Waiving franchise fees, royalties, and incentives to sell franchises
Using incentives to boost franchise sales can be tempting, but it might not be the best way to grow your business.
Takeaways:
Although offering incentives might seem like a good way to generate leads and close sales, incentives can have disadvantages for franchisors.
Drawbacks include attracting the wrong candidates, unexpected costs for the franchisor, and potential growth and legal risks.
Instead of offering incentives, franchisors should rely on franchising best practices to attract and over-support qualified candidates.
As a startup franchisor hoping to sell your first franchise, the idea of offering incentives to new franchisees can be appealing.
From reducing or waiving the initial franchise fees to offering financing, delayed royalties, contests and more, incentives for new franchisees can seem like a great way to accelerate the growth of your business by generating leads, competitively positioning your franchise and scaling more quickly. But for many new and emerging franchisors, franchise sales incentives can sometimes have more drawbacks than advantages when it comes to sustainable long-term growth.
Below, we’ll discuss the key considerations you should keep in mind as a franchisor when it comes to offering incentives in your franchise sales process – and why erring on the side of caution is always best practice when scaling your franchise system.
Qualified franchisees make a difference
If there’s one thing every seasoned franchisor knows, it’s that bad franchisees can harm the entire franchise system. Because of that, one of the most important factors in the franchise sales process is attracting – and validating – properly capitalized, well-qualified franchisees. After all, the future value of your franchise system rests on the quality of your franchisees and the earnings before interest, taxes, depreciation, and amortization (EBITA) value that is generated from their businesses.
Although offering incentives to prospective franchisees might seem like a great idea for quickly generating franchise sales leads early on, doing so can also potentially attract the wrong candidates to your franchise system. For example, offering to waive initial franchise fees or delay royalty payments could attract franchisee candidates that are under-capitalized, less motivated or less qualified to become successful franchise business owners. By removing the important barriers to entry that separate quality candidates from those without the proper qualifications, franchisors risk hurting their franchise system’s unit-level economics and undermining its growth and primary revenue streams.
As a new franchisor developing a five-year success plan, it’s important to recognize that when you sit down with a private equity investor in the future, you’ll want to be able to demonstrate a valuable network of franchisees that are properly capitalized, aligned with your brand’s values and committed to the success of the franchise system. Rather than offering financial incentives to prospective franchisees, franchisors should instead consider following industry best practices to attract quality candidates instead.
By maintaining consistent standards and validating a candidate’s financial preparedness, level of commitment, mindset and other important qualifications before selling a franchise, you can set your franchise system up for long-term sustainable success.
Onboarding with the right expectations
While attracting the right franchisees is important for franchising success, so is setting the right expectations when it comes to onboarding new franchisees. As an emerging franchisor, it’s critical to send the right message to franchisees from the start, with no exceptions.
Although incentives can attract sales leads early on, undercapitalization can undermine onboarding and training processes and send the wrong message to candidates about your expectations and values as a franchisor – potentially giving the impression that you don’t value your franchise system.
By maintaining consistent franchisee obligations, including initial franchise fees, royalty payments and similar, franchisors can avoid creating bad relations with franchisees or enabling undercapitalized candidates to buy a business they can’t afford to operate sustainably – a problem that could have serious consequences for the franchise system’s value in the future.
Hidden costs of franchise sales incentives
Beyond sending the wrong message and potentially attracting the wrong candidates to your franchise system, offering incentives to prospective franchisees can also have unexpected financial drawbacks for franchisors.Because the initial franchise fee often covers everything from startup expenses to broker fees, if your sales process involves working with franchise brokers to generate sales leads, waiving the initial franchise fee as an incentive for a new franchisee can mean you’ll be on the hook for the broker fee as the franchisor once the sale is closed.In addition to unexpected fees, franchisors that waive the initial franchise fee as part of their incentive program also run the risk of bringing undercapitalized franchisees into their system that lack the resources to properly open and operate their business – something that could complicate the franchise system’s ability to thrive and grow sustainably over time
Legal risks of incentives
In addition to disadvantages like unanticipated expenses and attracting potentially under-qualified candidates, franchise sales incentives can also create possible legal risks. From a legal perspective, it’s critical that franchisors make an effort to treat all of their franchisees in as uniform a manner as possible. Typically, this is achieved by following industry best practices and offering every franchisee the same benefits and levels of support. By maintaining uniformity, you can limit liability by avoiding disparities in the treatment of franchisees across the franchise network.
Make franchising worth it for franchisees
While offering franchise sales incentives might not be the best choice for franchisors that are hoping to grow their brand sustainably over time, there are still excellent alternatives that can lead to growth and longevity.
One method of successfully growing a franchise system involves going above and beyond for your first few franchisees – making a difference in their lives and investing in their success. As a franchisor, rather than offering financial incentives to entice candidates that are potentially wrong for your system just to make a sale, you can instead maintain consistent standards and expectations across your network while over-supporting new franchisees during their first few years in business by providing them with strong onboarding, training, inventory and marketing assistance.
By following industry best practices, adopting a growth mindset and maintaining standards of uniformity in relationships with franchisees, you can season, scale and grow a franchise system that is poised for success from the very beginning – and that will stand the test of time and continue growing and thriving for years to come.
