Francorp happy learning centre financial plan

.

FINANCIAL PLAN – FRANCHISE’S PERSPECTIVE

Happy Learning Center

February 2014

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CONTENTS

1 OBJECTIVE______________________________________________________________________1

2 APPROACH______________________________________________________________________2

3 INTRODUCTION___________________________________________________________________3

4 INCEPTION COST_________________________________________________________________4

5 STARTING PROFIT AND LOSS______________________________________________________8

6 ONE TIME EXPENSES_____________________________________________________________10

7 RECURRING EXPENSES__________________________________________________________11

8 TAX IMPLICATIONS AND COMPLIANCES____________________________________________12

9 TREND AND RATIO ANALYSIS_____________________________________________________15

10 CONCLUSION___________________________________________________________________16

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1 Objective_____________________________________

The purpose of this report is to review the financial implications of the

Franchise arrangement between franchisor and Franchisee. The report

outlines the financial structure from a Franchisee‟s perspective. Broadly, the

report would serve the following purposes:

Highlight the financial implications from a Franchisee‟s perspective;

Identifying the financial requirements to start the business;

Indentifying the financial requirements to keep the business profitable

and liquid;

Analyzing the financial performance of the business over a period of

time;

Analyzing various ratios and doing a trend analysis;

Review of the financial structure from a Franchisee‟s perspective; and

Assistance in taking significant business decisions based on financial

implications.

(This space is intentionally left blank.)

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Interlinkage between different financial planning aspects for a franchisee

Planning of financial

elements

Planning of revenue

Planning of

investments

Planning of

expenses

Planning of capital

requirements

Planning of

financing

Balance sheet

planning

Fixed assets

Current assets

Total assets

Equity capital

Debt capital

Total liabilities

and equity

Income statement

planning

Sales

- Expenses

- Depreciation

Operating income

- Interest

- Taxes

Net income

Debt financing

Planning of cash

flow requirements

Sup

po

rted b

y Assu

mp

tion

s

Industry trends / aspects

to be considered for all

start ups

2 Approach____________________________________

The financial projections have been prepared on a very conservative basis.

This approach is adopted since it's not possible to project the unexpected

delays or challenges that always seem to happen in any new Franchise

setup.

We build our financial models based on the following quote:

“Use conservative estimates to produce realistic models”

Following is an overview of the approach which we aim to highlight in our

financial plan.

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3 Introduction__________________________________

Happy Learning Center established in 2006, it is home based K12 tutorial

institute, helps children to increase the mental strength by several innovative

ways. It is one the most highly rated tutorials were people come from 15 km

distance to study

The company is now looking at expanding its operations in India and is keen

on opening Franchise units. The financial projections of the Franchise units

have been observed in the present report.


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4 Inception cost________________________________

Inception cost or the start up cost is the cost of starting any business. It is the cost or expense associated solely with the implementation of a plan or project and typically represents the cost incurred prior to the realization of benefits from such a plan or project. The objective is to lay down all the significant cost elements which should be owned by any business to venture into the Franchise setup. Following are the broad categories of cost elements to setup a Franchise of Happy Learning Center:

The estimated area required for starting a franchisee of Happy Learning Centre is approximately 500 sq ft.

Centre Furnishing / Improvement

Furniture / Fixtures / wood work

Signage (Int / ext)

Equipments

Laptops

Projector

Printer/Scanner/Fax

CCTV

Sound System

Communication equipments & Internet Connection

LCD

Misc (display boards, stationery etc.)

Business promotion

Launch & Pre-Opening Marketing Expenses

Software & Licensing cost

Training (Lodging & Boarding)

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Working capital

In addition to the above, there are certain working capital requirements which

the Franchisee will have to make provisions for. Such requirements are

imperative from an operational stand point as there is some level of liquidity

which the Franchisee would need to have at the inception.

Franchise fees

The methodology for fee determination calls for Franchisors to look to their

primarily as a cost recovery tool and only secondarily as a profit centre.

Franchisors would obviously like to maximize their Franchise fee revenue, but

knowing the importance of establishing the associated royalties, most

Franchisors price their fees low enough to avoid erecting barriers to the

Franchise sale.

