50 Business Franchise Australia and New ZealandExpERT ADvIcEfEATURE:
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the royalties high or low, depending on the
franchisee’s turnover, although generally as
their turnover increases with the growth of
their busines, the royalties will decrease as a
proportion of that turnover.
On the other hand, in many white-collar
and most fixed-location franchises, royalties
are generally calculated as a percentage of the
franchisee’s total sales. While this will keep
the cost of royalties equally proportional to
the franchisee’s turnover regardless of how
low or high this turnover might be, it also
means that franchisees on this royalty model
will usually end up paying a lot more to their
franchisor over time compared to franchisees
who pay the set regular amount.
However while franchisees on percentage
royalty models typically pay more, they
also generally have access to higher levels of
support as their franchisor is better-resourced
through the higher royalties to provide
additional support.
In addition to the key differences
of investment cost, working capital
requirements, lifestyle and royalties, mobile
franchises frequently differ from fixed-
location franchises in the levels of support
delivered by the franchisor.
They also differ in the degree of
responsibility and stress involved in
operating a business without staff (less hassle“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.”and responsibility) to operating a fixed
location business that may be dependent on
staff (with all the challenges that managing
staff provide).And then there’s capital gains
And while this is not meant to be an
exhaustive list of the differences between
mobile versus fixed location businesses,
a final consideration for any potential
franchisee might be the potential for a
future capital gain if they want to sell the
business in future. Both types of businesses
can potentially make capital gains, however
the role of the owner in the business will
determine the size of any future capital gain.
Because 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, and in turn, the
buyer will price for that risk in what they
are prepared to pay for the business. But
for fixed-location businesses where there is
usually a staffing infrastructure around the
owner and the businsess is not so critically
dependant on the owner for its dailyoperations, the risk to a buyer is reduced
and increases the potential of a capital gain
accordingly. These factors are reflected in
the earnings multiple used to price a going
concern business for sale – mobile businesses
usually sell for much lower multiples than
fixed-location businesses.
As you can see, there is more than price
to consider when distinguishing between
a mobile service versus fixed-location
franchise. Remember in either case to do
your homework first, and always rush slowly.Jason Gehrke is the director of the
Franchise Advisory Centre and has been
involved in franchising for more than 25
years at franchisee, franchisor and advisor
level.
He advises both existing and potential
franchisors and franchisees, conducts
franchise education programs throughout
Australia, and publishes Franchise News,
a fortnightly email news bulletin on
franchising issues and trends.
http://www.franchiseadvice.com.au