Is the offer of an income guarantee with a franchise purchase too good to be true? An income guarantee is an agreement between a franchisor and franchisee where the franchisor guarantees an amount of income a franchisee will earn over a set period.
On the surface this might seem like a win-win option but our experts point to some important considerations.
Alicia Hill is an experienced Melbourne-based franchise lawyer. She says an income guarantee can provide surety of income and peace of mind for an initial period of a new franchise. However, it’s worth asking some questions to see whether or not this guarantee is really beneficial.
Understanding the details of the deal is crucial
“How is the income guarantee structured? Is the guarantee a monetary payment, or is it the provision of a certain number of leads equivalent to the income guarantee amount which the franchisee then needs to convert to sales to generate the income? If it is the latter, what are the usual conversion rates for the number of leads provided?”
Alicia says it’s important to know when the franchisee receives the guaranteed amount? Is it at the discretion of the franchisor, or subject to some terms for it to be paid? Is there a set-off mechanism so that any amounts owed to the franchisor are taken from the fixed amount and only a balance remitted to the franchisee or is there a full payment?
“What is the franchisor’s past performance of paying the amount to new franchisees? Is the amount paid regularly or does it fluctuate? This requires speaking to new franchisees and asking them about their experience,” says Alicia.
She also suggests comparing the purchase price of this franchise to an equivalent franchise where no fixed income is offered. “Is the purchase price greater to cover the cost of the income guarantee provided?” she asks.
A final point is to check if, after the expiry of the guarantee period, the business model is still effective.
“Depending upon the answers to these questions, the income guarantee may be a benefit, or it may be less attractive than initially thought. Proceed with caution and always ask questions so you are clear about how an income guarantee works,” says Alicia.
Will a guaranteed income lull a franchisee into a false sense of security?
Aaron March is an expert in tax planning, budgeting, accounting, advisory, superannuation, income tax and estate planning.
“We find that an income guarantee can be a great incentive and stress reliever for new business owners who can turn their attention to growing their business with a financial safeguard,” Aaron says.
He suggests an income guarantee can be a good idea because it reduces the risk of opening a new site, and it shows that the franchisor is committed to making the site work as it has additional skin in the game.
“It also fosters a collaborative partnership between franchisee and franchisor,” says Aaron.
But he believes for some franchisees a fixed income could prove too much of a security blanket.
“If the franchisee is earning a fixed income, they will be less hungry compared to franchisees whose income is purely a result of their effort.
“Franchisees may also become reliant on the fixed income and receive a shock when the safety net disappears,” he suggests.
As with many things, there are pros and cons to an income guarantee, and whether or not the deal is right for the franchisee is an individual choice.