Franchisors increase recruitment incentives to entice franchisees

Previously in this column I have written about recruitment incentives offered by franchisors to stimulate franchise enquiry and increase the appeal of their franchise offer.

These incentives included:

1. Offering an income guarantee for a period following commencement.
2. Providing free equipment upgrades or bonus stock on set-up.
3. Increasing the size of a territory, or offering an additional territory at no cost.
4. Vendor financing by the franchisor.
5. A buy-back guarantee if the business fails to meet agreed performance levels.
6. Price discounts offered on the up-front investment to buy into the franchise.
7. Last chance or “never to be repeated” offers to sell the last remaining franchises in a market.

In the time since that first article was written, recruiting franchisees has become more difficult as economic uncertainty, tighter lending criteria and a weakening property market erode the confidence of potential franchisees to move into self-employment, coupled with a tight labour market that has pushed wages and salaries to all-time highs.

Consequently, some additional franchise recruitment incentives have appeared in recent years, as well as the re-emergence of others that take on a new significance in the current environment. These are summarised below…

Refund guarantee

Unlike a buyback guarantee, which returns control of the business to the franchisor after its purchase from the franchisee, a refund guarantee pays back to the franchisee a portion of their upfront investment cost if the business has not performed at a certain level within a defined timeframe.

The franchisee remains in possession and operation of their business, but to qualify for the refund guarantee they would have to fully comply with the franchise’s operations and procedures, plus all reasonable directions of the franchisor (in relation to local area marketing for example).

The franchisor would naturally set the standard of compliance quite high to avoid creating an incentive for franchisees to underperform in order to get a partial refund of their franchise investment, and this would need to be spelled out to any franchisee in detail up front for the refund guarantee to be meaningful.

Training destination incentive

Most franchise systems will conduct the training of their franchisees at or near their state or national head offices, and then supplement this with training in the field in the franchisee’s business. However, some systems which are headquartered overseas, or which have specialist trainers based overseas, may require the franchisee to attend training at the offshore location which could be perceived as an exotic or desirable destination to visit.

Training locations such as Bali, Las Vegas and other foreign cities (or even domestic locations such as the Gold Coast), may be perceived or promoted as “working holiday” destinations for new franchisees to learn before they earn.

Irrespective of where the training is held, the franchisee must focus on the quality of the training to be provided, otherwise the exotic destination may be an expensive junket rather than an interesting backdrop to the education necessary to run a successful business.

Royalty holiday

The idea of a royalty holiday is very simple – give franchisees who are starting-out a period of time in which they do not have to pay royalties so that they can build-up their cashflow and profitability. In theory this is a benevolent act by a franchisor to assist their franchisees at start-up, but in reality often undermines the franchise relationship in the mid- to long-term.

When a franchisee first commences, their need for support from the franchisor is greatest. As the franchisee becomes more operationally proficient in their business, the need for support reduces, and along with it, the perception of the value that the franchisee gets from the franchisor in return for paying royalties.

If this natural state of entropy is interrupted by a royalty holiday, then once the franchisee is required to start paying royalties, the risk of the franchisee becoming dissatisfied with the value they receive for the royalties they pay increases significantly.

Similarly, franchisors who do not receive royalties from new franchisees may struggle to properly resource the support needs of the new franchisee during the royalty-holiday period, which may result in sub-optimal levels of support provided to the franchisee from the outset.

Rent holiday

Landlords commonly offer rent holidays as incentives for retail tenants, and as a way of “discounting” their rent without actually reducing the rate per square metre charged. For those systems which take head leases on their sites and then sublet to their franchisees, the rent holiday offered by the landlord is then passed on to the franchisee via the franchisor.

The practice of offering rent holidays has existed for many years, but is becoming more common and is often expected of landlords in any robust lease negotiation. The duration of the rent-free period is usually proportional to the term of the lease. (For example, a rent free period of six months is highly unlikely for a lease of just two years).

The existence and likely duration of a rent free holiday can act as an incentive to a potential franchisee when distinguishing between two outwardly similar franchise offers.

Fit-out contribution

Similarly with rent holidays, landlords may also offer to contribute toward the cost of fitting-out a new franchise store or refurbishing an existing one as a condition of signing a new lease. Again, this cost contribution may be passed-on by the franchisor if they hold the head lease.

Additionally, the negotiation of cost contributions and rent holidays is often best done by the franchisor based on their experience across a range of outlets and dealings with multiple landlords, allowing them to potentially negotiate better deals than individual franchisees would get by themselves.

While fit-out contributions have also been in existence for some time, their importance in the current environment has increased as an incentive for both tenant and franchisee recruitment.

Try before you buy

In a difficult recruitment environment, some franchisors distinguish themselves by offering maximum transparency through a “try before you buy” arrangement that allows potential franchisees to work in one or more outlets of the franchise before committing to a franchise agreement.

Of course the potential franchisee must be serious in their consideration of the business on offer, and will be required to sign a confidentiality and restraint of trade agreement to protect the intellectual property and brand integrity of the system from opportunistic industrial espionage.

Several systems are now offering try before you buy programs via “manage to own” incentives that may even be linked with vendor financing by the franchisor.

Profitability trumps all

No single incentive is likely to be a silver bullet that will magically conjure hoards of potential franchisees from thin air, but several incentives combined may be critical to building the confidence of the franchise candidate to approach one system in favour of another.

Of course, underlying any recruitment incentive should be a profitable business model with a track record of success for existing and former franchisees. At the end of the day, any incentive that ultimately fails to deliver a profitable business for the franchisee will inevitably cause harm to the franchise brand and the reputation of the franchisor, and this in turn will make it more difficult or even impossible to recruit franchisees in future.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.