Have you eaten at a quick serve recently and found the store looking tired and obviously in need of updating? Was the dining experience less than expected because the store was run down? The next time you were out for a meal, did you drive past that franchised store in favor of another chain with newer, cleaner facilities?

This is happening ever more frequently today. Stores built 10 or 20 years ago now need substantial updating, or even a scrape and rebuild, to compete with progressive chains. But getting franchisees to invest in updating can be a struggle. The Franchise Disclosure Documents may contain specific language stating when the update should take place, but most franchisors have no way to enforce it and franchisees have no way to pay for it.

Next to the initial costs of buying and setting up a franchised store, the largest expenditure will come when an update to the physical store is completed. We all know it»s not if, but when the store will need to be refreshed, remodeled, or rebuilt. The big question is how to finance the project.

In better economic times, access to financing was easy. Lenders were around every corner. But the world has changed over the past 18 months. Now lenders are hiding behind every corner. Credit is tight and lenders are few in number, particularly for restaurant concepts. If necessity is the mother of invention, then it»s time to look for creative ways to solve the financing dilemma.

One such bit of creativity is the use of non-qualified deferred compensation to finance the eventual store update.

Deferred compensation has been a staple of executive compensation packages for years. In 2004 Congress introduced section 409A into the tax code. This section was written to address problems perceived and real arising out of certain corporate excesses evidenced by Enron and WorldCom. Section 409A now governs all forms of deferrals not otherwise in the qualified plan system.

A key provision of 409A allows a manufacturer (franchisor) to sponsor a deferred compensation plan for a service provider or independent contractor (franchisee). The resulting plan enables the franchisee to save up to 100 percent of their franchisee income pre-tax and invest it tax-deferred for the needed remodel. When the date arrives for the remodel, the franchisee takes the distribution and pays ordinary income taxes on the money received. If used for remodeling, which is a business expense, the franchisee may be able to expense it again.

To encourage system-wide participation, the franchisor could even make a matching contribution, or could predicate the match to the franchisee resigning their contract. A vesting provision could be added stating the match be used only for a refresh, remodel, or rebuild.

By sponsoring a tax-favored savings plan and encouraging participation with a match, the franchisor is assured that needed updating will take place on schedule. An updated store assures a consistent, positive customer experience across the system. The franchisor has also contributed to the goodwill of the relationship between franchisor and franchisee. And finally, the franchisee is happy because he or she now has a vehicle to save pre-tax and tax-deferred for a large future expenditure.