1. .
FINANCIAL PLAN – FRANCHISE’S PERSPECTIVE
Happy Learning Center
February 2014

2. CONTENTS
1
OBJECTIVE______________________________________________________________________1
2
APPROACH______________________________________________________________________2
3
INTRODUCTION___________________________________________________________________3
4
INCEPTION COST_________________________________________________________________4
5
STARTING PROFIT AND LOSS______________________________________________________7
6
ONE TIME EXPENSES_____________________________________________________________9
7
RECURRING EXPENSES__________________________________________________________10
8
TAX IMPLICATIONS AND COMPLIANCES____________________________________________11
9
TREND AND RATIO ANALYSIS_____________________________________________________14
10
CONCLUSION___________________________________________________________________15
-1–

3. 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.)
-1–

4. 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.
Interlinkage between different financial planning aspects for a franchisee
Balance sheet
planning
Income statement
planning
Planning of financial
elements
Sales
Fixed assets
Planning of revenue
- Expenses
- Depreciation
Current assets
Equity capital
Planning of
investments
Planning of
expenses
Operating income
Debt capital
Total liabilities
and equity
- Interest
- Taxes
Planning of capital
requirements
Net income
Debt financing
Planning of
financing
Planning of cash
flow requirements
-2–
Industry trends / aspects
to be considered for all
start ups
Supported by Assumptions
Total assets

5. 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.
(This space is intentionally left blank.)
-3–

6. 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- Home Based:
Centre Furnishing / Improvement
Signage (Int / ext)
Equipments
Projector
CCTV
Misc (display boards, stationery etc.)
Business promotion
Launch & Pre-Opening Marketing Expenses
Software & Licensing cost
Training (Lodging & Boarding)
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.
-4–

7. In determining
simultaneously:
Franchise
fees,
several
approaches
can
be
used
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
+ 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 100,000
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.
-5–

8. [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 100,000 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.
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 20,000.
Based on our industry analysis we have assumed that the Franchise fees
for this Franchise setup would be INR 100,000.
The details of the project cost are provided in Franchise setup cost (A1).
-6–

9. 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
Referral Commission to Faculty
Commission to Part Time Faculty
Royalty to Franchisor
Electricity
Cost of refreshments/gifts
Communication Expenses (Tel + Internet)
Printing & Stationery
-7–

10. 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).
(This space is intentionally left blank.)
-8–

11. 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.
(This space is intentionally left blank.)
-9–

12. 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
Referral Commission to Faculty
Commission to Part Time Faculty
Royalty to Franchisor
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.
(This space is intentionally left blank.)
- 10 –

13. 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
- 11 –

14. 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.
- 12 –

15. 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.
(This space is intentionally left blank.)
- 13 –

16. 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 225,000 –
250,000 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.
ROI (%)
1000%
900%
800%
700%
600%
500%
400%
300%
200%
100%
0%
ROI (%)
1
2
3
4
5
(This space is intentionally left blank.)
- 14 –

17. 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.
- 15 –

18. 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
Total income
Up to INR 200,000, *,**,***,****
INR 200,001 to INR 500,000
INR 500,001 to INR 1,000,000
INR 1,000,001 and above
Tax rates
Nil
10%
20%
30%
* 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
Total income
Up to INR 10,000
INR 10,001 to INR 20,000
INR 20,001 and above
Tax rates
10%
20%
30%
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
- 16 –

19. 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
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.
1.5 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
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 (inclusive of
surcharge, if any).
1.6 For Foreign Companies
Foreign companies are taxable @ 40 percent
A 2 percent surcharge is applicable if the total income exceeds INR
10,000,000 but does not exceed INR 100,000,000. Marginal relief available
A 5 percent surcharge is applicable if the total income exceeds INR
100,000,000. Marginal relief available
Education cess is applicable @ 3 percent on income-tax (inclusive of
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.
- 17 –

20. 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
Education cess is applicable @ 3 percent on income-tax (inclusive of
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
Until 31st
May 2013
Payable by
From 1st
June 2013
Purchase/Sale of equity shares
(delivery based)
0.1%
0.1% Purchaser /
Seller
Purchase of units of equityoriented mutual fund (delivery
based)
0.1%
Nil
- 18 –
Purchaser

21. 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%
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
0.13% Purchaser
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.
- 19 –

22. 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
o
such dividend is received from its subsidiary (i.e. in which it holds more
than 50 percent of equity shares);
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
o
the dividend is received from its subsidiary; (i.e. in which it holds more than
50 percent of equity shares);
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
o 33.99 percent (inclusive of applicable surcharge and education cess) on
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;
o 33.99 percent (inclusive of applicable surcharge and education cess) on
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.
- 20 –

23. 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
Royalty
20%
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
- 21 –

24. 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.
- 22 –