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Affordable Franchises

 

There is a myriad of low-cost franchises that offer good opportunities for someone who has been made redundant or looking for a different lifestyle. The big-name franchises we all know and see, can involve an investment of anywhere between $600,000 and up to $2 million which requires huge financial commitment. As they say the bigger the financial commitment, the bigger the risk but also potentially the bigger the reward.

 

Many of the low-cost franchises are mobile franchises in all sorts of sectors such as lawn mowing, home maintenance, car repairs, house cleaning, courier services. The attraction of a mobile franchise may also be the lure of driving around, wind in your hair, dog in the back, coffee in hand heading off to the next appointment rather than being tied to a retail shop or office.

 

Another attraction may be that you are free from paying exorbitant fixed overheads such as rent, and staff costs. So low cost and or mobile franchises can be a great option! Following Covid and changed work expectations we have seen a “franchise frenzy” across the whole franchise sector in the low-cost franchise models.

 

Benefits of a low cost /mobile franchise

 

There are a great many benefits to taking up a low cost /mobile franchise as opposed to a fixed site franchise which includes:

 

  • Avoiding the high up-front costs of a retail franchise such as occupancy costs and security deposits -rent and rates;
  • Usually only modest stock levels are needed as opposed to sock in a fixed site;
  • Often there is no need to employ other staff;
  • Flexible work hours; 
  • Operational costs are generally lower;
  • Less working capital needed for the first 12 months of operation;

 

Even mobile franchisors had to embrace the advances in on-line marketing and ordering and embracing a social media presence which has helped to make mobile franchises even more user friendly for the franchisee and their customer. The frenzied demand for courier drivers during Covid has now settled down but out of that came increased demand for food delivery drivers and businesses continue to benefit from consumers wanting to have goods and services to their door.

 

Many businesses also realized that you could downsize your retail and office footprint, reduce costs, operate just as efficiently and even be more profitable! Taking your business to the consumer’s home or office is also a great way to generate work and build your brand in the market, without carrying the huge overheads of a fixed site. It has also solved a problem for many over worked families juggling their work and children’s commitments.

 

The size of the franchise market

 

The mobile sector is staggering when you look at for example Jim’s Mowing with over 1,500 franchisees, VIP Home Services over 1,000 in (AU + NZ), Jim’s Cleaning Group around 950 franchisees, Cleantastic over 900 and couriers such as Aramex (ex-Fastway) 900+, Couriers Please over 700, Hire A Hubby over 300 and the list goes on. The Franchise sector has over the last 5 years grown at 2.4% to around $169.5bn

 

For larger franchised business their profits are down and their costs are up and the Australian dollar is weak. Many of these factors do not overly impact on the smaller franchises although we are seeing the increase in inflation and higher interest rates affecting households’ disposable income and we are seeing an increase in insolvencies particularly in certain sectors such as hospitality and building.

But enough of this doom and gloom!!  with change and some business going to the wall others in the services segment take up greater market share and other opportunities open up.

You just have to drive around and look!

 

Mobile and fixed site franchise costs

 

Let’s talk about real dollars!

 

With a mobile franchise, the up-front franchise fee is usually the biggest cost (it could be as low as $8,000 up to $25,000.00 apart from the need to lease a vehicle, branding and equipment costs. Overall, the investment in a mobile franchise may be in the range of $30,000 to $100,000 (high end) to get moving. The vehicle and equipment can usually be leased, which also reduces the up-front capital outlay.

 

The franchise fee for a fixed site franchise on the other hand are generally in the range of $30,000 to $80,000 plus fit out costs, stock and a myriad of other costs such as funding a bank guarantee on a lease, staff and insurance so the start-up costs could be well over $250,000.00 and up to even $600,000.

 

Mobile work may not suit everyone, and this is something to consider if you would prefer an office or shop environment and even though a mobile franchise has less up-front cost (which means less risk) that may also mean a smaller income or return. 

 

Many mobile franchisors charge a fixed weekly or monthly royalty rather than a percentage of gross turnover which for a fixed site franchise can range from 6% to 10% plus a marketing fee of between 2% to 4%. Therefore, the amount that is deducted from a franchisee’s gross turnover (not their profit) can be overall in the range of 10% up to 14% all up.

 

A weekly fixed fee with a smaller franchise can be positive if the business is successful and growing but can otherwise be a fixed cost that becomes a debt to the franchisor, irrespective of what income you have generated. Fixed site franchises also require the franchisee to hold stock which has to be funded up front and the working capital requirements for a fixed site franchise over the first six or twelve months of operation will be much greater than for a mobile franchise. 

 

So, all in all low cost and mobile franchising may be a great option but won’t suit everyone. If you are considering one, here are a few things to think about:

 

  • Will you get an allocated and exclusive territory, or will the franchisor or other franchisees be able to sell to customers in your territory?
  • What is the franchisors “on line” policy as far as directing leads to you, in your territory? Is it fair and clear how that works?
  • Is the territory near where you live? as travelling across town to service your territory may become tiring and costly.
  • Do you have to travel long distances within your territory to service clients for a small fee in which there may be little profit in each job?
  • Can you still take time off and have a break without impacting on the business if you are a sole trader?
  • What is the franchisors policy if you want to go on leave?

 

Do the numbers work?

 

Even though there may be lower entry costs you still need to do your own financial due diligence and cash flows (with the assistance of your accountant and financial advisor) to see if the business is sufficiently viable to at least pay you a reasonable salary. If the numbers don’t work, then don’t commit, as mobile franchises can be difficult to sell. You may also need to accept that by taking up a mobile franchise you are buying yourself a job and that’s fine, but you need to be able to take a reasonable salary out for your effort. There may be no goodwill or great capital gain when you sell the business in the future which is a risk in most businesses.

 

Training and support 

 

You should ensure the franchisor provides adequate training up front and ongoing training and support, and that they have the latest booking and CRM software for ease of bookings and payment. There is really no excuse these days for franchisors having outdated software or a franchisee having to fax sales details at the end of each week!  We are living in a new digital age and if the franchisor is not up to speed with technology I would move on!

 

Does the franchisor have a social media presence, and do they charge a marketing fee which is spent on misplaced and expensive advertising, that’s not really that effective? Talk to other franchisees in the system to get a gauge on their happiness level with the franchise and its support. If the feedback is negative that’s a red flag. 

 

Your exit plan

 

Most mobile franchises have a limited life span of say 4 to 6 years after which you will likely want to move on. Therefore, you need to look at what the transfer or assignment costs are and any restrictions on selling the franchise and any restraint clauses that may restrict you from carrying on a similar business when you sell or get to the end of your franchise term.

 

If things don’t go to plan it can be difficult to get out and sell a mobile franchise and you may still crystallize a loss if you walk away during the franchise term.  There are lots of tricks and traps when looking to become a franchisee so before you “get on the road again” like Willie Nelson did back in the 60’s, do your analysis and get advice from a Franchise Law Specialist who is a member of the FCA as we know the good, the bad and the ugly in franchising. 

 

That way you will limit your risk and make an informed decision before you hit the road.

 

 

Robert Toth is Special Counsel and Franchise Specialist at Sanicki Lawyers with over 35 years of experience in franchise, licensing and distribution law.

Robert is also an Accredited Commercial Law Specialist and regularly publishes articles on franchising in Australia and overseas journals and acts for a number of overseas, local and master franchisors and acts in dispute resolution and mediations. 

Sanicki Lawyers  robert@sanickilawyers.com.au | Mobile 0412 67 37 57 | www.sanickilawyers.com.au