In determining Franchise fees, several approaches can be used

simultaneously:

Cost-Plus Approach: The cost-plus approach is one way to determine the

"floor" level above which a Franchise fee should be set. To establish this

floor, the Franchisor calculates its Franchise acquisition, total marketing,

training, and initial support costs involved in selling a Franchise and add

a reasonable markup.

Based on Francorp experience, 15% component of Franchise Fee is the

Franchise Acquisition cost, which turns out to be 5% of the Project Cost.

However, in product Franchises where franchisor is already enjoying a

certain margin on the supplied merchandise, it is advisable to either

waive off the Franchise Fee or set it at a level which does not serve as

resistance in Franchise sales.

However, Francorp would advise the client to make a re-assessment

during next discussion on the following lines:

Expenses per Franchisee

Marketing and Lead Generation Expenses

+ Sales Expense

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+ Site Evaluation

+ General & Administrative Expenses

+ Headquarters Training

+ On-Site Training and Travel

+ X-factor: Initial Support

Competitive Approach: Francorp recommends a "ceiling" price for the

Franchise by considering what the market will bear. Upon examining the

Franchise fees of "competing" franchisors, Francorp found INR 150,000

as the suitable Franchise Fee

Perceived Value Approach: Finally, Francorp uses this approach to

determine where a Franchise fee should be set above the "floor" price.

[Note: Some franchisors will intentionally price above the ceiling price to

establish the "exclusivity" of the Franchise offering, while others will price

well below its assumed costs in an effort to saturate the market.]

Although relatively few examples exist of companies entering franchising

with a high degree of name recognition, those that do exist can position

their offering toward the high end of the competitive spectrum. Premium

positioning is not a license to charge more than the market price in the

face of established successful franchise competition. It is, however,

grounds to avoid the introductory pricing that beginning franchisors often

charge to get a foothold in the market in a field dominated by a few big

names.

Based on the financial results that the Franchisor expects Franchisees to

achieve, its positioning in the industry, sales goals, and the level of

support it intends to provide, a Franchise fee of INR 150,000 will be

charged.

The Franchise fees paid by the Franchisee shall also be subject to the

applicable service tax. Presently, the same is applied at the rate of 12.36

percent.

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Assumptions

Following are the broad assumptions which we have relied on while arriving at the start up cost:

Based on our industry analysis and the inputs from Happy Learning

Center, we have assumed that the initial marketing cost for a Franchisee

of Happy Learning Center would be around INR 50,000.

The working capital requirements of the Franchisee have been worked

out presuming a 3 months gestation period.

Based on our industry analysis we have assumed that the Franchise fees

for this Franchise setup would be INR 150,000.

The details of the project cost are provided in Franchise setup cost (A1).


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5 Starting profit and loss_________________________

In order to assess the financial efficiency of the Franchise business to the

Franchisee, the preparation of a detailed income projection statement is

imperative. The statement aims to highlight the income / loss which the

Franchisee would enjoy/ bear in the first 5 years of its operations.

The statement is prepared based on the following format: Income from operations / Revenue / Turnover Less: Cost of goods sold Cost of operations Depreciation

Profit before tax Less: service tax / VAT

Profit after tax

_____________________________________________________________

In the instant case, following are the broad heads considered to arrive at the profit forecast for the Franchisee:

Revenue

Revenue from Coaching

Expenses

Cost of Educational Kit Delivered

Employee Cost

Referral to Faculty

Incentives to Full time Faculty

Commission to Part Time Faculty

Royalty to Franchisor

Rent

Electricity

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Cost of refreshments/gifts

Communication Expenses (Tel + Internet)

Printing & Stationery

Quality Monitoring Charges

Misc Expenses

Marketing Expenses

o Local marketing overhead

o Contribution to central marketing fund

Depreciation

The various assumptions adopted in preparing the income forecast are enumerated as below along with the basis of such assumptions:

The Royalty given by the franchisee to the franchisor will be 15

percent of total Gross Receipts.

