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DISTRIBUTIONAL MODEL

Global

Finance

Board

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fairness

How to distribute the money fairly among the LCs

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Royalty / Tax model

MC Charges a “royalty” to the LC for every customer that pays for a program. Therefore MC and LC splits the revenue. There’s no limit of contribution.

As Example: if Contract fees is 100 USDs, 40% would go to the MC and 60% to the LC

MC

40$

LC

60$

This would cover other associated costs

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Royalty Model

Advantages

  • MC is accountable to meet the goal.
  • If the EY surpasses the goal, then the MC will exceed their income target, producing reserves for the future.
  • It’s very unlikely that an Entity with a “Royalty” model will have LCs in debt, since if they don’t perform, they don’t have to pay.

Disadvantages

  • LCs have no financial responsibility towards the EY. If an LC drops from 100 units of sales to 20, they have no financial pressure since they just pay less.
  • The MC will receive variable amount of revenue. Cash flow management becomes an issue.
  • MC is constantly under stress dealing with uncertainty, since they don’t know if they will receive enough money in the future. This cuts potential investments.

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Royalty Model

YES

Entity is accountable, and the average goal achievement is high

Most of its LCs in debt

YES

Royalty model FOR you if

Royalty model NOT FOR you if

NO

Entity trends of plan achievement of operation goals is low

In the Entity is a lacking of financial responsibilities from LCs

NO

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Affiliation model

MC Charges an “Affiliation Fee” to every LC in order to cover the annual budget. MC calculates this “distribution model” using the data they consider relevant (exchange performance, number of members or membership status)

As Example: if MC Annual Budget is 1000$

LC1

300$

LC2

600$

LC3

100$

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Affiliation Model

Advantages

  • MC knows in advance when will they receive incomes (i.e. every Q), therefore financial planning it’s easier and more accurate.
  • LCs have a very clear Financial Goal, which very oben drives them to achieve at least a certain number of revenues.
  • Even if an LC is not performing they are “consuming” MC Services (Such as using EXPA, attending conferences, time allocated into them), and they should pay for them.
  • LCs are encouraged to perform.

Disadvantages

  • MC behaves as an admin body. “I need X money to operate so I collect that amount of money and I spend that amount of money”. The only way to build reserves is through cost cutting.
  • MC is not encouraged - financially speaking- to achieve a goal since that doesn’t mean having extra income for investments or reserves.
  • If an LC drops they will have less revenue that typically is translated to not being able to pay the affiliation fee, which means being in debt with the MC.

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Affiliation Model

YES

LCs are encourage to grow/perform

MC can receive certain amount of money which will not change under any circumstances

YES

Affiliation model FOR you if

affiliation model NOT FOR you if

NO

Most of the LCs are in debt, as if LCs will drop they will have less revenue that typically is translated to not being able to pay the affiliation fee, which means being in debt with the MC.

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hybrid model

Mixing or Unifying between both previous models.

As Example: if MC Annual Budget is 700$

200$ will be categorized & generated by doing sales & collecting royalties.

500$ will be collected by Affiliation fees.

LC1

320$

LC2

180$

LC3

200$

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hybrid Model

Advantages

  • MC will guarantee at least certain amount of income that will secure some expenses.
  • Affiliation Fees are not as high as in a “100% Affiliation Fee entity”, giving more freedom to LCs.
  • Both MC and LC are accountable to meet the revenue goal. If underperforming MC won’t receive their royalties and LC won’t have cash to pay for the affiliation fee.
  • Both MC and LC have incentives to over achieve. If they do it LC will have more money and MC will build reserves.

Disadvantages

  • This require a lot of tracking from MCVP Finance since this means having two different kind of income.
  • How much of the budget should be covered by royalties and how much by Affiliation fees? Big conversation.
  • Without proper explanation, LCs feel that they are being charged twice for every sale they are making.

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Affiliation Model

YES

If you have clearly defined fixed cost and not fixed, the last one which can be changed based on Entity performance.

Hybrid model FOR you if

Hybrid model NOT FOR you if

NO

If some of the previous model is not fitting to your Entity reality.

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Profitability