In the process of investing in another’s business filing for bankruptcy is just one step. What can you do to prevent financial ruin by opting to invest passively in a franchise?
We discovered the three choices for passive investments into a franchise based on the kind of agreement between the franchisor and franchisee. We will now discuss what investors are exposed to and the best way to stay out of problems by contacting smaller and medium-sized companies that have been launched under the well-known plan.
A result of the investment practice of a professional in the business
If you know the potential pitfalls and where you should find they are no issues. The investment consultant Anton Alputov acquired two management franchises simultaneously which included a sushi restaurant in Moscow and beauty coworking in Ufa even though he’d never visited the city. It is a franchise model that allows the company to be fully involved in the establishment of a retail establishment as well as its operational management and the investor is the owner of the establishment the outlet.
“I earn a profit as I view everything inside the building on CCTV cameras. I can see completely transparent all the figures in real-time. Monthly (pass. – Ed.) Video calls to managers “says Alputov about his experience.
As per his report, the division of investment proceeds is as follows:
- up to the time of return up to the time of return, 90% of profits are paid to the investor. Another 10% is paid as a bonus for the manager. The payback time for a business is 2 to 4 years, and the profit is approximately 30% annually;
- following the return of investment half of the profit is paid to the investor and the remaining 50 percent is transferred to the management firm.
According to Alputov the reason for this strategy, the management company strives to make the company profitable as quickly as it can since only when it returns the capital that was invested to the investor can it make more money to its advantage. The investor will be able to quickly receive the capital he invested and all the assurances of this are given for him from the business.
Fashion trend to earn money and do nothing? “That doesn’t happen,” you argue. Real renters would protest to this, but they’ll be energy-efficient. Let’s see what strategies might generate an income stream that is passive.
Risks and Returns from passive investment
For many, committing money to create a successful business seems to be the more logical business model than opening an account with a brokerage company and selecting bonds to invest in. One doesn’t wish to tackle the stock market as they find it to be a daunting subject for them. One would prefer that the asset be as real as it is possible to be: if real property is the case, then an apartment or a house or a business then a candle manufacturing plant. When it comes to the markets for shares as well as direct investment the principle of operation is similar: lend or invest in development and eventually become co-owners.
The main difference lies on the scale of businesses that are they are organized and transparent in their operations are, as well as their reporting system. The risks associated with operating a business with the start-up of a new venture following a pre-designed business plan are also different. For marketable assets, the advantage is the fact that they’ve passed the test of the exchange. If they are categorized as the first listing level they are highly reliable.
A comparable level of profits, as well as franchisesis offered by venture-backed projects. But the results of their establishment is more unpredictable than launching an franchise business.
Venture capitalists are huge funds that are able to cover losses. If the venture proves to be a success huge money is in the future for the investor. For instance, Apple founder Ronald Wayne sold a 10-percent part of the business in $800 which is currently valued at $300 billion.
In the case of franchises, if you decide to invest your money like, say, pizzerias “you should be aware that the profits you earn will be limited in a way by the walls of the pizzeria. Once you have reached the maximum profit and achieving the maximum profit, you will be rewarded with an additional profit percent of up to 10 percent annually,” explains Anton Alputov. If the scenario improves, in three years, the investor will be paid 20%, and in four years two years – 24%.
Legal risks for an investor in the franchise
You can verify the trustworthiness and viability of a franchised business through asking the franchisor to provide information on financial reporting and registration documents, as well as reading reviews from customers. What are the terms of operation of your capital within the business, only the agreement with an investor or a loan contract will provide the information. You should be aware of the terms of payment towards the investors, how often they are made, and other factors. For instance how is the accountability for decisions made by the management of the company distributed because the investor in reality is not a part of them.
“In the event of illegal actions, companies can be held liable both as a manager and a founder (investor) as persons responsible for the activities of a legal entity,” says Yegor Redin the managing partner of the Pozitsia Prava law firm.
If a business is in debt, bankruptcy could be awaiting not only the legal entity, but also its founder, who could include an investor.
