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, the word royalty came to modern English 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 developing the brand, 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 technology. 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 of consumables, as, for example, in the HOTFIX Russia network, which provides thermal insulation services for premises. Head of Department wholesale sales Olga Isachenko 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 is the royalty rate at Techprint. 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 the Best Credit Finance credit brokerage franchise does.

For life cycle franchisees change and the size of the royalty they pay. 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 to the same Best Credit Finance. If 10% of the franchisee’s commission turns out to be less than 500 USD, he will still have to pay this amount. Minimum amount is established depending on the size of the lump sum contribution. 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 Umnichka Children's Eco-Club franchise. General manager 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 and rebuild business processes, which is why companies do not set large royalty amounts right away. 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, the JumpingClay franchise, whose roots go back to Korea, set a royalty of $300. 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"

The main copyright holder of the JumpingClay brand is a Korean company that is developing new training programs and new items in the product range. This is where 75% of royalties go. The remaining portion of the royalty proceeds is used to develop the brand in Russia.

As you can see, royalty collection schemes can vary greatly among different franchises. The franchisor company has the right to set the payment calculation scheme, the amount of payments and even the currency independently. However, royalty calculations are always structured so that the franchisee’s business does not wither in the very first months of operation, but begins to bring in stable income, including the franchisor.

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The concept of “royalty” can be found quite often. What does it mean and what is it used for? everyday life? Let's analyze this neologism in simple words.

The term “royalty” itself comes from a word from medieval French. It sounded like roialte, which, in turn, came from the Latin word regalis, translated as royal or royal.

The modern concept of royalty refers to one of the types of licensing fees or temporary compensation (usually monetary compensation) for the use of various patents, copyrights, or even natural resources. We can also talk about other types of property.

Temporary deductions in the form of interest (the so-called “current deductions”), which are transferred to the license seller, are established in the form of any interest rates that are assigned taking into account the actual economic outcome of using a particular license.

Royalties can be paid in the form of some strictly fixed one-time payment, which gives reason to call it similar to certain types of rent.

A royalty (unlike a regular commission) is not a one-time cash bonus.

Where are royalties most often used?

Typically, royalties are used in economics and land law. Royalty is the same rent payment for the opportunity to use certain natural resources. The royalty is paid by the businessman to the owner of the land or subsoil.

What types of royalties exist today?

1. One type of royalty is a percentage of turnover. A percentage of turnover is paid from the franchisee to the franchisor. This type of royalty is paid based on the performance of a company or enterprise for a certain time period.
2. Another type of royalty is a percentage of margin. In order to understand this concept, you should learn what the concept of “margin” means. Margin is a value that expresses the difference between several specific indicators. The percentage of margin is most interesting to those franchisees who set different levels of markup on goods. Typically, a percentage of the margin is used where the franchisee is able to fully control pricing policy in sales.
3. The third type of royalty is called fixed. A fixed royalty is a payment tied to any agreement and having a strictly fixed percentage of all sales. The amount of a fixed royalty is usually tied to the cost of the franchisor's services or the number of companies and the number of clients served.

Copyright and royalties

The term “intellectual property” means a patent trademark or any work of art. Typically, copyright royalties are paid for literally every publication or any reproduction in public. We can also talk about distribution or another way of using a particular work of art.

Music Royalties

Music royalties have a number of connections with private owners. Typically, “private owners” mean composers and lyricists. It is these people who can be the owners of copyrights for the musical works they create. Only they have the right to license musical compositions for execution.

Recording companies use certain sets of copyrights and even royalties. This is necessary for the implementation of recordings and their subsequent digital transfer. In this matter, much depends on local or state legislation.

By the way, music receives all the necessary copyright protection immediately after it has been recorded. However, music has no protection from copyright infringement.

Press rights

Sheet music is also a form of music, so royalty rules also apply to it. After royalties began to be used with sheet music, they appeared in several other formats.

It is important that the music performed by the singer (or group) requires the execution of written notes. If this condition is met, the authenticity of the origin of the music will be lost. The process of loss occurred with folk songs, which became widespread in oral form.

Royalties today are an important part of the legal system in the field of licensing of various rights and even natural resources. It is almost impossible to do without royalties today.

IN modern world Franchise-based business relationships are increasingly occupying space. For some, this word still remains unclear, but most entrepreneurs are already actively using franchise agreements in their activities.

Royalty is a monetary contribution that no franchise can do without, because, as everyone knows, free cheese only comes in a mousetrap. Therefore, after concluding the contract, every month you will need to pay a certain amount.

