European Journal of Economic and Financial Research
ISSN: 2501-9430
ISSN-L: 2501-9430
Available on-line at: http://www.oapub.org/soc
10.5281/zenodo.61282
Volume 1│Issue 1│2016
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON
PAYMENT. HOW TO DEAL WITH THIS SITUATION?
Arturo, García-Santillán1i, Santiago, González Gómez2,
Ilse Villanueva Reyes3
1
Researcher Professor at UCC Business School, Universidad Cristóbal Colón, México
Full Time Research Professor at Universidad Panamericana, México
2
Master Business Administration student, UCC Business School,
3
Universidad Cristóbal Colón, México
Abstract:
The aim of this work is to design a debt restructuring proposal through a new
payments scheme, with the purpose of giving franchisees an opportunity to finish
credit debts acquired with the aim to buying operative equipment for a franchise. With
this purpose, this work used the procedure proposed by García–Santillán and Vega
Lebrúm (2008) related to an equivalent equations model capable of, in first place, reevaluating the original debt, including overdue payments, as well as those that already
were paid. Besides, the debt restructuring model pursues knowing the amount of each
payment in the new payments scheme. The result of the design proposed by the
restructuring scheme, offers the franchisee a scenario where he/she could have a better
control on the reference debt and besides offers a viable scenario for finishing it.
Keywords: franchises, payment insolvency, debt restructuring
AMS 62PO5, 91G30, 91G40, 91G50, 97M30, 97D40
JEL: C69, M21
1.
Introduction
Nowadays, acquiring a franchise might represent a certain amount of security for
investors, due to the advantages that this model shows. This franchise modality is a
Copyright © The Author(s). All Rights Reserved
Published by Open Access Publishing Group ©2015.
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
proven, experienced business and knowing how is the key that can explain what works
fine and leads to success, all this, based on the processes and final products uniformity
and of course, with a big advertising support.
About franchises, the Department of Enterprise and Employment from the
Generalitat de Cataluña (2012), (Departamento de Empresa y Empleo de la Generalitat
de Cataluña), has refered that this business figures are the kind of business model that
works according a contractual collaboration system between two companies, legally
and economically independent, and where one of the parts (named franchisor) gives
transfers the other (franchisee) the right to take advantage of its brand and
commercialize a series of services object of the business activity, in response to certain
economic remunerations.
Nevertheless and as it happens at every business, there is a risk, even though in
the case of franchises it might be lesser, there are some external factors that strongly
affect the brand’s performance, giving place to a loss of profits and above all, liquidity
and in economic crisis periods this happens to be a very serious situation. An example
is when there is a depreciation of the Mexican peso; it could represent for the investors
in foreign franchises an unpayable debt and even worse, the loss of a brand.
Nowadays, the Company Emparedados de Veracruz is a fast food brand that
performs under the franchise model. The starting investment for acquiring a franchise
in this kind of business MX $ ’
,
. , and this amount, when covered, gives the
franchisee the right to make use of the brand for five years, with the right to receive
assistance in profitability, performance and marketing as well as material for the
restaurant’s operation, including furniture, advertising material and even equipment
such as ovens, refrigerators, fridges, cold line, hot line, toaster, among other elements. It
is important to clarify that the investment does not include supplies neither the space
for the commercial use.
However, when the franchisee does not count with an enough amount of
resources in order to cover the total amount of the starting investment, he/she may ask
the brand a financing and therefore be able to acquire all the required electric
equipment in order to start operations (ovens, refrigerators, fridges, cold line, hot line
and toaster). Normally, all this package is valuated in MX $800,000.00; When the
franchisee accepts the debt, he/she also accepts responsibility for paying each month the
agreed amount with a previously stipulated interest rate and the corresponding
monthly capitalization. About this, it is important to point out that the aforementioned
assumed debt is calculated in dollars.
In some cases, the franchise’s success is affected by factors from the macro
environment and the results might not be the desired ones. The business becomes not
profitable and the franchisee after paying royalties, chooses only to cover only the
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
supplies invoices and basic expenditures such as electricity, internet and rent, and stops
paying the credit previously acquired on equipment for the business operation.