The investment’s earnings could be reduced significantly in the event that the franchisee is found to be in violation of contract terms for commercial concessions and is then forced to pay a substantial penalty for this. “The money that should have gone to the development of entrepreneurial activity will go to the franchisor, and there will be less money in circulation,” warns Sergey Demkin, adviser on special projects for A1 Bar Association. A1 Bar Association.
Lawyers advise reading not just an investment or loan agreement as well as commercial concession agreements, which is signed by the franchisor and the franchisee.
What are the warnings for an investor when they sign the accession agreement?
The inclusion of a clause in the concession contract an amount guaranteed by the franchisor the franchisee must pay to the franchisor an initial “red flag”. In the case of an example the franchisee must pay three million rubles each month to the right-holder each month and pay a percentage of the earnings. “This is a very serious risk, because if the franchisee’s business does not go well for certain reasons, he will still have to give money to the right holder under a commercial concession agreement,” states Sergey Demkin.
The other “red flag” is potential huge penalties for franchisees. These types of sanctions are not uncommon. For instance the franchisor is entitled to the right to penalize the franchisee for failure to pay its royalties on time or establishing a different location without the knowledge of the owner of the copyright. However, if the amount is excessive, it’s better to find a different partner. “The investor should consider that money that he gives to the franchisee might be used to pay fees under a commercial concession agreement. In the end the franchisee will be unable to recover the money he has invested, “the lawyer emphasizes.
A further guarantee of the security of the money involved in the undertaking for the investor could be a personal guarantee from the management company or the owner of the business.
End of contract The place of an investor
The process of letting go of a project that has the franchise model is significantly slower in terms time and effort to an exchange transaction that is regular where you can eliminate an asset with just a few clicks.
If an investor is seeking or may be forced to pull out of the project, it is likely there will be no one to immediately offer him the money. “This is not a stock exchange, the average withdrawal period is 6-8 months,” says in the investment proposition for”Personal Solution “Personal Solution”, which creates a franchise offering services to loaders.
The investor must also be warned about the intention to pull out from the contract in order to receive cash in advance, which could be for a month or a few weeks prior to.
There is a possibility to end an investment contract or loan contract before the due date However, the majority of the time it won’t be for the benefit of the investor. According to Viktor Stoumov-Oleshkevich who is the Dodo Pizza franchisee, in the actual practice, this option is not often implemented. “The investor has the right to sell his share if he owns a share, or to offer partners to terminate the investment agreement ahead of schedule if he receives payments from turnover,” he states. For the investor, this could in reality be a voluntary surrender of income in the form the percentage of profits or turnover.
Entrepreneurs can provide a partner with the option to buy a portion of the company. This occurs when the term of the investment contract expires or the entrepreneur wishes to “remove” the partner from the company. They make this move to rid themselves of those old, burdensome agreements. As an example, if investors invested money in an organization in 2005. the money was returned to the investor, but the partners still transfer the interest earned from their profits to him. However, most franchisees appreciate relations with shareholders and it’s beneficial for franchisees to earn the passive income.
If the investor doesn’t consent to withdraw from the project and the arrangement remains in force, entrepreneurs are required to pay dividends, regardless of whether they want to or not. A thorough legal plan will assist to avoid conflicts arising from the break in business relationships even from the very beginning of joint working. “It is essential to accurately define all the terms. Let’s suppose that an investor invests cash for three consecutive years. After a year, the investor returns the money, and receives dividends for two years and then decides to end the venture. It is equally important to define the conditions that will be followed when the project is terminated – this could be a purchase of a share , or an investment return or a bonus “Stanislav Tikhomolov who is the CEO of Investment Franchising, shares his experiences.
Pandemic as a force greater than the franchise
Any force majeure event like natural disasters or fire should be mentioned by the written contract. The investor and the entrepreneur decide in advance when they will split when the company closes. This can eliminate the problems of the repayment of debts as well as the payment of compensation, as well as the date of transfer of funds. But, obviously, it is not possible to predict everything predicted. “Last year, at the peak of the pandemic, from April to August, many investors themselves allowed payments to be paused,” Anton Rutsky, a franchisee of the Dodo Pizza pizza chain, offers an illustration. “Despite this, all loan repayments are planned ahead of the deadline specified in the contract.”
