Be wary of franchise income guarantees, expert says
According to Jason Gehrke, director of the Franchise Advisory Centre, income guarantees are particularly common among service franchises, which tend to attract first-time business owners.
“There is the uncertainty [among first-time business owners] of going from a fixed, regular income to the irregular income of being self-employed,” Gehrke says.
“Income guarantees among service franchisees are often structured along the lines of ‘$2,000 a week guaranteed for the first eight weeks’ to ease the transition from employed to self-employed.”
“My recommendation is to look at the recruitment incentives being offered, but [income guarantees] should be part of the overall decision-making process and not the sole factor.”
Gehrke’s comments come on the back of an announcement by Reliance Roof Restoration, which has moved into franchising after nine years in operation, offering a guaranteed income system.
The Brisbane-based business provides roof restoration, replacement, painting and guttering services to homeowners throughout Queensland, but is now also looking at Victoria and NSW.
As part of its recruitment drive, managing director Justin Eldershaw says the company will guarantee its franchisees a net income of at least $75,000 per year.
“After much research, I realised there were many home service franchises demanding a high initial investment and long working hours, but providing little stability of income,” he says.
“We are currently offering a large number of franchise opportunities across Queensland, NSW and Victoria.”
“These are qualified territories where we know there are strong work levels for franchisees, hence we are able to offer the income guarantee.”
“We are so confident in [our] business model we will pay franchisees the difference if they do not meet this minimum level [of $75,000 per annum].”
Similarly, John Newton, founder of party hire franchise Jumping J-Jays, uses income guarantee as a major selling point with regard to franchisee recruitment.
“All our franchisees have a minimum guarantee of $100,000 in sales [per annum],” he says.
Gehrke says while income guarantees are not new, prospective franchisees should be wary, describing them as “a capitalised form of working capital”.
“While it provides some potential peace of mind for franchisees coming into the system, it doesn’t provide that working capital comfort that the other form of income does,” he says.
Gehrke says it is also important for prospective franchisees to look beyond income guarantees at the other incentives on offer.
“At the end of the day, most people looking at buying a franchise will look at two, possibly three, different franchise offers in the same space,” he says.
“If all else is equal, then the… income guarantee might be the thing that tips the franchisee to favour one [franchise] over another.”
“But it’s rarely the case that all else is equal – it’s a combination of things as part of the offer. Don’t let the decision-making process be influenced by just one element.”