This decision causes that the debt and the interests will increase month after month
getting to a point where the franchisee does not know what to do and might lose all
his/her investment. This scenario opens the possibility for renegotiating the debt as it
has been proposed in the seminal works on equivalent equations models by GarcíaSantillán and Vega-Lebrúm (2008) and recently in the works of García-Santillán,
Venegas-Martínez and Escalera-Chávez (2014); Moreno-García, García-Santillán,
Bermúdez, and Almeida (2015); García-Santillán, Escalera-Chávez, Moreno-García, and
Kramer-Rojas (2015).
It is from these reasoning that the next question emerges: Which is the best
alternative for negotiating the debt derived from the acquisition of operative equipment
of the franchises model, given a possible payment breach scenario? What to do in such a
case?
Which is the restructuring model that may allow both parts (debtor and creditor)
to benefit in terms of equity?
2.
Literature Review
It is the purpose of this work to show possible alternatives for designing a debts
restructuring scheme, these alternatives are derived from the payments insolvency in a
franchise business model. Therefore, in this section it is carried out the conceptual
theoretical discussion on the analysed phenomena. First, the key elements of the
franchise variable are defined and later, the debt restructuring variable is discussed and
analysed.
On the franchise variable, these are business models where, through a
commercial and finance agreement (royalties and rights), a company named franchiser
(owner) permits the use of its business model to another named franchisee or franchised
(Silva, 2003). One of the keys for companies profitability are the fees that the franchisee
pays to the brand in an obligatory way each certain period of time and that is not
conditioned the sales success. Based on what Silva (2003) remarks, these mandatory
payments are divided the following way:
1. RIGHTS (fee). Some franchisers ask for an entry amount in order to be able to
have access to the right of receiving the transference of a business model. This
amount is relative to the franchise’s prestige that would support the commercial
success for the franchisee
2. OPERATION ROYALTIES. They refer to the rights that the franchisee must pay
due to the use of the business format received plus the support of training
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
supplied by the franchiser. They can vary between 1 and 12% of the gross sales
depending on the franchisers positioning.
3. ROYALTIES FOR ADVERTISING. They refer to the contribution that the
franchisee does in order to design and execute a corporate advertising plan at
wide coverage mass media keeping an image uniformity at all business. This
element is centralized at the franchise’s owner and is equivalent to an average
between 3% and 55 of the gross total sales.
About this and with a less optimistic point of view, the Department of Enterprise
and Employment of the Generalitat de Cataluña (2012), points out that these obligatory
fees are one of the main disadvantages when acquiring a franchise, since they become
much higher compared to a start up with one’s own brand, since they are set in
accordance with the restaurant’s net sales and not in accordance to its profitability.
Regardless the franchises high costs, a research carried out by Alba (2010) on the
franchises in Mexico, demonstrated that there is a progressive increase of this business
model penetration in Mexico. By the end of 2007, the business with the biggest amount
of franchises were: food and restaurants, remarking foreign fast food, restaurants and
bars, cafeterias and national fast food; in second place, beauty and personal care,
education and specialty stores, standing out the food and restaurants sector that jointly
represented 33% of the market.
For operating this kind of food and restaurants franchises it is fundamental the
required equipment in order to produce the final products, which can reach 50% of the
initial investment. In those cases where the franchisee does not count with enough
solvency, a possible option is acquiring a debt that might supply the required economic
resources. This fact leads to the search for financing at the bank system or with the
suppliers themselves.
A possible advantage of suppliers is that they are who supply materials and
variable consumable goods for the companies that they have deals with. Even if it is
true that franchises offer security through a business model that has been proved and
accredited, and that allows a better probability for assured profitability and selfsustainability, it is also true that unfortunately success does not depend only of the
name of the acquired brand, but there are external factors like inflation and
devaluation, jointly with other variables associated to financial crisis and that have a
direct relation with the acquired debt. (Departamento de Empresa y Empleo de la
Generalitat de Cataluña, 2012).