How do management companies mitigate risks?
There is a consensus that the risk of the investor and the entrepreneur should be split in half. Management companies, however, try to secure franchise investment in the maximum extent possible. In their eyes, any conflict between the franchisees and the investor can be a blow to the brand’s reputation, and consequently, it could cause problems when trying to attract new capital. The risks are minimized in this manner:
- Large networks only allow successful franchisees to get investors through a management firm. Entrepreneurs must be able to establish profitable establishments within the same network and have a minimum of 25-30% of the money needed to open the new location. Additionally when an investor is seeking collaborators among his friends and contacts, then of course there is no restrictions.
“In order to enter the investment database proposals, the operating franchisees must possess high-quality indicators of their product conforming to brand standards. These are reviews of the mystery shoppers, deliveries times … There are around 40-50 indicators which are used as the basis upon which the evaluation is made,” Victor explains. Stoumov-Oleshkevich.
- Investors have the ability to regulate the decisions of the company’s management as well as learn about monthly reports, information on marketing, sales relationships with customers as well as being given the ability to access video cameras. Investors who are naive are eager to view live online what’s happening at the barbershop or restaurant that they have opened using their funds.
Management companies can’t promise that the funds will be returned 100% to investors. “Business is business,” is the message in Dodo Pizza’s website. Dodo Pizza website.
How do you determine if it is worth the money?
Investor in business Anton Alputov has prepared a checklist specifically for the readers of Banki.ru to those contemplating buying franchises. It is, by default, safer when investing into a company which is already operating as opposed to one that hasn’t opened. However, prior to making the decision, it’s important to ask yourself some questions.
- Who will be the person to manage your company?
This is the first thing prospective investors should be asking themselves. The likelihood of profit is heavily contingent upon the expertise of managers and their decision-making. The franchisee or the management company himself will be able to manage every aspect of business. “I recommend that you go to the management firm. It’s more trustworthy and efficient, for obvious reasons. If it is an franchisee, you should carefully look into his experiences. It is more beneficial if he has points that have been in operation for some time. Then examine their performance “Alputov notes.
- Which institutions (points) are part of the system?
Attention is more important than larger networks. “The greater the network size more brand recognition and lower prices for products (because of higher purchases) More advertising, lower rental (reliable tenants) and other things like that. However, the most important issue is to have a solid and sustainable commercial model” claims Anton Alputov. He encourages investors to study carefully the various points of operation in a city that has the same population, and discover the particulars of the market as well as other factors.
- Are other investors satisfied?
It is important to communicate not just with the franchisee but also the other investor who has made a decision to invest in this network. It is feasible and essential to consider the financial performance of these franchises.
- How do you define the business structure of the business?
The business procedure must be understood by the investor. Then he can determine the potential profit of the offer for him.
- How does access to information be made transparent?
The franchisee or management company must provide the investor access to videos taken by surveillance cameras, and also an account that is personal to all indicators of the company. “We want monthly or weekly text as well as video updates from the managers (what was the plan to increase profits? What is the actual plan? ),” continues Anton Alputov.
- What are the guarantees for investors?
Franchisees need to be prepared to address difficult questions like What happens if a franchise has a profit of half that is declared or may turn into a loss? Who is responsible for the expense of moving locations?
The lawyers interviewed note that investors can as per the information arbitral courts’ bailiff bases examine franchisees for outstanding obligations and numerous actions. One of the best indicators is the possibility of bank loans through franchisees – which signifies it is that the bank has examined the businesspersons and has entrusted the franchisee with their funds despite the high risk.
How to get the status of a qualified investor and what it gives
Investors with a qualifying status can invest in financial instruments that aren’t available to normal investors. We explain what kind of status is granted and what the prerequisites for it and the best way to be eligible for it.
