Franchisor's income: entry fee and royalties

In the first place, franchisors receive income when signing the franchise agreement, this is called the initial flat-rate fee, some sometimes call it an entry fee, which I do not recommend I will tell you later why, it is therefore collected once the contract is signed, then there are fees whose counterparts are the provision of the brand, the provision of know-how, the permanent assistance of the franchisor who are collected throughout the life of the contract since these counterparties are provided throughout the duration of the contract in succession.

You can also charge fees for services, such as communication services for example. Finally, the franchisor usually supplies its network by reselling goods or referencing suppliers, as such it will receive either a margin if the purchasing centers, or if the referencing centers commissions paid by the suppliers possibly service revenues rendered to its suppliers. 

A future franchisor has in principle four professions: that of developing, that of animating its network, that of doing brand communication and that of supplying, so for each of these professions we will build specific sources of income, the initial fee for the development profession, the franchise fees for the network animation profession, the communication fee for marketing and finally the margins or commissions for the supply profession, we will therefore determine for each of these professions all the jobs, that is to say the necessary needs in terms of investment, human resources, operating costs, so that each of the professions can be executed in accordance with the organizational expectations that the franchisor has defined and we will face income levels that will cover these costs and generate a margin. 

Once we have indeed constructed hypotheses for fixing entry fees, initial fees, permanent franchise fees, etc., in relation to the cost we have carried out a budget balancing exercise, we can then choose to position, that is to say to make a marketing decision to say I am cheaper than my competitors or I am more expensive than my competitors so this amounts to defining the offer of the franchise network and positioning it in relation to the offer of the other franchisors that will eventually be selected by the franchise candidates because they are your most direct competitors, it is therefore a benchmarking exercise that is operated. 

In the first place, it should be noted that all these revenues are communicating vessels, that is to say that if the franchisor by strategy does not wish to balance a profession it can perfectly do so by making up for it on another profession therefore in the franchises in particular of supply of clients. well, we’ll often have a margin much more significant and therefore there will be less need for flat initial fees or franchise fees.

Then, you have to be extremely careful about a number of subjects, we were talking about the communication fee earlier; it is a fee that can affected if the contract provides that there is a communication fund, in this case the royalty is collected on a specific bank account which will oblige the franchisor to an account, but if it happens that he did not use at the end of this account, the royalty in accordance with what was provided for in the contract in addition to a civil fault which may lead to the termination of the contract, he commits the crime of breach of trust, so this qualification can be avoided by avoiding the creation of a communication fund and by providing that the franchisor will provide communication services, remunerated by a royalty collected on the general account of the company and that this royalty will remunerate its services, in this case there is no longer a strict sense of accountability and there is no longer any criminal risk, the risk of breach of trust disappears.

In addition, it is necessary to preserve the future income of the franchisor, I told you earlier that I did not like the term entry fee it is not that I personally find it inappropriate but in any case the case law recently in a case on summons of the Minister of the Economy, held that there was a significant imbalance to collect identical entry fee amounts when signing a 2nd or 3rd contract, that is to say following a contractual relationship with a franchisee, of the same nature and therefore we now recommend no longer talking about entry fee but initial royalty which have counterparts, which do not consist in entry into the network, the counterpart a different consistency such as for example territorial exclusivity or additional remuneration for the provision of know-how or the brand, we thus preserve the future income of the franchisor. Finally, I would like to stress that depending on the counterparties defined, the accounting and tax treatment of the fees paid by the franchisee may not be the same, so in particular for the initial flat fee if the fee is an intangible right it will normally be able to immobilize and amortize it over the duration of the contract, if on the contrary, this fee is the counterparty of services such as initial assistance training services, it will have to be expensed, we see immediately that the impact on the operating account will not be the same in the first case there is a spreading of the expense, while in a second case and well there is the year of exposure, a deduction of the entire expense which will degrade the presentation of the operating account.