There is no guarantee of a return on investment in the business world, and any suggestion otherwise should be treated with caution. A franchise business will not generate money on its own– as a general rule you will only get out of the franchise business what you put into it. Two common misconceptions that a franchise business will provide guaranteed returns are as follows:
Proven Business Model
It is true that investing in a franchise business with a successful track record gives a prospective franchisee some comfort in knowing that the business model works. There is no guarantee however that such success will flow through to your franchise business. Location can often be a key indicator of a franchisee’s success and trying to replicate the business in a different location can have vastly different results. In addition, you should not underestimate that an existing successful franchise may have exceptional management and may have developed a strong client base over time. There is no guarantee that a new franchise will be able to have the same success.
Income Guarantee Clause
Many franchise agreements have an income guarantee clause. An income guarantee clause ensures a franchisee earns a minimum income over a determined period, often within the first year of trading. This is a valuable right, as it gives security to franchisees to forecast their income, particularly in the early stages.
Income guarantee clauses can also be quite misleading in that they might hide the true cash flow needs of a franchisee. A franchisee may be guaranteed an income that is not sufficient to cover the expenses of the franchise. Often this will not become apparent until after you have commenced operating the franchise business, at which time it may be too late to renegotiate the income guarantee in the agreement.
You should carefully review your franchise agreement and disclosure document and have a realistic view of any income guarantees being offered.
If you are considering purchasing a franchise business, you should have realistic expectations of the potential return on investment. You should not rely on any suggestions that the franchise business is guaranteed to provide you with positive returns, as such verbal assurances have little legal standing and are difficult to enforce against the franchisor. To fully understand the true potential of a franchise business, we recommend you speak with your accountant or a franchise lawyer.
Our team of franchise lawyers, here at LegalVision, are very experienced in all areas of franchising and can provide you with the advice you need. Get in touch on 1300 544 755.