The Realities of Mobile vs Fixed Site Franchising

Jason Gehrke | Director | Franchise Advisory Centre

The Realities of Mobile vs Fixed Site Franchising

Working capital, lifestyle and royalties differ between mobile and fixed-location franchises.

On the face of it, the single and most obvious difference between a mobile franchise versus a fixed-location franchise is the initial investment cost, but there is far more to it than meets the eye.

Typically a ‘greenfield’ (ie. new and not previously operated) mobile franchise will have an initial upfront cost of under $100,000, whereas fixed-location businesses can cost hundreds of thousands more, with the typical entry cost for a greenfield retail franchise tending to average around the $400,000 mark.

For an existing business, those costs can go even higher when factoring in the goodwill component for a going concern that is generating steady profits. (Unprofitable franchisees, on the other hand, can often be worth less than a greenfield).

Working Capital

Aside from the initial upfront investment, there are significant cost differences in working capital requirements, and ongoing royalty payments.

Fixed-location brands, especially retail businesses, can deliver fairly strong cashflows to an operator quite quickly after opening if the initial marketing campaign has been effective. In turn, this reduces the amount of working capital an operator needs because the business can meet its working capital requirements from its strong cash flows.

However in a mobile franchise, the ‘spoolup’ period may take considerably longer as the operator develops a market, finds customers, performs the services, and then waits for payment. In some white-collar mobile service franchises (such as mortgage broking), a franchisee may need to have six months (or more) of working capital behind them to cover the operating costs of the business while its cashflow develops.

A mobile service franchise that might initially cost a relatively low $50,000 upfront could cost an extra $50,000 or more in working capital over the coming months, meaning that the operator should really have access to $100,000 or more at the outset to ensure they can not only afford to buy the franchise, but also afford to operate it until it starts making money.

This working capital issue is resolved by some blue-colour mobile service franchises (eg. lawnmowing), where the franchisor may offer a minimum income guarantee to a new franchisee for the first month or two after they join the franchise.

In reality, this income guarantee is simply a capitalised form of working capital. In other words, the franchisee pays for it in their upfront investment, but can draw down against it only if they fail to achieve minimum turnover targets. Because the franchisee paid for it in their upfront payment to the franchisor to start with, the income guarantee is basically a refund of their own money, but allows the recipient to still pay for costs that working capital would otherwise cover anyway.

Income guarantees (ie. capitalised working capital) occur frequently in mobile franchises but rarely, if ever in fixed-location businesses.

Lifestyle

A common benefit perceived by potential franchisees – and sometimes actively promoted by franchisors – is that a mobile service franchise gives an operator a great lifestyle because they can choose the hours they work and will not be tied-down to a shop or an office.

The reality though is very different, with mobile operators often working just as many hours as an operator of a fixed-location business. While mobile operators might be able to take advantage of spare time between appointments for lifestyle activities, this time during working hours is often better used to actively seek more business by following up on quotes or finding opportunities to meet new customers.

The commitment of time to a mobile service business (where the operator is usually the business’ entire labour force) also increases during periods of peak demand such as summer for a lawnmowing or pool maintenance business.

Furthermore, whenever a mobile operator takes time off work it costs them money through lost income, as such businesses rarely have employees to keep things going when the owner is away. Of course this is different for fixed-location businesses where the owner is generally not the sole income-earner for the business, and if they do take time off, the staff can usually keep things going without them (for a short while at least).

So despite the potential for mobile service franchises to offer a franchisee a high level of flexiblity with where and how they spend their time, this often comes at a much greater cost than to the operator of a fixed-location franchise.

Royalties

Royalties are the ongoing payments a franchisee makes to the franchisor in return for the continued use of the brand, systems and the support provided by the head office team.

In most blue-collar mobile service franchises, royalties are paid as a set regular amount, regardless of the franchisee’s sales performance. This has the effect of making the royalties high or low, depending on the franchisee’s turnover, although generally as their turnover increases with the growth of their busines, the royalties will decrease as a proportion of that turnover.

On the other hand, in many white-collar and most fixed-location franchises, royalties are generally calculated as a percentage of the franchisee’s total sales. While this will keep the cost of royalties equally proportional to the franchisee’s turnover regardless of how low or high this turnover might be, it also means that franchisees on this royalty model will usually end up paying a lot more to their franchisor over time compared to franchisees who pay the set regular amount.

However while franchisees on percentage royalty models typically pay more, they also generally have access to higher levels of support as their franchisor is better-resourced through the higher royalties to provide additional support.

In addition to the key differences of investment cost, working capital requirements, lifestyle and royalties, mobile franchises frequently differ from fixedlocation franchises in the levels of support delivered by the franchisor.

They also differ in the degree of responsibility and stress involved in operating a business without staff (less hassle and responsibility) to operating a fixed location business that may be dependent on staff (with all the challenges that managing staff provide).

And then there’s capital gains

And while this is not meant to be an exhaustive list of the differences between mobile versus fixed location businesses, a final consideration for any potential franchisee might be the potential for a future capital gain if they want to sell the business in future. Both types of businesses can potentially make capital gains, however the role of the owner in the business will determine the size of any future capital gain.

Because mobile service operators are often the whole business themselves, the potential to make a capital gain when they sell is offset by the risk that their customers will not readily accept the buyer, and in turn, the buyer will price for that risk in what they are prepared to pay for the business. But for fixed-location businesses where there is usually a staffing infrastructure around the owner and the businsess is not so critically dependant on the owner for its daily operations, the risk to a buyer is reduced and increases the potential of a capital gain accordingly. These factors are reflected in the earnings multiple used to price a going concern business for sale – mobile businesses usually sell for much lower multiples than fixed-location businesses.

As you can see, there is more than price to consider when distinguishing between a mobile service versus fixed-location franchise. Remember in either case to do your homework first, and always rush slowly.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for more than 25 years at franchisee, franchisor and advisor level.

He advises both existing and potential franchisors and franchisees, conducts franchise education programs throughout Australia, and publishes Franchise News, a fortnightly email news bulletin on franchising issues and trends.

www.franchiseadvice.com.au