Based on our industry analysis, we have presumed that on an average

the revenue of the Franchisee would increase by approximately

20 percent.

The employee cost has been arrived by considering the cost of each

employee of the Franchise. The number of employees as presumed is

an estimated manpower requirement from Happy Learning Center

perspective. It is also presumed that the overall employee cost would

increase at an average rate of 5-10 percent. The complete computation

of the HR cost is provided in Franchise HR cost (A2).

The complete revenue model of the Franchisee over a period of 5 years

is provided in Franchisee Revenue Statement (A3).

The depreciation rate employed is 10 percent.

The total marketing overhead are categorized as follows:

o Local marketing overheads – 1.5% of gross revenue

o Contribution to central marketing fund – 1.5% of gross revenue

Based on the discussions with Happy Learning Center, we have

assumed that the average increase in the operating expenses of the

Franchise unit would range between 5-10 percent subject to the

corresponding increase in revenue.

The details regarding the 5 year income projections of the Franchisee of

Happy Learning Center are provided in Franchisee Income Statement (A4).


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6 One time expenses____________________________

One-time costs related to the business are usually considered capital

expenses. This includes expenses such as the purchase of new equipment

and related costs. The main reason for separating operating cost and one

time costs is that it gives the company, and any investors, a more detailed

picture of where money is spent before it can be turned into profit.

In the instant case, the initial project cost is the one time cost for the

Franchisee. The same is provided in Franchise setup cost (A1). In case the

Franchisee aims to diversify or expand its scope of services then additional

capital expenditure at a later date will also be classified as a one time cost.


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7 Recurring expenses___________________________

Recurring cost is the cost incurred repeatedly, or for each item produced or

each service performed. It is the operating cost of the business and is

essential for the functioning of the Franchise.

In the instant case, following are the operational cost which will be imperative

to the functioning of the Franchise unit by the Franchisee:

Cost of Educational Kit Delivered

Employee Cost

Referral to Faculty

Incentives to Full time Faculty

Commission to Part Time Faculty

Royalty to Franchisor

Rent

Electricity

Cost of refreshments/gifts

Communication Expenses (Tel + Internet)

Printing & Stationery

Quality Monitoring Charges

Misc Expenses

Marketing Expenses

o Local marketing overhead

o Contribution to central marketing fund

Depreciation

The aforementioned expenses are incidental to the main business of the

Franchisee and therefore will be modified as and when the Franchisee

expands its scope of services.


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8 Tax Implications and compliances_______________

The Franchise arrangement between the franchisor and Franchisee would

result into tax implications for the Franchisee from both Direct and Indirect

tax perspective. A prima facie view of the applicable tax implications are

enumerated below:

Direct tax

Every company operating in India is liable to comply with the provisions of

Income-tax Act, 1961 (Act) and to pay taxes on the income earned at the

applicable rates. The Franchisee would be liable to pay corporate taxes at

30 percent (plus surcharge and cess as applicable) on the income earned

during the year, as computed in accordance with the provisions of the Act.

Alternatively, in case the tax on book profits at 18 percent (plus surcharge

and cess as applicable) exceed the tax computed under the normal

provisions, the Franchisee would be liable to pay such tax.

The income tax is required to be deposited to the credit of the Central

Government through the advance tax mechanism in four instalments during

the financial year.

The amount of such instalments shall be as follows:

by the 15th day of June of the financial year - 15 percent of tax payable

by the 15th day of September of the financial year - 45 percent of tax

payable

by the 15th day of December of the financial year - 75 percent of tax

payable

by the 15th day of March of the financial year - 100 percent of tax

payable

Indirect tax

Sales tax

Sale tax is a tax on sale of goods in India. In India there is a federal

system of taxation where by:

o Inter-state sales of goods (i.e. where goods move from one state to

another pursuant to a contract of sale) are subject to CST and are

governed by the provisions of Central Sales Tax Act, 1956 („CST

Act‟); and

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o Intra-state sales of goods (ie sale of goods within the states) are

subject to VAT and accordingly the provisions of VAT of the

respective State shall apply.

