Contents - AL-Tax

122 8 Replication of Internet-Based Business Model2. RSVP Publications: A direct mail operation that targets upscale consumers.Publications reach approximately 8 million homes. Has over 11,000 clients.Offers extensive training to franchisees. Also provides central purchasing andfield training, organizes regional meetings, and operates an 800 hotline number.Established in 1985. Has no company-owned units and 80 franchised units. Franchiseespay an up-front fee of $30,000 and a royalty of 7.0% of net sales on anongoing basis.3. Impressions on Hold: An advertising company tied to the telecommunicationsindustry. Franchisees enable businesses to use the “on-hold” time of their phonesystem as a marketing tool. Franchisor provides central data processing, centralpurchasing, field operations evaluation and field training, publishes a franchiseenewsletter, organizes regional meetings (at additional cost) and operates an 800hotline number. Franchisees are required to pay an up-front fee of $47,000 anda running royalty of 4.0% of net sales. Franchisees must also contribute 1.0% ofnet sales to an advertising fund.4. Netspace: Consults with companies to help build their business. Utilizes technologyavailable through the Internet. Assists clients to increase sales, reduce costsand improve customer communications. Provides initial and quarterly training,central data processing, central purchasing, field operations evaluation and fieldtraining, assistance with initial store opening and inventory control (at additionalcost); publishes a franchisee newsletter, organizes regional meetings and operatesan 800 hotline number. Established in 1996. Has 40 franchised units and 1company-owned unit. Franchisees are required to pay an up-front fee of $39,500and a running royalty of 10.0% of net sales. Franchisees must also contribute1.0% of net sales to an advertising fund.5. WSI Consulting and Education: Franchisees assist clients (small and mediumsizedbusinesses) to assess their Internet needs and develop a customized Internetmarketing solution. Provides at additional cost central data processing, centralpurchasing, field operations evaluation and assistance with initial store opening;provides at no additional cost an 800 hotline number, publishes a franchiseenewsletter and organizes national meetings. Has 1,998 franchised units and 2company-owned units. Franchisees are required to pay a one-time fee of $49,700and a running royalty of 10.0% of net sales.The above sample of comparable B2B arm’s length franchise arrangements indicatesthat running royalties range from 4.0% to 10.0% of net sales, and entitlefranchisees to (a) initial training, (b) access to an established business model, (c)rights to use franchisors’ other intellectual property, and (d) certain limited ongoingsupport services. One-time fees range from $9,500 to $49,700.USP’s operations most closely resemble those of Coupon Cash Saver, Netspaceand WSI Consulting & Education, in terms of both mandate and medium. In contrast,Impressions On Hold’s direct marketing activities are tied to the telecommunicationsindustry, and RSVP Publications’ activities are tied to traditional hardcopypublishing. Based on these considerations, we conclude that USP should chargerunning royalty fees of 8%–10% of FS’ net sales.