Franchise Agreement: Payment Terms and Method of Calculating Franchisor’s Income and Expenditure

Abstract

The diversity of fees is a peculiarity of financial flows in franchising. In addition to regular payments in the form of royalty, the franchisee shall also pay a lump sum upon conclusion of the agreement and make all the other negotiated payments. However, in spite of the diversity of franchise payments, there is no unified classification and method of their calculation in Russian literature. As a result, would-be franchisees often give up buying a franchise in order to avoid all the complexities of financial relations with the franchisor. However, franchisors often calculate payments in accordance with subjective realities and do not consider market conditions. The article focuses on financial flows in franchising and offers a method of calculating franchise fees. The article proves that the diversity of franchise fees emanates from economic essence of franchising and that objective market laws should serve as a necessary fundament for franchise fees’ calculation. The study analyzes the factors of generation and distribution of franchise financial flows, and its results can be applied to business practices of franchising enterprises.