Franchising

What it means

Franchising is a business model in which a brand owner, the franchisor, grants an independent entrepreneur, the franchisee, the right to trade under its trademark and according to its proven know-how. The franchisee does not start from scratch but takes over a working concept.

In return it pays an entry fee and ongoing fees, most often a percentage of revenue, and frequently a contribution to joint marketing. The franchisor supplies manuals, training, suppliers, systems and quality control, and the franchisee undertakes to keep to a uniform standard.

The franchisee is a separate company with its own books, staff and risk. It is neither a branch nor an employee of the franchisor and is solely liable for its own obligations, even though customers see the same brand as in other outlets.

How it works in practice

Depending on the contract, the franchisee books the entry fee as an intangible fixed asset amortised over the term of the agreement, or as an expense where it pays for services. Ongoing fees are an ordinary expense and, where the franchisor is foreign, they are royalties.

Where the franchisor is in another EU state, the fees are taxed in Slovakia as a service received from the EU under VAT reverse charge. Where it is outside the EU, withholding tax on the royalties may be due, which a double tax treaty may reduce.

Before the franchise agreement is signed we prepare a business plan with the client, with a realistic estimate of revenue, costs and payback. Franchisors often show the average results of their outlets, but these may not apply to a specific location and a smaller market.

What to watch out for

Franchise agreements tend to be long and one-sided, dictating suppliers, prices, design, opening hours and what happens on termination. They often contain a non-compete that survives the end of the relationship, and breaches of trade secret protection carry heavy contractual penalties.

Revenue-based fees are payable regardless of profit. An outlet with good sales but high rent and wages can be loss-making while the franchisor still gets its share, so our plans include all the fees, not just the entry fee.