Franchisors use a variety of tools and tricks to attract high-quality candidates for franchise ownership. Recently, we have seen a trend toward franchisors offering various types of incentives. While these incentives are typically financial in nature, they take a variety of different forms—and they also come with a variety of caveats and conditions.
As a prospective franchisee, it is critical to make an informed buying decision. While financial incentives can be enticing, you should not make your decision based on incentives alone. There are several factors to consider, and when weighing the benefits of an incentive program, it is important to work with an experienced franchisee lawyer who can help you understand all of the terms involved.
Recent Examples of Franchisor Incentive Programs
Franchisor incentive programs are designed to grab prospective franchisees’ attention. As a result, as incentives become more common, franchisors are coming up with new ways to offer incentives that their competitors aren’t. Some examples of incentive programs we’ve recently seen include:
- Initial Franchise Fee Rebates – In January, Franchise Times published an article on a franchise system that is offering initial franchise fee rebates to its franchisees. If franchisees meet the franchisor’s revenue targets over a period of four to five years, then they become eligible for the rebate.
- Royalty–Free First Year – Another franchise system highlighted by Franchise Times is offering new franchisees the opportunity to operate royalty-free for their first year. For single-unit franchisees, the franchisor’s standard six-percent royalty kicks in for year two, while multi-unit franchisees pay a discounted three-percent royalty rate during their second year before taking on the full six-percent royalty in year three.
- Financial Performance Groups – A third franchise system (also covered by Franchise Times) is offering franchisees the opportunity to participate in “financial performance groups” that receive advice on benchmarking, goal setting and profit maximization. While participating franchisees do not receive rebates or royalty waivers, the franchisor reports that participating franchisees achieved “increases and stability in profits and were able to continue doing so.”
From discounts to financing offers, franchisors are seeking to attract high-quality candidates with various other incentive programs as well. But, while these incentive programs may seem worth considering, in many cases the fine print mitigates the benefits involved.
Franchisor Incentive Programs: Reading the Fine Print
As with all aspects of franchise ownership, when evaluating franchisor incentive programs, it is important to read the fine print. Oftentimes, franchisors will promote the upsides of their incentive programs while leaving it to franchisees to uncover the caveats and conditions that apply.
For example, the franchisor offering a royalty-free first year mentioned above also requires franchisees to increase their advertising expenditures during the first year. While this is disclosed in the Franchise Times article (and most likely in the franchisor’s franchise agreement), it certainly isn’t the lead. The article also doesn’t state how much franchisees are required to spend, though it does note that franchisees “get[] to choose how that marketing money is spent.”
Other franchisor incentive programs are also typically subject to similar types of terms and conditions. As the saying goes, if an offer sounds too good to be true, it probably is.
When you are going through the process of evaluating franchise opportunities, you will quickly learn that the process is heavily sales-oriented. Franchisors’ sales representatives want to get people into the system, and they will try to sell you on the system regardless of whether investing is in your best interests. This is important to keep in mind, especially when evaluating incentive programs and other similar types of terms. Do not assume that you are getting the whole story, and do not sign anything until you are confident that you have all of the information you need to make an informed buying decision.
Making an Informed Buying Decision as a Prospective Franchisee
How do you make an informed buying decision as a prospective franchisee? Buying a franchise is a multi-step process, and it is important to approach each step systematically and with an open mind. While you need to be willing to invest the time to learn everything you need to know, you also need to be willing to walk away if a franchise isn’t right for you. If the numbers don’t work, if you aren’t confident in the franchise system’s trajectory, or if an incentive program isn’t what you thought it was initially, these are all signs that it may be time to consider a different franchise opportunity.
Here are some tips for evaluating franchisor incentive programs (along with all of the other aspects of a franchise system):
- Read the Franchise Disclosure Document (FDD) and Franchise Agreement – Take a few hours to read the entire FDD and franchise agreement. Highlight provisions that seem troubling or that you don’t understand to discuss with your franchisee lawyer.
- Talk to Current and Former Franchisees – Current and former franchisees can provide a wealth of unbiased information about a franchise opportunity. This includes unbiased information about franchisors’ incentive programs.
- Attend a Discovery Day and Ask Questions – Attend a discovery day to meet with the franchisor’s representatives in person. While you’re there, ask all of your questions, and make a mental note when the franchisor’s representatives are evasive.
- Compare Competing Franchise Opportunities – When evaluating a franchise opportunity, comparing competing franchise opportunities can help you understand the truly unique aspects of each system and make an informed buying decision.
- Talk to a Franchisee Lawyer – Finally, getting a franchise business review from an experienced franchisee lawyer is one of the best steps you can take to protect yourself during the franchise buying process. Your franchisee lawyer will advise you with your best interests in mind, and your lawyer can negotiate key provisions of the franchise agreement (including any incentive clauses) on your behalf.
Discuss Your Franchise Opportunity with Franchisee Lawyer Jeffrey M. Goldstein
At the Goldstein Law Firm, we help prospective franchisees make informed buying decisions and negotiate key protections into their franchise agreements. To discuss your franchise opportunity with franchisee lawyer Jeffrey M. Goldstein in confidence, give us a call at 202-293-3947 or request a free initial consultation online today.