Anyone can purchase bonds and stocks, even those with no prior experience dealing on the exchanges. There is however a range of financial instruments that aren’t accessible to investors of all kinds for example, securities of foreign companies that aren’t traded in Russia derivative financial instruments as well as high-risk (venture) investments, and various other investments.
They can be extremely profitable, but they can be challenging to manage and come with the highest risk, which is why they are only available to investors who have experience and substantial capital. They are also known as qualified.
Qualified investor: What is this status and what benefits does it offer?
The term “qualified investor” is a unique designation that demonstrates the competence of a participant in the market for securities. The existence of this designation means that the person has the knowledge and skills to evaluate the situation in the market for stocks and make a conscious decision to invest in more risky assets.
The qualification of a qualified investor may be earned by a legal entity that fulfills certain specifications set forth within Article 51.2 of Federal Law No. 39-FZ “On the Securities Market”. This status is granted automatically to organizations or individuals who are professionals on the market for financial instruments.
- Brokers, professional managers dealers, non-state and investment pension funds, as well as some non-profit organizations.
- A few international or government financial institutions, such as the World Bank, the Central Bank of Russia and the International Monetary Fund, the Deposit Insurance Agency, and the like.
- Some lending institutions
The distinction between investors in qualified and non-qualified (“quals” as well as “non-quals”) appeared in Russia in 2007, however, the distinction was legally recognized in the year 2020. The law then came into effect, establishing the classification between investors and two types and limiting access to a number of instruments. To complete certain transactions, they have to be evaluated by an agent. There are no limitations for investors who are qualified.
Why Become a Qualified Investor
Investors who are qualified are able to access nearly every financial instrument on the market. This allows you to accumulate an array of securities that could generate significant returns.
There are only the most basic and liquid investments are offered for investors who aren’t qualified including US government bonds (OFZ), shares and bonds of big companies, shares of mutual funds as well as other mutual funds. A restriction like this can protect new investors from risky transactions and huge financial losses, but it also restricts the potential for earning.
Additionally, because of the increasing possibility in blocking foreign currency from an account that belongs to Russians from July 20, 2022, The Central Bank recommended that brokers set up additional restrictions on unqualified investors. In the end, many brokers have stopped selling securities from foreign companies to people who are not qualified.
What Assets Can Qualified Investors Use?
When a person is deemed to be an accredited investor is granted the advantage of access to investments that carry a higher risk. The exact list of securities varies according to brokers, but generally comprises:
* Foreign securities that aren’t traded on Russian exchanges;
* Access to IPO;
* Foreign exchange-traded funds (ETFs);
* Depositary receipts;
* foreign derivative financial instruments, ie derivatives: futures, options, forwards, etc. ;
• shares in closed investment funds (ZPIFs) and venture funds;
* notes on structure;
* high-risk bonds.
The requirements for being investors who are qualified
In order to be considered a Qualified investor, one must fulfill one of the following requirements:
1. The value of the property. The simplest way to gain “qual” status is to possess assets that total a minimum 6 million rubles. Deposits and money on accounts and securities, derivatives and unallocated accounts for metal are all considered. Cars, personal property, and personal property do not count.
2. Experience in dealing with securities. The other option is to be a part of an organization that deals with derivatives or securities. If the company is in the status of being a qualified investor, it’s sufficient to stay there for two years or, if not, then three years. It’s not just the duration of time within the company that is considered and also the personal experience of dealing with securities.
3. Investment experience. It is essential to complete transactions involving securities or derivatives of them that are at a minimum 6 million rubles in the past year. Each month, you need to complete more than one deal and in the course of the quarter, at minimum 10.