That is why, any instability or affectation in these aforementioned variables,
triggers an economic imbalance for every moral or natural person’s finances, which
added to a lack of financial culture and the possible absence about knowledge on
models on debt restructuring, leads people and companies to make bad decisions
related to the acquired debts and this might cause legal situations that have to be solved
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
at legal courts, besides being in the possibility of losing the initial investment provided
by the franchisee.
Considering this, García-Santillán and Vega-Lebrúm (2008), García-Santillán,
Venegas-Martínez and Escalera-Chávez
refer that when facing a debt’s nonfulfillment what is healthier is looking for a renegotiation or restructuring, instead of a
moratorium or even declaring bankruptcy. About this, we can refer the strategy
proposed by Citibank and this is associated precisely, with negotiating with the
creditors. Literally mentions:
Negotiate with your creditors: Do not fear about negotiating with your creditors in
order to figure out a way to pay your debt. Design a plan that you can show them. It is
recommended to pay the same monthly amount to each creditor, or more to that one who
asks for the highest interest rate .
(Citibank, 2007)
Following the same idea, another research carried out by García-Santillán, EscaleraChávez, Moreno-García, Rojas-Kramer (2015), identified a common factor based on the
valuation of original debts and the new dates proposal for the programed payments,
that permits setting a balance between the expired promissory notes and future
promissory notes that have not expired yet, benefiting both, debtor and creditor.
They also point out that besides, within this debt restructuring proposal the
departure point is valuating all the amounts (expired and not expired) to a certain date,
which they denominated focal date.
Later, and according to the debtor’s requirements and possibilities, a proposal
for the new payment dates is made as well as the amounts, which also will have a focal
date in order to obtain the number of payment coefficient, starting from de equivalent
equations model. With this procedure, a debt restructuring model can be achieved and
through it, people and companies are able to pay off the debt and reduce the possibility
to become legal cases.
In summary, and considering as a reference what Pastor (1999) and GarcíaSantillán, (2014) recommended, the next procedure is followed:
1.
It must be defined a date when every original debt must be located as well as the
new payment scheme, which will be named focal date.
2.
Recalculate the value of all the debt that will be renegotiated considering that it is
about promissory notes that were signed with the same supplier (creditor). All
these values are taken to the focal date, the expired indexing the values to future
value
value
S1 1 i
m
S1 / 1 i
n/ m
m
and those not expired are discounted those values to present
n/ m
.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
3.
Calculate based on that focal date the supplier payment options proposed by the
debtor, this is, the new payment scheme (number of payments and dates).
4.
3.
Last, calculate the amount of each payment that the debtor wants and is able to
pay to the creditor, all this derived from the new payment scheme.
Hypothetical case developed
The hypothetical assumption showed in this work, starts from the insolvency situation
of the debtor who got the franchise, where it is assumed that given the moment of
liquidity loss, this will derive in a lack of payment to his creditor, who in this case is the
supplier of the machinery and equipment for the business that was required in a certain
moment by the person who acquired the franchise.
4.
Model Development
In order to develop the mathematic model of the assumption set, we depart from the
following data: The franchisee gets a credit for MX $400,000.00 in order to acquire
equipment that consists of a refrigerator and an industrial fridge and therefore be able
to start operations with the new franchise. To finish the debt the franchisee must pay
during 3 years equal amounts of MX $11,111.11 each month. With an interest rate of
18% annual nominal that can be capitalized monthly starting at the second year and
through the end. With this consideration the debtor would make the payments the first
year without interests as part of an agreement previously agreed. This way, the
payment of the first month of the second year and through the payment number 36,
would already consider an interest rate of 18% and in the case of a lack of payment an
interest rate of 29% would be applied for all the payments (expired and not expired).
When starting operations the new franchise sales show good dividends and
above all good cash flow, which made possible covering each month’s payments on
time. “fter the opening’s hit and in combination with external and internal factors,
the sales begin to decline gradually causing that only the basic expenditures of the
franchise and mandatory payments such as royalties could be covered, neglecting the
debt’s payment, leading to a point where the franchisee has already several months and
promissory notes unfulfilled and some promissory notes next to be paid, all this in a
sales scenario not favourable.
