Actualise your Service Franchise
Actualise your Service Franchise
Service franchises cover a wide range of business types that require different ranges of skill levels, time and investment. Examples of service franchises include: business coaching, domestic cleaning, commercial cleaning, pool maintenance, education services, childcare, travel agency, home care and maintenance, mortgage broking etc.
This segment provides franchise business opportunities in a broad range of activities. Buyers will be able to tailor their research depending on their interests, risk profile and financial capacity.
With a few exceptions, service franchises can offer a relatively high return on capital invested. When compared to retail business, service franchises tend to have lower stock levels and equipment/fit out requirements.
Other benefits can include:
• The current trend of outsourcing in the business sector where businesses prefer to use a contractor, rather than an employee, to undertake some activities. For example businesses may use contract couriers to deliver goods and documents. The provision of cleaning and security services while once done in-house may be outsourced to specialist providers.
• Growth in the outsourcing of domestic activities as large numbers of families become increasingly time poor. These tasks may include, household lawn mowing, house/car cleaning, window cleaning and swimming pool servicing.
• Income guarantee by franchisor. A word of caution, buyers must take care to understand these arrangements as any income guarantee will have a number of conditions attached. Also this income will rely on the franchisors capacity/willingness to pay. Banks are unable to rely on an income guarantee to support a loan.
• Lower stock levels which may reduce overall investment.
• Operating hours may be more flexible than the more restrictive nature of retail trading hours. Some franchise systems may even offer weekend or part time opportunities.
• Overheads in many service businesses are low. For example, mobile services may not need expensive premises and others have an ability to work from home. This means they may be profitable more quickly than other business segments.
• They may offer a good way of using existing skills rather than relying on capital to generate an income.
• Service franchises tend to require handson and direct input from the owner. They are best run on an owner-operator basis.
• Some mobile businesses have the opportunity to grow through the addition of one or more employees. This will vary depending on the franchise system.
• While returns on investment may be high, many service businesses may offer low absolute profits, particularly when factoring in the franchisee’s time working (personal exertion).
• Earnings will be limited by the hours that can be physically worked by the franchisee and their own abilities to compete the tasks.
• Some may be more seasonal in nature with lower levels of activity in certain times of the year.
• Many require the franchisee to market and sell the service. Although franchisors may provide the tools, processes, and undertake group advertising, the success or otherwise of the business will depend on the franchisee’s efforts. This will usually continue for the life of the franchise. The time required to complete this aspect of the business will need to be considered. This is particularly evident in the start-up phase.
• Lower entry costs also make it easier for others to enter the market. This may include both competing franchise groups and independent operators.
• Business may be highly dependent on the continuing efforts of the owner. This may make the business more difficult to sell unless these skills are transferable to a new operator.
• Some may require additional licenses and qualifications. For example franchisees operating in real estate sales or pest control are required to hold appropriate licences.
There will be a number of other advantages and disadvantages. It is essential to engage an accountant and a lawyer who has prior experience in the franchise sector.
Funding to Buy a Service Franchise
Some of the characteristics of a service franchise as outlined above may make it more difficult to obtain funding. Traditional funding may depend on whether the franchisor has a financing arrangement in place with a bank and/or the financial capacity of the buyer.
Franchise systems with lower levels of investment tend to be funded using equity in the buyer’s residential property. Banks will generally lend up to 80 per cent of the property’s valuation subject to a demonstrated capacity to repay to loans. The applicant’s full position will be considered. This includes any additional income sources and requirement to meet living costs and repayment of business loans, home loans, credit cards, personal loans etc.
Applicants will be required to present a detailed business plan to support their application. This should include the following:
• Historical financial results (for the purchase of an existing business);
• Cash flow/profit and loss projections (new and existing businesses);
• Applicant’s current financial position (including assets and liabilities, income and expenditure);
• Applicant’s background (prior work experience, industry experience and education);
• Full details of the business being purchased, ingoing cost, working capital requirements, legal/accounting/training costs, location/territory, local competition;
• Lease term and expiry (if applicable); and
• Franchise term and expiry.
Buyers without property may look to other (non-bank) funding sources. These may include one or a combination of the following:
• The Buyer’s own cash, through savings or sale of an owned asset;
• Equipment finance to fund vehicles and any major pieces of equipment;
• Private loans from family and friends. (Take care to fully document in order to avoid any misunderstandings in the future);
• A vendor loan from the outgoing franchise; and
• Assistance from the franchise (this is rare, however some franchise systems may provide a level of assistance).
The above may not suit everyone. However, it is important to ensure any loan repayments are taken into account when looking at the financial viability of the business.
Take care to fully research and understand the business opportunity, consider:
• The full ingoing cost;
• The expected turnover and profit;
• How quickly the business will reach a ‘break even’ point (income covering costs);
• The time required to earn the income. Don’t forget to include time to complete the actual work task, marketing activity, administration, travel time, training time;
• The location and surrounding territory. Don’t forget to research existing and potential competition;
• The business’s industry growth prospects and risk of decline. Look at what happened to the video rental industry;
• Allowing for costs to repay the loan and cover franchise and marketing fees;
• Seeking good quality advice from an accountant and lawyer (experienced in franchising).
Content has been prepared with the assistance and input from Daniel Cloete, National Manager Franchise, Westpac Banking Corporation, New Zealand.
Free information is available at Westpac’s Davidson Institute. Visit: www.davidsoninstitute.edu.au.
Steve Seddon is Westpac’s, Senior Business Development Manager – Franchising, Western Australia, Queensland and South Australia. He is a CPA and a member of the Franchise Council of Australia’s Western Australian committee.
Westpac continues a long-term commitment to the franchise sector in Australia. The bank has a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector.
Contact Steve at: