is set by the franchise owner. Some franchisors approach each potential partner individually. In other cases, the amount of monthly payments is the same for everyone. You can agree to the terms or look for another franchise.
Sometimes it turns out to agree on your own amount, but this only applies to small businesses. Large companies operate according to a calibrated pattern and rarely make concessions. Moreover: you may also have to prove that you are a worthy candidate for acquisition.

What are the types of payments:

Fixed payment. The amount of the contribution is negotiated immediately and does not change. It doesn't matter what your franchise income is. If things go wrong, you will have to cover the payment out of your own pocket. If, on the contrary, the income is rather big, then no one will force you to pay more;
Percentage from revenue or turnover. In this case, the amount of payments depends on how successful your business is. On the one hand, you will not have to look for additional funds with low revenue. But in the case of large income, you will have to deduct a tidy sum;
Percentage of sales. Rough explanation - what was sold and paid for. Selling the product is beneficial for you, but at the same time, you pay a commission to the franchisor for this;
Combined payment. In this case, the individual royalty rate applies. You can work on a fixed payment, but a percentage of the sales volume will be set for a specific product. Or vice versa. It already depends on the order established in the contract.

There are also royalty-free franchises. In most cases, this applies to product franchises. Those. clothing stores, gifts and others. The more you buy from them goods for sale, the better for the company itself. Therefore, in such cases, a lump-sum payment is sufficient. But it often happens that the owners still get what they want - simply by setting a margin on the product.

The most common option is a percentage of revenue. The franchisor simply sets a specific percentage. Those companies that have been working with franchises for a long time usually give a grace period for payments. Those. payments of contributions begin from the 3rd month of ownership of the franchise, or even after 6 months. This time is given so that the entrepreneur can get back on his feet. Initial payments will cost a pretty penny and it is important to get at least zero during the grace period.

The length of the period depends on the conditions of the company. Usually the company gives independent forecasts for payback. But be careful: numbers are displayed based on averages. In one region, the business will pay off in a year, and in another two. Or maybe not pay for yourself at all and get up.

Therefore, when dealing with franchisors, try to listen to them, but do your own market analyzes as well.

Not everyone can pull huge lump sum sums. Therefore, franchisors go to a meeting and in some cases simply spread the amount of a lump-sum royalty fee. Accordingly, when the fee is paid, the amount of royalties will decrease. But in this case, the amount of royalties can even reach 50% of the proceeds. The franchisor can also set a minimum size. Suppose you have a revenue royalty of 5%, but no less than € 1,000. But in one month things went badly and the percentage on the total turned out to be very small - 500 euros. You still have to pay a thousand, as there is a minimum royalty rate.

Royalty: for or against

The old truth that every coin has two sides works in our case. Royalty has both pros and cons. This is undoubtedly a plus for the franchisor. He makes a monthly profit from an entrepreneur simply for renting a brand. It's worth noting that the fixed fees leave more flexibility for the franchisee. But the percentage royalty allows the company to follow in more detail the affairs of its partner.

But not everyone loves to part with their hard-earned money, which is a big disadvantage. If you are not ready for this kind of cooperation, then you should go on an independent voyage and start your own business. But if you look at the issue from the other side, then unfixed royalty gives rise to a great interest in your development. The more deductions, the more the owner's profit. So you can count on his support, since your success is his success.

Sometimes royalties just don't pay off. You monthly deduct a piece of income, and in return you get nothing but the right to use the brand. Such conditions are not very favorable. Moreover, it is difficult for a novice businessman to find out whether a franchise is worth the money. In this case, there is only one piece of advice: read the contract carefully. It would be nice to enlist the support of your own lawyers and show the contract to an outside specialist.
Pay special attention to whether the franchisor reserves the right to increase the payment rate and for what penalties are provided.
Read the reviews, find the real owners of a particular franchise. This will protect yourself from future disappointments. The average figure is 5-10%. This is the standard amount of royalties, but if the percentage is higher, then you should think about the owner's greed, and carefully check for what you will pay that amount.
But take your time to acquire royalty-free franchises. This option also has pitfalls. New companies operate royalty-free. This applies to small businesses or companies that have just entered the franchise market. In this case, you will also be working from scratch.

The brand owner will not have a clear policy and you, it turns out, will be a kind of experiment. Trial and error will be applied to your case.

Tax side

Royalties are tax deductible. There are two types: VAT and personal income tax. VAT is borne by the franchisor. But if you cooperate with a foreign company without registration in the Russian Federation, then the fee goes from the franchisee, followed by collection from the owner. Personal income tax is paid by the franchisee, but collection from the owner is also provided. Size 20%. If cooperation takes place with a foreign owner registered in the Russian Federation, then they can be exempted from tax, but this requires a special agreement.

What threatens for non-payment

If the franchisee misses payments, then the result is the same - termination of the contract. When things are not going uphill, the owner can go to a meeting and postpone the payment, or send a manager to help to fix matters. But this issue must be discussed before concluding a contract. And do not wait to the last. If you have a problem that you feel you cannot cope with, it is better to notify the franchisor in advance. Provided that there were no problems with payments, the owner can renew the contract. However, the extension is influenced not only by this factor, although it also means a lot.

Conclusion

Not everyone can handle their own business, so many turn to franchises. But before that, you need to carefully study the terms of purchase. Royalty is one of the main items of waste. Therefore, it is important to understand what it is and why it is needed. After the agreement has been concluded, nothing can be done if you missed something. In this case, there is only one way out - termination of the contract.

Trading is becoming an increasingly popular form of running your own business.

For production, many conditions and qualified personnel are required, and for opening your own store, the requirements are much less.

The basis for success is the ability to work in your niche and compete in the market.

Franchise principle

To get started, you are offered a product, promotional materials and brochures, as well as instructions for working with clients in the field of sales. That is, it only remains to sell the proposed product on the market.

The only fee that is required is the purchase of products for the sale of the first batch of goods. In this business, there is no need for additional spending, as it does not need an office, equipment and additional staff.

Franchise from the manufacturer

No lump-sum payment, that is, distribution work. In this version, a person concludes with the manufacturer of goods agreement on the representation of its products in a specific region.

The entrepreneur receives discounts on products and trade equipment of the brand. In this case, the manufacturer expands the sales market, and the businessman gets the opportunity to start working with the products of a foreign brand at minimal cost.

Conditional franchise

This type means starting a business without a high lump-sum fee and additional investments.

Here businessman receiving training at the company, and then he is given knowledge of business processes.

At the beginning of a person's work a mentor is providedwho advises on emerging issues.

All activities are conducted by the entrepreneur himself. He also decides the issue of the amount of start-up capital for his business.

Royalty Free Method

The royalty exemption method is used to evaluate patents and various licenses.

Typically, the owner gives other people the opportunity to use the license for a material fee (royalty), which usually varies from revenue for use and ranges from 7% .

If the patent owner sells the license for the first time, then the royalty set by the appraiser.

The appraiser, based on market analysis and demand, conducts research and determines the percentage rate of deductions.

Video: Collecting royalties from franchisees

It explains what points should be specified in the contract in order to freely receive a debt from the defaulter, as in practice the proceedings on the claim against the debtor take place.

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