Westpac
buying a SERVICE FRANCHISE

Service and business-to-business operations are a strong and growing part of the franchise sector worldwide. In New Zealand, surveys suggest that the market is growing at way above average rates per annum. So what is a service franchise? What are the benefits and drawbacks of owning one? And, if you don’t have significant assets of your own, how do you go about funding the purchase of such a franchise?

What Is A Service Franchise?

Service franchises operate in a vast variety of industries. There are blue and white collar opportunities covering a wide range of occupations and skill levels as well as investment levels. Examples of service franchises include: business coaches; bookkeeping; real estate agents; travel agents; handymen; pool services, lawn mowing and garden services; commercial and domestic cleaning; taxis, automotive services; education and childcare; mortgage brokers; computer services; kitchen designers; transport and courier services; medical practitioners of various types; web designers and many others.

From this brief list, you can see that most people would be able to find a service franchise that suits their skill level, interests, risk profile and investment ability. And while qualified tradespeople such as electricians and plumbers used to be mainly independents, many are now joining franchise groups to get benefits such as joint purchasing, advertising, business and management systems, as well as advantages such as the brand identity that helps generate a higher price when selling their businesses.

Potential Benefits

For the potential franchisee, some good reasons for considering a service franchise are:

- Service franchises tend to offer a relatively high return on investment compared to industries such as retail or manufacturing. For example, establishing a mobile pool cleaning business may cost $60,000 as opposed to $400,000 for a retail swimming pool shop, yet the mobile business can still offer a good income to the owner.

- Many service franchises are relatively low risk – but see below.

- Some offer a conditional guaranteed income or a work guarantee for a limited time.

- There is high demand for many of the services in a modern economy.

- Service franchises offer a good way of using your skills rather than capital to get into business.

- They usually require less capital, making them more affordable.

- The overheads in many service franchises are low. For example, mobile services do not need expensive premises, while many business advisors work from home. This means they tend to return a positive cashflow quite quickly.

- You are not restricted by having to work retail hours and may be able to enjoy working evenings, part-time or flexible hours to suit your lifestyle. Bear in mind, however, that shorter hours may directly impact your income.

- Service franchises tend to rely less on staff and more on direct input from the owner.

Potential Drawbacks

Franchise buyers do need to be aware that service franchises can have their drawbacks, too:

- While returns on investment are high, many service businesses may offer low absolute profits.

- Earnings may be limited by the hours that can be physically worked by the franchisee or by the franchisee’s own abilities.

- Risk can be higher, especially in businesses that require skills such as excellent selling ability, or in marginal or new industries

- It could be difficult to grow the business beyond a certain size if franchisees are not allowed to employ others or the area may be limited, or because the owner can only do a finite amount of work.

- Many service businesses require a lot of selling, which doesn’t suit everyone.

- The small size of some service businesses in itself increases the perceived risk to others, making it difficult to fund or sell.

- A high level of skills may be required in some franchises: for example, plumbers or business advisors may require qualifications or experience.

- The business tends to be very dependent on the owner and/or key employees. This can present significant risk in the case of illness or staff departures: eg, a real estate agency where the star seller leaves and takes their clients with them.

It’s worth exploring the above advantages and disadvantages for any specific opportunity that you’re looking at. A good specialist franchise accountant, lawyer or banker will be able to help you consider all of these points and more.

Funding To Buy a Service Franchise

When you are looking for funding to buy a business, some of the characteristics mentioned above can make it more difficult for banks to fund service franchises. In many cases, the generally lower capital requirements of service franchises mean that prospective purchasers are able to provide security for loans in the form of equity in property or other assets. What happens though, if you want to buy one of the higher investment level service franchises or a highly profitable existing business with a lot of goodwill but little in the form of assets?

Although return on investment may make it possible to earn $150,000 per annum from a $100,000 investment as opposed to the $450,000 investment that might be required to achieve the same from a retail operation, the bank still requires security. Service franchises often have few assets, stock or fit-out for a bank to fund against; in addition, the perceived risk to the bank is higher because it depends to a large extent on the skills of the franchisee.

That is why it pays to deal with specialist franchise bankers with a real understanding of the cashflow and the value of the intellectual property and systems of the specific business. When seeking funding, it’s vital to have excellent information and a good understanding of the business model. A banker who has good knowledge of the franchise can not only help address the funding needs but can also add to your understanding of the business.

Because the franchisee’s own skills and abilities are crucial to the success of a service business, when you approach the bank for funding it is important to have a CV or summary of your experience. This can help them to evaluate risk and improve the likelihood of your receiving the funds you seek. Once again, the more familiar the banker is with your chosen franchise and its other franchisees, the better they can help you. 

In Summary

The services sectors of franchising offer a wide range of exciting opportunities with relatively low investment and relatively high returns. Although not without risk, it is a sector where people can use their time and skills to have a secure and profitable future. If funding is required, the lack of actual assets can cause some issues which are best resolved with the assistance of a specialist franchise banker. 

This advertorial is taken from Franchise New Zealand magazine Volume 20 Issue 4 

Contact details for Westpac

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