Sale of goods in the course of exports and imports are beyond the

purview of Indian VAT/ CST regime.

VAT is typically a multiple point levy which provides for levying tax at

each stage of sale of goods within the state. However, there are a few

exceptions to this general principle (for example petroleum products in

most of the states are taxed at single / first point of sale within the

state).

Typical VAT rate is 12.5 percent (also known as revenue neutral rate)

while specified capital and other goods enjoy concessional VAT rate of

4 percent. For example, in most states the VAT rate of intangibles and

of iron and steel items is 4 percent.

Service Tax

Service tax is levied on provision of „specified taxable services‟. At

present, there are more than 110 such specified taxable services on

which service tax is levied. The current rate of service tax is 12.36

percent.

Service tax is levied on taxable services provided by a service provider

in case the total value of services rendered (including exempt) services

exceeds the threshold limit prescribed in this regard. (presently

threshold stands at INR 1 million)

Typically, service provider is statutorily liable to register and pay

service tax to the Government. However, in certain cases, the

statutory liability to register and deposit service tax to the Government

is on the service recipient.

The exceptions, as relevant to the Franchisee of Happy Learning

Center are any taxable service provided by a person who does not

have any business/ fixed establishment in India. In such a scenario,

the liability to discharge service tax liability shall be on Indian service

recipient under reverse charge mechanism.

Like excise duty, service tax also works under credit mechanism

whereby a service provider can typically avail the credit of service tax

paid on inputs, capital goods and input services to be adjusted against

the payment of output service tax.

Service tax is payable on receipt of value of taxable services provided

by the service provider to the service recipient.

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A service provider or a person liable to pay service tax as a recipient of

services is required to apply for a registration with the service tax

authorities.

In the instant case, there can be specific tax implications subject to the

categorization of the Franchisee‟s services under various tax clauses

as enumerated in the Act. These tax implications need expert guidance

and analyses and thus have not been captured as a part of our report.

The various tax rates applicable for Financial Year 2013-14 are

provided in Annexure A of this document.


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0%

50%

100%

150%

200%

250%

300%

1 2 3 4 5

ROI (%)

ROI (%)

9 Trend and ratio analysis________________________

The objective of this section is to analyse the financial performance of the Franchisee by doing a rigorous ratio and trend analysis.

Our observations and results from the analysis are enumerated as below:

There is an optimistic trend apparent from the profitability of the

Franchisee.

The initial set up cost of the Franchise is approximately INR 730,000 –

1,145,000 and is subject to increase depending on the add-on services

which the Franchisee may wish to offer.

ROI – The return on investment of the Franchisee shows and upward

trend and serves as a lucrative opportunity.


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10 Conclusion___________________________________

This report including the observations contained herein has been developed

on a coherent, theoretically and grounded comprehensive framework for

financial planning in a Franchise setup. Before starting with any quantitative

projection, the Franchisee gathers and analyses information concerning the

new venture, conducts a thorough market analysis to specify market needs,

evaluate relevant external threats and opportunities, as well as internal

strength and weaknesses. This leads to assumptions and connections which

build up the foundation of the whole financial planning process. Thus, the

sales volume and price can be extracted from the preceding analyses and

written justification. The revenues determine related expenses and a derived

production plan specifies the needs of capital investments. Aggregation

based on which the entrepreneur calculates capital requirements. The next

step is the planning of financing which initiates an adjustment mechanism

due to financial “bottlenecks” that leads to an iterative planning process.

Finally, the robustness of the financial plan can be tested by employing trend

and ratio analysis. These methods are applied to financial planning elements

and components and results in a cost effective and profitable Franchise

setup.

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Appendix A

Income tax rates in India

These rates are subject to the enactment of the Finance Bill2013. The rates are for the

Financial Year 2013-14.

1. Income tax rates

1.1 For Individuals, Hindu Undivided Families, Association of Persons and Body

of Individuals

* In the case of a resident individual of the age of sixty years or above but

below eighty years, the basic exemption limit is INR 250,000.

** In the case of a resident individual of the age of eighty years or above, the

basic exemption limit is INR 500,000.

