An income guarantee: money for nothing?

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An income guarantee might sound like a fabulous option for someone starting up their own business. But taking the risk out of the early days of a franchise doesn't mean a hand-out.

In 1998 Chris Bylhouwer sold his first business package as Spray Pave Australia, a company he had established seven years earlier. Although not a franchise and demanding no ongoing fees the company provides full support, he says.

His research led him to offer some security to prospects and every package still comes with a guarantee of 20 customer leads (someone who wants to get a quotation for a job) which are sourced by Bylhouwer through various channels of local area marketing.

Out of these 20 leads, he says, the operator should confirm 10 jobs.

"The shortest time it's taken is three days for someone to get 45 leads but the average is five to six weeks."

Quotations can range from domestic jobs such as paving the patio to commercial contracts worth tens of thousands of dollars.

"Once they have the 20 leads then it's up to them and how big they want to go. Some people are quite happy to take on the work part time, just doing a job once a week or once a fortnight," reveals Bylhouwer.

Another level of security can be added to the package: guaranteed work, which is available both to new operators and at any time running the business.

Bylhouwer admits he can make a good profit from this and is candid about it to prospects. To meet the guarantee he will advertise in the appropriate area, find leads, then provide a quotation and get a contract signed. The downside to all this he says, is taking some of the responsibility from the operator who relies on someone else to hold their hand.

But he says only one operator has ever taken up the optional extra.

Doing the work

So while the guarantee is in place to provide security, perhaps having the option without taking it up is security enough for franchisees? When United Home Services was bought out in 2003, explains general manager Rachael Keeble, the franchisor had offered a standard income guarantee.

"When we looked at the business we thought there might be a different way," she says.

The resulting work availability guarantee to either $600, $800 or $1200 allows for United Home Services to effectively top up a franchisee's shortfall in monthly income over the first three months not with a payment but by quoting and securing the appropriate jobs to meet the budget. The franchisee still has to do the work themselves.

"They don't get it for nothing," asserts Keeble, "and they have to meet customer satisfaction levels". But she reveals the company has always had more work than it can handle so has not been required to step in to fulfil the guarantee.

She quotes a 55 per cent figure for franchisees too busy to take on any more work. Keeble believes cleaning is a discretionary spend and the market is tighter now with people less willing to pay out for the services, so reaching the target income becomes harder.

"It could be a challenge but we are planning to step in and address the issue," she says.

Monitoring performance is the key to ensuring franchisees are getting conversions and if someone is not winning enough work action is taken. The company already monitors new franchisees on a weekly basis; if they choose not to take up the guarantee they can drop their compliance reporting down to monthly. Upcoming developments include online reporting which allows for immediate tracking of a franchisee's conversion rate, and bringing the external call centre in-house to provide a personalised service.

Maree Rogers, the newly appointed national franchise manager, is also keen to extend the current three month period, an extension which Keeble explains is designed to meet current economic conditions.

"It's important to look at economic conditions and people's fears. Franchises in our business can find it difficult to help people get finance and they may have little equity in their assets. Banks will see a certain level of security. We're considering up to 20 weeks at a higher guarantee," reveals Keeble.

One criticism of any financial guarantee system is paying for the privilege of security upfront with a higher franchise fee covering the franchisor's costs, but not at United Home Services. "I don't believe we've built it into our pricing," says Keeble. Any increase in price comes from additional support such as business training.

Fastway Couriers' national franchise development manager Paul Maraia disagrees too. Every territory in the Fastway Couriers network is subject to a franchise fee which, unusually in the franchising arena, entitles the franchisee to a perpetual franchise agreement but income guarantees are offered only when the regional franchisee deems it appropriate.

An income guarantee is offered on selected courier franchise territories as a means of assistance for the start-up phase of the business; franchisees have the knowledge that they'll be earning a decent living from day one, explains Maraia. The income guarantee is offered over a set period of time as agreed by the regional franchisee and is accrued on a daily basis.

Guarantees vary from 20 to 52 weeks depending on the individual market. "It is designed to instil confidence in the new franchisee and allows them to gradually build their business over a number of months by assisting them in covering the day to day operational costs without the pressure to immediately achieve a desired income level," he says.

Income guarantees have been in place since the company began its franchise operations in New Zealand in 1984. At the time there was a limited established customer base and the guarantee provided franchisees with financial support during start-up. The concept of an income guarantee was reasonably unfamiliar and helped to position Fastway as a serious contender in the franchising arena, believes Maraia.

"Since that time, most franchising systems have embraced the income guarantee with the benefits extending not only to the incoming franchisee, but also to the franchisor as a method of increasing franchisee interest without the risk associated with establishing a new business."

Just a safety net

Are there downsides to this? "We try to convey to potential franchisees that an income guarantee is purely a safety net during the start up period and should act as a guide to their earnings potential at the conclusion of the guarantee period - it should not be relied upon to achieve a desired income level," says Maraia.

"It is imperative for franchisees to utilise the income guarantee period to actively increase their business and subsequent earnings potential. At Fastway, we have a tried and tested business development program, which when followed correctly, provides the new franchisee with every chance of success in their new business."

Actively sourcing quality business leads at a local level is the key to the business. Courier franchisees are trained to prospect and secure new business within their exclusive territory but they also have on hand a vast network of experienced sales representatives to help grow their business to the desired income level. The emphasis on franchisees growing their own business is a fundamental reason why some companies choose not to embrace the income guarantee option.

Ben Forrest, chief development officer at PoolWerx, supports this view. "I'm reluctant to adopt this because we're looking for entrepreneurs, for people who want to build a very big business."

However he reports seeing a sudden increased demand for some form of income guarantee from prospective franchisees and assumes it's because other franchises are going down this route. "We don't provide that because we're a full format system. We give you the tools to do the work, and because ultimately the franchisee is responsible for getting the work, it's hard to guarantee the amount."

Choosing a franchise with an income guarantee is neither right nor wrong, he insists. "There are different business models and it depends entirely on the individual."

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