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. Income guarantees can provide surety of income and peace of mind for an initial period of start-up for a new franchise, but there are some questions a franchisee needs to ask to identify if this guarantee is actually going to provide a benefit or not.
Read on to find out what to look out for, in this article by BlueRock Accounting Director Aaron March.
Understand the Details of the Income Guarantee
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 then need to be converted to sales to generate the income flow? If it is the latter, what are the usual conversion rates for the number of leads provided?
Once you know the nuts and bolts of the deal, it’s important to confirm that the franchisor is able to pay the income guarantee amount over the income guarantee period. This requires analysis of the franchisor’s financial position through the information provided in the disclosure statement and any other sources.
Confirm When the Franchisee Will Receive the Income Guarantee Amount
An income guarantee may be at the discretion of the franchisor, or subject to specific terms. For example, a set-off mechanism can mean that any amounts owed to the franchisor are taken from the income guarantee amount and only the balance is remitted to the franchisee.
The income guarantee details need to be reviewed to understand exactly what’s on offer.
For franchisees, it’s important to investigate the franchisor’s past performance of paying the amount to new franchisees. Find out if the income guarantee amount is paid regularly or if it fluctuates. This requires due diligence by speaking to new franchisees within the system and asking them about their experience.
Compare the Franchise Purchase Price to the Income Guarantee Amount
An income guarantee isn’t half as good as it seems if the purchase price is inflated to cover the cost of the guarantee amount. Determine how the purchase price of the franchise compares to an equivalent franchise where no income guarantee is offered.
Additionally, after the expiry of the income guarantee period, is the business model still effective? Financial modelling will help you find the profit in a franchise business before you buy it .
Income Guarantees Can Lull a Franchisee into a False Sense of Security
Here at BlueRock, 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.
An income guarantee can be a good idea for the following reasons:
- It helps the franchisor attract franchisees
- By attracting more franchisees, the franchisor is able to roll out stores faster
- It de-risks the opening of a new site for the franchisee and gives them time to focus on learning and getting the business up and running without the financial pressure
- It shows that the franchisor is committed to making the site work as it has additional skin in the game
- It fosters a collaborative partnership between franchisee and franchisor.
Of course there are a few considerations around franchise income guarantees:
- 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
- It could be an additional cost to the franchisor
- Franchisees may become reliant on the fixed income and receive a shock when the safety net disappears.
In the right circumstances, an income guarantee is a great strategy to attract new franchisees and expand the rollout of the franchise system. But in taking on the additional risk, the franchisor needs to pay extra attention to other factors, such as the site selection and the process
Ask Questions About Franchise Income Guarantees
Depending upon the answers to the questions above, the income guarantee may be a benefit, or it may not be as attractive as it sounds. Proceed with caution and always ask questions so you are clear about how an income guarantee works.
Get In Touch With BlueRock’s Franchise Industry Experts
BlueRock’s multidisciplinary framework means we provide a one-stop-shop for all your franchise needs. We have every angle of the franchise industry covered, and work with both franchisees and franchisors. So you can rely on us to identify new opportunities, define growth strategies and effectively execute as one team. Get in touch with one of our franchise consultants today to discuss your franchise needs .