We’ll look at everything you need to know about royalties, their design features and nuances in this article.

What is royalty?

Many active and temperamental people, in order to improve their own well-being, dream of opening their own business. In this case, there are three ways.

1. Open your own business from scratch. But! In this case, you will need to go through the entire story from the very beginning. In most cases, this will take more than one year. However, all beginning businessmen want to receive profit from their own business almost immediately, from the first day. Therefore, this option is suitable only for very aspiring people.
2. Buy a business that is already fully functioning throughout the country. In this way, you will save yourself from additional expenses and difficulties that arise at the initial stage.
3. . This is the most famous and correct path, since it contains the minimum number of risks and dangers. All you need to do is follow the company’s rules and pay your royalties on time. In return, you will receive invaluable business experience, which can be successfully used after the end of the contract with the main company.

To understand what royalties are in a franchise, you need to know the essence of this concept itself. So, a franchise is the name of a deal concluded between the main company, which is well known with positive side in the world, and a smaller company just starting out.

According to the documents, the aspiring businessman receives:

1. Right to use software which may be needed to conduct business.
2. Ongoing legal advice relating to any field of work.
3. Continuous training of staff, improving the quality of work with clients.
4. A complete base of suppliers, be it food, equipment or services. But, you can only use the companies provided for your 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:

1. Duty.
2. Rent.
3. Tax.
4. Payment for the license.
5. 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:

1. Registration of a franchised enterprise and start of its work;
2. Rent of premises, office, warehouse;
3. Payment of hired personnel;
4. 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.

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 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 legal 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 already ready-made 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 you take into account the size of the profit from it, then this disadvantage can be leveled out in a short 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.

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:

1. 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.
2. Franchise for an employee. Large companies trains 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.
3. 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.

Use of the subject of the license agreement. In practice, ROYALties are established in the form of fixed rates as a percentage of the cost of net sales of licensed products, their cost, gross profit, or determined per unit of output.

Dictionary of financial terms.

Royalty

Royalty is a license fee in the form of periodic percentage payments, which are set in the form of fixed rates based on calculation of actual economic result use of the license and are paid by the licensee at certain agreed intervals.

In English: Royalty

Synonyms: Royalty

See also: License agreements

Finam Financial Dictionary.

See what "ROYALTY" is in other dictionaries:

royalties- For each premium product released for sale, the OCOG pays a royalty. The procedure for paying royalties is specified in detail in each agreement with a marketing partner. The partner is obliged to fully report on this issue to the OCOG. [Department... ... Technical Translator's Guide

Royalty- Royalty - 1. Compensation regularly paid for the use of a patent, copyright, property of another person in the form of a certain percentage of deductions from the volume of income, sales volume of products, its cost, ... ... Economic-mathematical dictionary

- (English royalty) periodic compensation, usually monetary, for the use of patents, copyrights, natural resources and other types of property, in the production of which these patents, copyrights were used... ... Wikipedia

- [English] royalty royal power; royalties to the author] econ. 1) periodic royalties for an invention or KNOW-HOW purchased under a license, paid to the licensor (LICENSOR) during a certain period specified in the license... ... Dictionary of foreign words of the Russian language

License fee, license fee; fee, remuneration, deduction, payment Dictionary of Russian synonyms. royalty noun, number of synonyms: 6 remuneration (26) ... Dictionary of synonyms

- (English royalty) compensation for the use of patents, copyrights, natural resources and other types of property, paid as a percentage of the cost of goods and services sold in the production of which patents were used... ... Legal dictionary

See Royalty Dictionary of business terms. Akademik.ru. 2001... Dictionary of business terms

- (English royalty, from medieval French roialte, from Latin regalis royal, royal, state), type of license fee; periodic interest payments (current payments) to the license seller,... ... Modern encyclopedia

See ROYALTY. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B.. Modern economic dictionary. 2nd ed., rev. M.: INFRA M. 479 p.. 1999 ... Economic dictionary

Royalty- (English royalty) 1) periodic license payment for the use of inventions, patents, know-how, publication of books, rental of films, etc.; 2) rent payment for the right to develop natural resources paid by the entrepreneur to the owner of the land... ... Encyclopedia of Law

Books

• Regulatory and legal principles of selection and seed production. Textbook, Berezkin Anatoly Nikolaevich, Minina Elena Leonidovna, Malko Alexander Mikhailovich. The main goal of the proposed teaching aid is to consider the legal basis of selection and seed production, systems for collecting selection remuneration (royalties) for the use of protected...