4. Profile education. It is required to possess an advanced economic education that is accompanied by an official state-recognized certification from a school that has accreditation for professional activity in the market for securities. Five institutions currently have this accreditation as The National Association of Participants in the Stock Market, ANO DPO “MFC Training Center” and The fund “Institute of the Stock Market and Management”, ANO VO “Ural Institute of the Stock Market”, Federal State Budgetary Educational Institution of Higher Professional Education “PREU named in honor of. G. V. Plekhanov. Certificates of qualification for an expert in financial markets or an auditor or insurance actuary as well as certificates from international organizations (Financial Risk Manager (FRM), Chartered Financial Analyst (CFA) and Certified International Investment Analyst (CIIA) certificates) are also considered.
How requirements may change
In July 2022 in 2022, in July 2022, the Central Bank presented a idea for enhancing the protection of investors who are retail In the concept, it is proposed to alter the criteria used to determine the qualification of an investor who is qualified.
- In order to expand the capacity of real estate from six million dollars to thirty million. The broker’s obligations to the broker are taken out of the value of the assets.
- Be aware of liquid assets, such as liquid securities that aren’t subject to encumbrance, conditions for a credit institution to pay for the cash equivalent of a valuable metal; and assets that are credited to the account as part of REPO transactions.
- Set requirements for documents that confirm asset ownership and the time in which documents are valid.
- Do not include higher economic education as being an independent criterion (provide an option to use it with other criteria to lessen the requirements).
- Examine the qualifications required in the field of financial markets as per the professional standards “specialist in the securities market” or “specialist in financial consulting”.
- Eliminate from the law on the market for securities the obligation to obtain the status of qualified investor, only for specific instruments or lists of instruments.
The proposals of the regulator will be debated with legislators, market participants, and the government. Although the proposed measures by Central Bank are under development but the prior conditions to be able to obtain the status are still.
Investors already having “qual” status will not be required to confirm their qualifications however those considering getting the status must be quick. After increasing the requirement to 30 million Russian rubles, and making the criteria more stringent the process will become harder to obtain this status.
How do you become an accredited investor?
A trustee, broker or management company, as well as the forex dealer, can grant the status as an investor who is qualified. To get”qualification “qual” you need to apply and submit documents that confirm the right to this status.
Important! Each management company or broker keeps its own register of investors who are certified. The information received through one intermediary (or MC) has to be verified by another intermediary. A broker could in its discretion, identify the investor’s qualifications the register of a different broker. There isn’t a unified registry of investors who are qualified however it is a goal of the Central Bank proposes to create it.
Every management company and the broker has its own set of rules to determine the status of “qual”, but the general rule is similar: the investor submits the request and then provides documents that prove his qualifications, then the company examines the documents. If everything is in order, the person gets the status of an investor who is qualified. If anything does not match the requirements that are set by the Central Bank, the status is refused.
How to obtain an investor status that qualifies as a Qualified Investor with Sberbank
Anyone who wants to gain the status of a qualified investor must submit at the request of the bank an application form and documents that prove his compliance with the rules. The applicant is required to personally hand in the application along with other documentation to Sberbank in paper. If the information on the transactions and assets of the applicant are held stored in banks, Sberbank itself checks the needed data.
- If the amount of money invested in transactions in the last four quarters exceeds six million rubles, it is eligible to be listed as a member of VTB My Investments. (Transactions that involve securities or other instruments are taken into consideration. The rate of transactions is at a minimum ten per quarter, at a minimum 1 every month.)
- If an investor has worked as a professional in the market for securities or advanced financial education, they can obtain the status through VTB. VTB bureau, which offers the services of investment.
A memo as opposed to an end
1. An investor who is qualified is an individual status granted to financial market participants which demonstrates his expertise and expertise. The status is granted to certain individuals and organizations.
2. Unqualified investors have access to a restricted list of securities, whereas a qualified investor can access all financial assets, even high-risk and complicated ones.
3. Instruments for investors with a qualifying score are able to yield high returns, however they can be risky.
4. Anyone who has a financial education and specialized experience in the field with a wealth of experience in dealing on the stocks market , or having a minimum capital of 6 million rubles could be considered an investor who is qualified.
5. The certification of an accredited investor is decided by brokers and banks The procedure and the requirements differ for each. The status that is granted by one company can be recognized by one broker, while another broker may request to confirm the status.