Usually with an income guarantee, a franchisee is assured of a minimum turnover for a limited period after acquiring the business, writes Jason Gehrke of the Franchise Advisory Centre.

This is effectively a way of underwriting a franchisee’s working capital requirements, and usually lasts only until such time as the business is expected to be sustainable in its own right, which for service franchises, the most common users of income guarantees, can range from two to 10 weeks.

Generally where an income guarantee is offered, it is factored into the upfront fee paid by the franchisee. In other words, it is paid from the franchisee’s own money and rarely is a burden on the franchisor.

Income guarantees may be a useful way of ensuring that franchisees have adequate working capital and cashflow during the early stages of their business.

An income guarantee is not a crutch on which a franchisee can lean indefinitely, and a potential franchisee who is too heavily focused on the income guarantee during the application process may not be a good business operator in the long term.

Retail franchises rarely ever offer income guarantees. The last one that did was the jewellery retailer Kleins, which went into receivership in July last year (2008). Its liquidators cited the income guarantee it paid to its franchisees as part of the reason for its demise.

Unfortunately when Kleins collapsed, most of its franchisees were also forced to close as well.