franchising aspects Oct, 27 2009

Minimum guarantee, pros and cons

Regular income is the requisite of every franchisee. Every franchisor understands it, and therefore, they have come up with an innovative method of offering minimum guarantee to their franchisees. This way, they not only encourage investors to opt for fra

By Ramanjit Kaur
Feature Writer
Minimum guarantee, pros and cons

A maiden foray into a business seems like risking in a gamble. An entrepreneur having delved into a business cannot for sure, pronounce his success, despite investing a huge sum of money, energy and his precious time in the venture. But in a franchise business, the franchisee receives all the security and umbrella cover of his franchisor, because in his (franchisee’s) stake lies the stake of his franchisor. And the latter has the might of resources and brand power to support his franchisee in the gravest of crisis. The franchisee receives lots of benefits and patronage of franchisor along the tie-up.

Part of package

To help franchisees establish their business and to make the business run successfully, many franchisors provide their franchisees with a minimum guarantee. It is a part of the franchise package which is decided before hand. This minimum guarantee is granted in two ways: either cash allowance or work contract.  The franchisor will either pay the franchisee an agreed cash allowance per month or would award him some work contract in order to help him generate income. For instance, Toon Kidz offers to its franchisees a minimum guarantee of 18 per cent on the set up investment along with complete monthly overheads.

But the minimum guarantee cannot be taken for granted as it remains time bound. A franchisee can enjoy the benefit only when he is unable to earn sufficient income from his new business. The franchisor in all earnestness monitors the sales progress of the franchisee and accordingly offers the minimum guarantee help. The element of minimum guarantee acts as an insurance for the franchisee, which provides him support to run his business efficiently. It is usually offered for the first year of the business but in some cases, the offer may be extended until franchise achieves a grip over the business. In most cases, franchisee starts earning within eighteen to twenty-four months of the start-up.

Downsides of minimum guarantee

Though the element of minimum guarantee may attract many potential investors to foray into franchisee business, for the support it provides during its start-up stage, but the scheme has its disadvantages too. Firstly, if a franchisor is offering an attractive package, he would surely ask for a hefty royalty or good sum of early investment. In other words, a franchisee has to pay some extra bucks to enjoy the leverage.

Secondly, it is not necessary that the guarantee will work the way franchisee expects and then the offering of guarantees may distort the market place and distract the franchisees from exploring the true prospective of franchisee opportunity.

The franchisee may start relying on the guaranteed income and eschew efforts to promote business which eventually leads to a business loss.

Significant points

So, if you are about to sign up with a company, which is offering you a minimum guarantee, then, there are certain key points that you must adhere to.

  • Is it a guarantee of work or money?
  • What is the guarantee amount?
  • Under what circumstances, will you get it?
  • When is the guaranteed amount payable?
  • For how long, will you get it?
  • What, if the franchisor cannot afford to pay the guaranteed amount?
  • What would be the evidence that you have been paid?

In short, minimum guarantee is just to ensure a proper financial back up in case you face a downfall in your start-up days. So, it should be taken positively rather than absolutely resting on it.

Related: Franchise Laws: Help or Hindrance?

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