Franchises will generally have higher taxes

In this article, we will discuss the steps to start a franchise business and also other crucial matters related to a franchise business.

Introduction

Running a franchise business might look lucrative at the outset but a lot goes into it to make it a successful one. In general, franchising involves a business owner or the franchisor licensing to a third party or the franchise, the right of operating a business or distributing the goods or services using franchisor’s brand for an agreed time period in return for a fee.

Steps to Start a Franchise Business

Step 1: Reaching out to the chosen Franchisor – You should bear in mind that every franchisor has different requirements in terms of documentation, fees, and business arrangements. Even if details are provided on their website, there might be other information which isn’t disclosed and talking to the franchisor directly would help you to keep yourself informed.

Step 2: Preparing and arranging the requirements – This is a crucial step. The requirements which you would be asked to provide could dictate whether or not the franchisor would approve the franchise application, so you must give proper heed to this step. Most of the franchisors have defined a set of requirements. However, below are some of the documents which are most common:

• Franchise application form completed in full, which you can find on the franchising company’s website. In case the form isn’t available, one could contact the company and get the same.
• Letter of Intent (LOI), which states the reasons for applying for the said franchise.
• Map of your proposed site of business. You could do it with the help of maps and you should also attach the pictures of the actual site too.
• Your updated resume/profile.
• At least two valid government ID proofs.
• If you would be renting the space for the business site, the lease contract or the written agreement with the lessor also needs to be provided.
• Latest bank statements.
• Taxpayer’s Identification Number (TIN).

Step 3: Meeting your Franchisor – This is yet another important step. Meeting the franchisor is the step where they assess your application and confirm if it’s good to go. Franchisors would assess whether you’re a good fit as their business partner.

Step 4: Signing the Franchise Agreement – Finally, if you have passed all the steps, you’re on the way to become a franchise. Don’t be too excited. Here, you should heed much-needed attention and review your Franchise Agreement before signing the agreement. You should pay attention to the key details as mentioned below:

• The franchise term, including the renewal term and costs for the same.
• Costs and fees such as the franchise fee and royalty fee.
• Grounds which might lead to termination of Franchise Agreement.
• Inclusions and exclusions in the franchise package.
• List of franchisor-approved products and suppliers.

How Quickly Can Your Franchise Business Become Profitable?

This is a question which crosses every franchise owners’ mind and it’s a crucial question too. After all, you have invested in your franchise and you are waiting to reap rewards. There are many factors at play when it comes to profitability. Some of the key factors are:

• The type of industry you’re in There are several different industries where you could get into a franchise business, and within those, there are various subsets. Some types of franchises such as the home-based ones don’t require much overhead and could be profitable much faster than the retail businesses. The retail stores which require you to have a good amount of inventory at all times would require heavy investment for starting the business.
• Financing your franchise business There are various franchise financing options available to individuals looking to buy a franchise. When you go for finance, you are bringing in extra costs to your mix. The principal amount along with the interest (in case of loans) might make it longer for you to break even and start profiting.
• Who would run the franchise? There is a big difference between the owner-run franchises and a manager-run franchise. Both of them have their own pros and cons. While you are calculating when you would become profitable, you should also consider the financial burden which comes with a manager/human resource and also the opportunity cost in case you decide to oversee the franchise business yourself.
• Understand the bottom line Most of the franchise owners who are new to franchise ownership believe that profits which are made from their franchise business are turned into personal income instantly. This is far from the truth. There are also taxes on business profits, loan repayments, and also frequent capital expenditures, which needs be paid before the owner could pay himself. Once all this is paid for than the franchise owner has his own income generated by his franchise business.
• Knowing your business goals A quick profit is not always the right business goal to go after. Your equity grows over time in a franchise. In case your goal is to sell your franchise, looking at the profits may not be as rewarding as you may think. Looking at a net worth of your franchise in your market would be a better indicator of how soon and how much you’ll profit. With several variables, it is not possible to ascertain when you would turn profitable after getting into a franchise business. Still, keeping aforesaid in mind could help you in having a better idea of when you would get into the green zone from red.

Legal aspects

The franchise sector in the Indian context is at an emerging stage and there’s no specific law relating to the franchise business in India, and as such, it touches various industry-specific and business laws within the country. Franchising is governed by several statues and rules and regulations. Some of the key ones as described below:

• The Contract Act The Indian Contract Act, 1872, governs the contractual relationship between the franchisor and the franchise.
• The Consumer Protection Act The Consumer Protection Act, 1986 provide remedies to the consumers in case of any defects in products or services and holding the producer/service providers liable.
• The Monopolies & Restrictive Trade Practices Act, 1969 The MRTP Act prohibits the imposition of restrictions with respect to the pricing of products and sources of supply. It should be ensured that the franchising terms of agreement monopolistic or restrictive. The MRTP Act also requires registration of the agreements which could include restrictive trade practices. The ones relevant in the context of the franchising setup include exclusivity in product dealing; exclusive supply provisions; resale price-fixing conditions and restrictions on methods used.
• Competition Act, 2002 Following the globalisation of the Indian economy, the competition law has shifted the focus from restricting monopolies to encouraging healthy competition. Some of the provisions aren’t effective yet. However, provisions relating to anti-competitive agreements as well as abuse of dominant position have come into force.
• The Trademarks Act, 1999 The Trademarks Act provides the rules and regulations with respect to the registration of trademarks as well as service marks.
• The Foreign Exchange Management Act, 1999 FEMA and relevant rules and regulations oversee the payments in foreign exchange. Franchising arrangements usually include payments such as a franchise fee, royalty payments for use of system and trademarks, advertisement contributions, and training expenses, which could be remitted to a foreign franchisor.

Taxation

Where a franchisor receives royalties, franchise, or service fees, tax needs to be paid under the Income Tax Act, irrespective of the fact whether the franchisor is an Indian or a foreigner. According to Section 9 of the Income Tax Act, certain income such as interest and royalty are deemed to arise and to accrue in India under specified circumstances.

Business profits under the franchise business are taxed up to 30%. There’s a withholding tax on fees for technical services and the prevailing rate is 10%. However, it’s subject to the relief provided under a tax treaty, if any.

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