Ahh mobile franchises, the wind in your hair as you drive to your next appointment in your branded van with dog in the back… freedom from exorbitant rents and staff costs and you can work as many hours as you like… mobile franchises are a great option… or are they? There are now a multitude of mobile franchises on the market, and these can have certain benefits over the traditional high-cost retail and fixed site business franchises in shopping strips and centers. Clients and customers now all have an expectation that the business will come to them and fit in with their work and home schedules.
The range of mobile franchises from couriers, home maintenance, care service and repairs, and even mobile banking just keeps expanding. Now Jim’s Group can clean your gutters, install your antenna, cut your grass and give you a facial with their new Jim’s Beauty offering! Many Franchised businesses also realised that a mobile business may be a more efficient and profitable way of doing business. Even though there has been a return to office policy for many employees there remain a great many employees who now work flexi days and still work from home. These customers still want their cars serviced at home, dog washed, garden mowed, house cleaned, and groceries delivered to the door. Taking your business to the consumer’s home or office is a great way to generate work and goodwill without carrying the huge overheads of rent and staff costs of a fixed site. Consumers want convenience and instant gratification particularly for hardworking families with young children.
The benefits of mobile franchises
The Pros
- A much smaller up front capital investment and therefore more affordable.
- A more flexible work life balance.
- Lower operating costs – less reliance on staff as generally owner operated.
- Freedom from an office or a shop front.
- A quicker and shorter time to get a return on your investment.
The franchise fee is usually the biggest cost in a mobile franchise apart from the need to lease a vehicle, branding and equipment costs. A mobile franchise can cost as little as $30,000 and up to $100,000 to establish. This means you don’t need to go the bank and borrow on the security of your home, which has become more difficult with tighter lending criteria by the banks. With a fixed site retail franchise the franchise fee is usually the lowest cost and by the time you add stock and shop fit out, bank guarantees on a lease, staff costs, insurance and the need for working capital the investment can be upwards of $300,000 and up to $1 million.
The Cons
Its not all “salad days” wind in your hair, dog in the trailer. A mobile franchise may not suit everyone. Being on the road can have its own issues and stress (just look at Melbourne traffic!) Even though a mobile franchise has less up-front cost (which means less risk) that may also mean a smaller return to the franchisee and restrict the wages a franchisee can draw out depending on the revenue created. For example, with a dog wash mobile business that may generate $200,000 of revenue a year the salary that can be drawn by the operator after all costs and expenses may be limited.
That may not be an issue for some people of course, due to the freedom and flexibility a mobile business can provide there is a compromise between freedom and earnings. In some cases, the franchisee can generate a very good return if they work hard and ensure they know their margin (profit) on delivery of the products and services.
Royalties
Many mobile franchisors charge a fixed royalty fee such as a fixed monthly fee, rather than a royalty based on the gross turnover of the business. This can be a positive for the franchisee if the business is successful and growing but the fixed fee can also become a debt to the franchisor, irrespective of the franchisee’s revenue.
For this reason, you need to talk to other franchisees in the system you are considering and do your own cash flow projections to see how the numbers “stack up”. You must also get independent and specialist legal and financial advice before your commit. I will say this more than once in this article “If the numbers don’t work, walk away”.
Fee comparisons
Fixed site retail franchises generally charge a royalty fee, based on the turnover of the business of between 4% to 10% of gross turnover (revenue) and a marketing or advertising fee of around 2% to 5% per cent. On top of this there may be additional IT fees and obligations to be spent on local area marketing. These costs should be set out in the Franchisors Disclosure document from which you can do your own financial due diligence and cash flow projections.
A mobile franchise may charge an up-front franchise fee of around $20,000 to $30,000, plus the cost of the vehicle and equipment, insurances and a marketing fee. The vehicle and equipment can usually be leased, thus reducing the capital outlay. These costs will also be set out in the Franchisors Disclosure document.
Stock
It should not be forgotten that a significant cost when setting up the business may be stock which needs to be funded so 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.
What to consider
Some relevant questions to consider would be:
- Whether you are allocated an exclusive or non-exclusive territory?
- Will the franchisor or other franchisees be able to compete in your territory?
- Does the Franchisor have a lead generation 1300 number and will they refer all leads to you in your territory?
- What is their on-line sales policy and how will that impact on your sales?
- Do they keep or share any rebates they receive from suppliers?
- Where is the territory based in relation to where you live – do you want to be travelling across town to service your territory?
- Do you have to travel long distances within your territory to service clients for a small fee in which case there may be little profit in each job that is outweighed by the costs.
- Can you still take time off and have a break without impacting the business if you are a sole trader?
- What are the costs if you want to sell the business during the term?
Crunch the numbers!
Even though a mobile franchise has lower entry costs you should still talk to other franchisees in the system to gain feedback and do your own financial due diligence and cash flow projections with the assistance of your accountant and financial advisor. You need to factor into your cash flow projections a reasonable salary, as no one wants to work for nothing. You cannot work on the assumption there will be a profit to draw on, at the end of the year as that rarely is the case. If the numbers don’t work, then don’t commit, as mobile franchises can be difficult to sell.
You should work on the assumption that a mobile franchise will enable you to earn an income but is unlikely to deliver any great capital return at the end or when you sell. That’s just being realistic, some do, but again that is the exception not the rule. There may be no goodwill value at the end, so you need to take funds out as you go.
Training and support
You should ensure the franchisor provides adequate up-front and ongoing training and is innovative and will generate product development and provide support as you may need it. Some franchisors are very hands off once they sign you off. It is important to ask them what sort of support they will give and who will give it. You will need to consider if they have the latest booking applications and payment systems, CRM software for ease of bookings and payment. There is really no excuse these days for outdated software.
Leads and sales
Another important fact to consider is does the franchisor have a social media presence and who is responsible for generating these leads. In some case the Franchisor will assist in generating leads but in most cases you have to get out there an network and market and secure the leads and sales. Be sure to check if they are on Instagram and across all social media in comparison to the competition.
Your exit plan
Most mobile franchises have a limited life span of 3 to 5 years. Therefore, you need to look at what the transfer or assignment rights and costs are and check any non-compete clauses that may restrict you from carrying on a similar business on the expiry. If things don’t go to plan it can be difficult to get out and sell a mobile franchise and you will crystallize a loss if you walk away during the franchise term.
Specialist Advice
The best insurance before committing to a franchise is to seek Specialist professional advice from a Specialist Franchise Lawyer and financial advisor. So, before you “get on the road” like Willie Nelson did back in the 60’s, do your analysis and get the right advice to limit your risk and make an informed decision.
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 line on Franchising and Licensing and acts for Overseas Franchisors and Master franchisees and in disputes mediations.
Mobile 0412 67 37 57 | robert@sanickilawyers.com.au | www.sanickilawyers.com.au