***Rebate from tax of upto INR 2,000 available for a resident

individual whose total income is below INR 500,000

****A 10 percent surcharge is applicable if the total income

exceeds INR 10,000,000. Marginal relief available.

*****A 3 percent education cess is applicable on income-tax

(inclusive of surcharge, if any)

1.2 For Co-operative Societies

On the above, a 10 percent surcharge is applicable if the total income exceeds

INR 10,000,000, Marginal relief applicable. Education cess is applicable @ 3

percent on income-tax.

1.3 For Local authorities

Total income Tax rates

Up to INR 200,000, *,**,***,**** Nil

INR 200,001 to INR 500,000 10%

INR 500,001 to INR 1,000,000 20%

INR 1,000,001 and above 30%

Total income Tax rates

Up to INR 10,000 10%

INR 10,001 to INR 20,000 20%

INR 20,001 and above 30%

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Local Authorities are taxable @ 30 percent.

A 10 percent surcharge is applicable if the total income exceeds INR

10,000,000, Marginal relief applicable.

Education cess is applicable @ 3 percent on income-tax.

1.4 For Firms [(including Limited Liability Partnership (LLP)]

Firms (including LLP) are taxable @ 30 percent



Education cess is applicable @ 3 percent on income-tax.

1.5 For Domestic Companies

Domestic companies are taxable @ 30 percent.

Special method for computation of total income of insurance companies.

The rate of tax on profits from life insurance business is 12.5 percent.

A 5 percent surcharge is applicable if the total income exceeds

INR 10,000,000 but does not exceed INR 100,000,000. Marginal relief

available



Education cess is applicable @ 3 percent on income-tax (inclusive of

surcharge, if any).

1.6 For Foreign Companies

Foreign companies are taxable @ 40 percent


10,000,000 but does not exceed INR 100,000,000. Marginal relief available


100,000,000. Marginal relief available


surcharge, if any).

2. Minimum Alternate Tax

(a) Companies

MAT is levied @ 18.5 percent of the adjusted book profits in the case of

those companies where income-tax payable on the taxable income

according to the normal provisions of the Act), is less than 18.5 percent of

the adjusted book profit.

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A 5 percent surcharge is applicable in case of domestic companies, if the

adjusted book profit exceeds INR 10,000,000 but does not exceed INR

100,000,000. Marginal relief available

A 10 percent surcharge is applicable in case of domestic companies, if the

adjusted book profit exceeds INR 100,000,000. Marginal relief available


surcharge, if any).

MAT credit is available for ten years.

(b) Person other than a Company

AMT is applicable to persons other than Company

AMT is levied at 18.5 percent of the adjusted total Income in case of

persons other than a Company where income-tax payable on the total

income (according to the normal provisions of the Act) is less than 18.5

percent of the adjusted total Income

AMT will not apply to an Individual, HUF, AOP, BOI or an Artificial

Judicial Person if the adjusted total income of such person does not exceed

INR 2,000,000

A 10 percent surcharge is applicable if the adjusted total income exceeds

INR 10,000,000. Marginal relief available

A 3 percent education cess is applicable on income-tax (inclusive of

surcharge, in any)

AMT credit is available for ten years.

3. Securities Transaction Tax

Securities Transaction Tax (STT) is levied on the value of taxable securities

transactions as under:

Transaction Rates Payable by

Until 31st May 2013

From 1st June 2013

Purchase/Sale of equity shares (delivery based)

0.1% 0.1% Purchaser / Seller

Purchase of units of equity-oriented mutual fund (delivery based)

0.1% Nil Purchaser

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Sale of units of equity-oriented mutual fund (delivery based)

0.100% 0.001% Seller

Sale of equity shares, units of equity oriented mutual fund (non-delivery based)

0.025% 0.025% Seller

Sale of an option in securities 0.017% 0.017% Seller

Sale of an option in securities, where option is exercised

0.125% 0.13% Purchaser

Sale of a futures in securities 0.02% 0.010% Seller

Sale of unit of equity oriented fund to the Mutual Fund

0.250% 0.001% Seller

4. Commodity Transaction Tax

CTT is proposed to be levied (effective from a date to be notified) on

the value of taxable commodities transactions as follows:

Transaction Rates Payable by

Sale of commodity derivative (other than agricultural commodities) entered in a recognized association

0.01% Seller

5. Wealth Tax

Wealth tax is imposed @ 1 percent on the value of specified assets held by the

taxpayer on the valuation date (31 March) in excess of the basic exemption of INR

3,000,000.