Next, the situation of the payments made by the franchisee is shown:
12 monthly payments paid.
5 monthly payments unfulfilled (afd)
1 monthly payment that expires the focal date (fd) the month 18
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
18 monthly payments remaining (bfd)
Therefore, in order to restructuring debt, firstly we have to apply a formula that allows
us to know the amount of each payment Y (formula 3) (according to number payments
proposed), to do this, we need to assess the original debt (ODV, formula 1), after, in order to
calculate the new payment scheme, we need to get the coefficient and to know the dates
of the new payment scheme, hence, we must use the formula 2 (NSD):
ODV Pn1bfd
bff
1... j
i1t1
1 a
t/m
...Pn jbfd
i jt j
1
a
t/m
Y
ff
1... j
bfd
i jt j
i t
N SD Snbfd 1 1 1 ...Sn 1
bfd
1 j
a
a
t
m
Pn fd
Pn1afd
i1t1
1 a
t/m
...
Pn j afd
i jt j
1
a
t /m
(1)
afd
Snafd
Snafd
...
S fd
t
t
1 j
intn m
i jt j m
1
1
a
a
t
m
(2)
ODV
N SD
(3)
Next, the first stage of financial modelling is developed, based on the formula for Value
of Original Scheme, (ODV, formula 1 , which allows us to know the debt’s updated value at
the focal date (month 18).
ODV Pn1bfd
bff
1... j
i1t1
1 a
t/m
...Pn jbfd
i jt j
1
a
t/m
Pn fd
ff
1... j
Pn1afd
i1t1
1 a
t/m
...
Pn j afd
i jt j
1
a
t /m
5
4
3
aff
0.29
0.29
0.29
$11,111.11
1
$11,111.11
1
ODV $11,111.111
12
12 ...
j...n
12
2
1
dff $11,111.11
0.29
0.29
...
$11,111.11
1
$11,111.11 j...
1
n
12
12
0.29
1 12
... $11,111.111
...
$11,111.11
0.29
1 12
2
$11,111.11
0.29
1 12
3
$11,111.11
0.29
1 12
4
...
$11,111.11
18
0.29
1 12
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
79
Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
aff
ODV $11,111.11 1.12681646 $11,111.11 1.10022763 $11,111.11 1.07426620 ...
1...5
dff $11,111.11
...
... $11,111.11 1.04897736 $11,111.11 1.02416667 $11,111.11
1...18 1.02416667
...
...
...
1.04891736 1.07426620 1.10022763 1.12681646 1.15404786 1.18193735
$11,111.11
$11,111.11
$11,111.11
$11,111.11
$11,111.11
$11,111.11
1.21050084 1.23975461 1.26971535 1.30040013 1.33182647 1.36401228
$11,111.11
$11,111.11
$11,111.11
$11,111.11
$11,111.11
$11,111.11
...
...
1.39697591 1.43073616 1.46531228 1.50072399 1.53699149
$11,111.11
$
bfd $
ODV $
1...5
$
$
$11,111.11
$11,111.11
$
$
$
$
$
$
$
12, 520.18
$
12, 224.75
afd $
11, 936.29 $11,111.11
1...18 $
11, 654.64
$
11, 379.63
$
$
$
$
$
$
$
$11,111.11
$11,111.11
10, 848.93
10, 592.93
10, 098.92
9, 860.62
9, 627.95
9, 400.76
9,178.94
8, 962.35
$231, 460.29
8, 750.87
8, 544.38
8, 342.76
8,145.90
7, 953.69
7, 766.01
7, 582.76
7, 403.83
7, 229.13
10, 342.98
Later, we make use of the New Scheme Value, (NSD), in order to obtain the coefficient of
the number of payments from which it is wanted to make a proposal with the
restructuring model. The origin formula lays down that:
N SD Snbfd
bfd
1 j
i1t1 m
1 a ...Snbfd
t
afd
Snafd
Snafd
i jt j m
1
S
...
fd
t
t
1 j
a
intn m
i jt j m
1
1
a
a
t
For the development of the hypothetical case, the following payment scheme is
proposed: 1st. payment, one month after the focal date; 2nd payment, six months after
the focal date. A monthly capitalizing nominal annual discount rate of 7% is used.
