48 Business Franchise Australia and New ZealandTHE rEALITIES oF
MoBILE vS FIxED
SITE FrANCHISING
working capital, lifestyle
and royalties differ between
mobile and fixed-location
franchisesOn the face of it, the single and most
obvious difference between a mobile
franchise versus a fixed-location franchise is
the initial investment cost, but there is far
more to it than meets the eye.
Typically a ‘greenfield’ (ie. new and not
previously operated) mobile franchise
will have an initial upfront cost of under
$100,000, whereas fixed-location businesses
can cost hundreds of thousands more, with
the typical entry cost for a greenfield retail
franchise tending to average around the
$400,000 mark.
For an existing business, those costs can go
even higher when factoring in the goodwill
component for a going concern that is
generating steady profits. (Unprofitable
franchisees, on the other hand, can often be
worth less than a greenfield).working capital
Aside from the initial upfront investment,
there are significant cost differences in
working capital requirements, and ongoing
royalty payments.
Fixed-location brands, especially retail
businesses, can deliver fairly strong cashflows
to an operator quite quickly after opening
if the initial marketing campaign has been
effective. In turn, this reduces the amount of
working capital an operator needs because
the business can meet its working capital
requirements from its strong cash flows.ExpERT ADvIcE“mobile service operators are often the
whole business themselves – the potential to
make a capital gain when they sell is offset
by the risk that their customers will not readily
accept the buyer.”jason gehrke | director | FrANchise Advisory ceNtreHowever in a mobile franchise, the ‘spool-
up’ period may take considerably longer
as the operator develops a market, finds
customers, performs the services, and then
waits for payment. In some white-collar
mobile service franchises (such as mortgage
broking), a franchisee may need to have six
months (or more) of working capital behind
them to cover the operating costs of the
business while its cashflow develops.
A mobile service franchise that might
initially cost a relatively low $50,000 upfront
could cost an extra $50,000 or more in
working capital over the coming months,
meaning that the operator should really have
access to $100,000 or more at the outset to
ensure they can not only afford to buy the
franchise, but also afford to operate it until it
starts making money.
This working capital issue is resolved by
some blue-colour mobile service franchises
(eg. lawnmowing), where the franchisor may
offer a minimum income guarantee to a new
franchisee for the first month or two after
they join the franchise.
In reality, this income guarantee is simply a
capitalised form of working capital.
In other words, the franchisee pays for itin their upfront investment, but can draw
down against it only if they fail to achieve
minimum turnover targets. Because the
franchisee paid for it in their upfront
payment to the franchisor to start with, the
income guarantee is basically a refund of
their own money, but allows the recipient to
still pay for costs that working capital would
otherwise cover anyway.
Income guarantees (ie. capitalised working
capital) occur frequently in mobile franchises
but rarely, if ever in fixed-location businesses.lifestyle
A common benefit perceived by potential
franchisees – and sometimes actively
promoted by franchisors – is that a mobile
service franchise gives an operator a great
lifestyle because they can choose the hours
they work and will not be tied-down to a
shop or an office.
The reality though is very different, with
mobile operators often working just as many
hours as an operator of a fixed-location
business. While mobile operators might be
able to take advantage of spare time between
appointments for lifestyle activities, this time
during working hours is often better used to
actively seek more business by following upfEATURE:
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