Franchise Territories for Mobile Operations
In the times where COVID-19 is having a strong influence on what we do, more and more mobile franchises are coming onto the market.
In the times where COVID-19 is having a strong influence on what we do, more and more mobile franchises are coming onto the market. The lower cost of entry makes these more affordable to the potential franchisee, along with not having the hassle of a retail lease.
A potential client rang me the other day and said he and his wife were looking at going into a mobile franchise relating to the auto industry. He said the franchisor had given him a territory, and could we do some work to decide if it made business sense!
Well, while I feel I am reasonably astute in these areas, my first question was what did your franchisor tell you in the disclosure document, and what are the basic assumptions about the market and specifically the brand and business you are becoming part of?
The answer was very little!
This seems to me to be a common problem, especially with small franchise systems, where the potential franchisee sits between a franchisor telling them enough to raise interest, and trying to avoid saying anything of substance in fear of later recriminations (legal), if there is a problem.
My view is if some logical work and assumptions have been formulated by the franchisor, then there is a reasonable case to give a territory with a realistic explanation, not just ‘This should work GREAT, but don’t ask me how we came to that conclusion’! – Which then evolves into a ‘Beer and Pizza map’.
The ‘Beer and Pizza map’ is normally the map on the wall derived by a few early entry franchisees and the franchisor after beers, red wine, pizza, and a black texta on the Boardroom table.
Some research and arithmetic
As a potential franchisee, you are predominantly interested in your own market and probably not other capital cities where the franchisor may operate. For this example let me consider we are in the automotive aftermarket business. Maybe we are joining a system doing mobile tyres as a franchise.
The first question is always – How big is the market? Let us imagine we are going into business in an area of Melbourne – so we can visualise.
On a national basis, if we undertake some research, we may find a report that incorporates the following:
‘The Australia retail tyre market is expected to be $5.1 Billion (according to IBISWorld) in 2022’. This may be able to be broken down to state level, and ultimately to specific areas
The franchisor should have a business plan that addresses issue like total market size and forecast market share, and a good understanding of where the opportunities lie for the business. The franchisor and their advisors have decided that they feel with their mobile system, they will target to be 2% of the Melbourne and Geelong market, or $20 Million pa.
NOW WE ARE STARTING TO UNDERSTAND THE MARKET!
Whilst you may dispute the detail, at least we are gathering an understanding of the big picture, so now we need to understand:
- Is the franchisor’s assumptions realistic?
- How many territories should be made and what should a territory comprise of?
The franchisor’s assumptions
In your ‘Due Diligence’ – fancy wording for doing your own investigations to decide whether you proceed or not, you have every right to ask the franchisor to convince you that what they are putting before you is reasonable. This information should be available and included in the Disclosure Document. That is an obligatory right, for you the franchisee has to receive this detail.
It does surprise us at times how some franchisors come to us for territory planning advice, and when we ask what is in their business plan and what the assumptions as far as market size and market share, there is a blank look.
In our view a franchisor should consider the question of territory numbers in one of 3 ways:
1. Have some successful territories that can be measured and replicated, and therefore you understand that each territory has been built to meet a requirement. We call this the ‘Cookie Cutter’ approach, when a franchisor can say that certain successful franchisees have been able to successfully operate the system based in the following territory. Normally this may be based on population, number of households or number of businesses in a B2B type application. This is then adjusted in size if the area (and postcodes) is seen to be better or worse than the average as far as likely to consume the service you are offering.
2. The franchisor may have an internal view that a franchisee needs to invoice out $800,000 pa. to cover own labour, return on investment, parts they he would expect to use in mobile servicing and other operating costs and make a reasonable profit. If the Melbourne / Geelong target market is $20M, then we should be able to support 25 franchisees when we approach maturity. This may need to be the 5 – 10 year plan, but at least you can issue some franchises and ask the franchisees to “care take” other areas until the system can support the mature number of franchises.
3. Sometimes a franchisor has been successful in another market, and therefore we can use the territory numbers and size of territories from elsewhere and transpose that into the market we are working in. If we have been operating for some years and have 30 territories in Sydney, Newcastle, Central Coast and Wollongong, this would be equivalent to having 25 territories in Melbourne and Geelong, which is based purely on population and household numbers.
*Based on Census 2016 population estimates
* NB – Census 2021 expected release date June 2022.
Whichever way it is put to you by the franchisor, you should expect to see realistic assumptions, facts and data to support this view.
Commitment of the franchisor
Many jobs we receive on territory planning at Spectrum Analysis start with the franchisor asking us ‘How many territories should I have’?
Our initial reply is that we do not write their Business Plan, and this type of work should be considered as a priority before any territory planning can occur. We walk them through most of the steps described here to come out with a logical and realistic position. In our view once established it should probably be a Board ratified decision, as it is fundamental to the future of the system.
Recently we had an inquiry on behalf of an overseas franchise wanting to come to Australia, and we were told based on their English experience, they should have 200 – 250 territories. The concept was IT based, and when we delved deeper into the logic, it was a wet finger in the air approach based on the number of businesses.
Once a franchisor has undertaken reasonable research, they should be able to show you a logically thought out set of information based on realistic assumptions, with mapping to back it up.
If you are looking at taking on a mobile franchise, ask the franchisor what research they have done, and more important, what assumptions are they making in working out your territory, and whether it has a reasonable chance of sustaining the business. If the answer is cloudy or blank, may I suggest either:
- Refer the franchisor to a company such as ours
- Look at another franchise system.
Bio Peter Buckingham CFE
Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, the leading Geodemographic, Mapping and Sales Prediction Modelling Company in Australia. He is a Certified Franchise Executive is contactable by email at: email@example.com or visit www.spectrumanalysis.com.au.