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
afd
N SD
1n
X1
0.07
1 12
1
afd
11
12
6 1n
1
6
1.00583333 1.00583333
0.07
X2
1 12
afd
11
12
N SD
1n 1.00583333 1.03551438
N SD 1.95990413
Last, it is necessary to know which will be the amount of the two payments:
ODV $231, 460.29
$118, 097.76
N SD 1.95990413
5.
Conclusion
As aforementioned at the theoretical chapter of this work, since the seminal Works of
García-Santillán and Vega-Lebrúm (2008), research has been looking for designing new
ways for restructuring debts between individuals. The breach of payments by the
debtor is a reality that must not be ignored because this is a possibility derived from all
kind of commercial and financial transactions carried out by clients and service
suppliers which transforms them, starting from this credit operation, into debtors and
creditors.
When looking for identifying a new payments scheme through which the debtor
might face the commitments acquired with his/her creditor and that has not been able
to accomplish on time and according to what was agreed, probably due to a lack of
liquidity. All this gives us the opportunity to establish a parameter in a time line in the
search for balance and benefit for both parts, this is, with the new payments scheme the
debtor will benefit getting a profit from the concept of interests in his favour for
restructuring his/her debts. On the other hand, the debtor obtains a deferral in time,
what allows him/her to manage the cash flows in a way that makes it possible to
administer the working capital and therefore, generate economic liquidity indicators in
order to face the contractual commitments with the creditors.
Several have been the proposals showed at the studies made by García-Santillán
and Vega-Lebrúm (2008); García-Santillán, Venegas-Martínez and Escalera-Chávez
(2014); Moreno-García, García-Santillán, Bermúdez, and Almeida (2015); GarcíaSantillán, Escalera-Chávez, Moreno-García, and Kramer-Rojas (2015), all of them using
the modelling of equivalent equations. Within this idea looks it has been searched that
this proposals might be a conduct through which an agreement can be achieved in the
European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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Arturo, García-Santillán, Santiago, González Gómez, Ilse Villanueva Reyes –
FROM A FRANCHISE ACQUISITION TO THE DEFAULT ON PAYMENT.
HOW TO DEAL WITH THIS SITUATION?
benefit of all the parts involved, before getting to legal instances that besides being
costly, they are exhausting for both.
In this specific case in which this work is framed, it was found that the debtor’s
payment breach derives from the acquisition of a franchise. This business model has
been identified by a high index of proven success according to “lba’s
findings,
who demonstrated that there has been a progressive increase in this business model’s
penetration in Mexico. However, beyond this documented information, it is also true
that in some cases it has been proved that it is not like that, that is the case in which the
proposal of this article is circumscribed, where it could be found that the franchisee
acquires an additional credit with the aim of buying operating equipment, which due to
the loss of economic liquidity due to a decrease of sales, through the time the resource
became insufficient in order to face the commitments with the creditor.
In this idea we can say that when using the equivalent equations model for
restructuring debts, they constitute schemes that supply benefits for both parts
involved. In the case of the debtor, it offers a finance vision traced over a time line on
the current situation of all the promissory notes, including those who already expired
and sparked off an alert for a payment breach. All this supplies the basement for the
next stage of the equivalent equations model, which refers to the proposal of the new
payments scheme (amounts and dates).
Finally, what has been attempted here with this proposal, is being able to offer an
alternative with the aim that the persons or companies at this financial and legal
situation might get to an agreement that favours both parts and that, might reduce the
risk of converting the debt in legal cases or a bigger economic penalization.
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HOW TO DEAL WITH THIS SITUATION?
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European Journal of Economic and Financial Research - Volume 1 │ Issue 1 │ 2016
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