Territories for Mobile Franchises… what you need to know (and ask your franchisor)

Peter Buckingham | Managing Director | Spectrum Analysis

Territories for Mobile Franchises… what you need to know (and ask your franchisor)

More and more mobile franchises are coming onto the market, many which we expect to be successful: like a business flying drones, or one taking mobile video games to kid’s parties.

A potential client rang me the other day and said he and his wife were looking at going into a mobile franchise in 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 business you are becoming part of?

The answer was quite unclear!

This seems 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 the ‘Beer and Pizza map’.

The ‘Beer and Pizza map’ is the map derived by a few early entry franchisees and the franchisor, after beers, 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’s consider we are in the automotive aftermarket business. Maybe we are joining a system that services vehicles as a mobile 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 that we can visualise it.

On a world-wide and national basis, if we undertake some research, we may find a report that incorporates the following: “The world slushie drink hire market is expected to reach US$5.59 billion by 2020, and the Australia market is expected to be $40 million in 2016”. 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 issues 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 with their mobile vehicle service system, they will target 30 per cent of the market, or a Melbourne and Geelong market of $7 million p.a.

NOW WE ARE STARTING TO UNDERSTAND THE MARKET!

While you may dispute the detail, at least we are gathering an understanding of the big picture, so now we need to understand:

1. Are the franchisor’s assumptions realistic?
2. How many territories should be created and what should a territory comprise of?

The franchisor’s assumptions

In your Due Diligence - 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. Information such as the above is available, and should probably be included in the Disclosure Document, that is an obligatory right that you have to receive.

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 assumptions they have made as far as market size and market share, we get a blank look.

In our view, a franchisor should consider the question of territory numbers in one of three ways:

1. Have some successful territories that can be measured and replicated, and you understand that each territory has been built to meet a requirement. We call this the ‘Cookie Cutter’ approach, where a franchisor can say that certain franchisees have been able to successfully operate the system based in the following territory. Usually this is 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 it is likely to consume the service you are offering.

2. The franchisor may have an internal view that a franchisee needs to invoice out $500,000 p.a. to cover his own labour, return on investment, parts that he would expect to use in mobile servicing and other operating costs. If the Melbourne / Geelong target market is $7 million, then we should be able to support 14 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 sizes from elsewhere, and transpose that into the market we are working in. For example, if we have been operating for some years and have 20 territories in Sydney / Newcastle / Central Coast / Wollongong, this would be equivalent to having 16 in Melbourne / Geelong, based purely on population and household numbers.

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 applications we receive for 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 the Business Plan, and this type of work should be considered in an urgent sense before any territory planning can occur. We walk them through most of the steps above to come out with a logical and realistic position. In our view, once established, it should be a Board ratified decision, as it is fundamental to the future of the system.

Only recently we had an inquiry on behalf of an overseas franchise wanting to come to Australia, and we were told based on their experience, they should have 300 – 360 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.

We can only say that (on behalf of any future franchisees), they do undertake some realistic research, and not try and convince us they know best, or we will be just making another donation to the European Bail Out fund.

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.

Summary

If you are looking at taking on a mobile franchise, ask the franchisor what research they have done, and more importantly, what assumptions they are making in working out your territory, and whether it has a reasonable chance of sustaining the business.

If the answer is cloudy or blank, I suggest you look at another franchise system.

Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, the leading Geodemographic and Sales Prediction Modelling Company in Australia. He is a Certified Franchise Executive, and also a past Director and Vic / Tas President of the Institute of Management Consultants. Peter is contactable at:

peterb@spectrumanalysis.com.au
www.spectrumanalysis.com.au