6. Dividends Earned by an Indian Company

Dividends earned by an Indian company from a foreign Company in which it

holds 26 percent or more equity shares shall be taxable at the rate of 15 percent

(plus applicable surcharge and education cess) on gross amount of such

dividends.

7. Dividend Distribution Tax

Dividend distributed by a Domestic Company is exempt from income-tax in the

hands of all shareholders. The Domestic Company is liable to pay DDT @ 16.995

percent (inclusive of applicable surcharge and education cess) on such dividends.

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For computation of DDT, the amount of dividend declared by the Domestic

Company will be reduced by the amount of dividend, if any, received by it during

the financial year if –

(a) Dividend received from domestic company if -

o such dividend is received from its subsidiary (i.e. in which it holds more

than 50 percent of equity shares);

o the subsidiary has paid DDT payable under section 115-O of the Act.

(b) Dividend received from foreign company (effective from 1 June 2013) if -

o the dividend is received from its subsidiary; (i.e. in which it holds more than

50 percent of equity shares);

o the tax on such dividend is payable by the domestic holding company under

section 115BBD of the Act.

(c) Dividends paid to any person for and on behalf of a New Pension System

Trust.

Income received by unit holders from a Mutual Fund is exempt from income tax.

The Mutual Fund (other than an equity oriented Mutual Fund) is liable to pay

income distribution tax as follows:

o 28.325 percent (inclusive of applicable surcharge and education cess) on

income distributed to any person being an individual or a HUF by a money

market Mutual Fund or a liquid fund


income distributed to any other person by a money market Mutual Fund or

a liquid fund

o 14.163 percent (inclusive of applicable surcharge and education cess) till 31

May 2013 and 28.325 percent (inclusive of applicable surcharge and

education cess) from 1 June 2013 on income distributed to any person being

an individual or a HUF by a debt fund other than a money market mutual

fund or a liquid fund;


income distributed to any other person by a debt fund other than a money

market mutual fund or a liquid fund; and

5.665 percent (inclusive of applicable surcharge and education cess) on income

distributed to non-resident or foreign company by Mutual Fund under an

Infrastructure Debt scheme.

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8. Special rates for non-residents

8.1 The following incomes in the case of non-resident are taxed at special rates

on gross basis:

Nature of income Rate

Dividend 20%

Interest received on loans given in foreign currency to Indian concern or Government of India

20%

Interest received on notified infrastructure debt fund

5%

Income received in respect of units purchased in foreign currency of specified mutual funds / UTI

20%

Royalty For Agreements entered into:

–– On or After 1 April 1961 but before

1 April 1976 - @ 50%

–– On or After 1 April 1976 - @ 25%

Fees for technical services For Agreements entered into:

–– On or After 1 March 1964 but before

1 April 1976 - @ 50%

–– On or After 1 April 1976 - @ 25%

Interest on FCCB, FCEB / Dividend on GDRs(b)

10%

For a foreign company, a 2 percent surcharge shall be applicable, where the total

income exceeds INR 10,000,000 but does not exceed INR 100,000,000 and at 5

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percent where the total income exceeds 100,000,000. For other persons, a 10

percent surcharge shall be applicable, where the total income exceeds INR

10,000,000. Marginal relief available.

A 3 percent education cess is applicable on income tax (inclusive of surcharge, if

any).

Other than dividends on which DDT has been paid.

If the non-resident has a Permanent Establishment in India and the royalties/fees

for technical services paid are effectively connected with such PE, this could be

taxed at 40 percent (plus surcharge and education cess) on net basis.

Francorp happy learning centre financial plan

Education

Transcript of Francorp happy learning centre financial plan