Automotive Franchise Industry Report
Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all of the provisions and fees related to investing in that specific franchise.
While business and managerial knowledge are important, they aren’t the only attributes franchisors look for when selecting franchisees. As CARSTAR CEO Byers divulged, franchisees in their system aren’t just “typically passionate about the automotive industry and passionate about being a business owner. They are entrepreneurial, hands-on managers. They are community leaders, and involved in giving back to the communities they serve. They put their customers first, and stake their name and reputation on delivering high-quality auto body repairs and high customer satisfaction to their customers.”
The qualifications needed for each franchise system vary by franchisor and the prospective franchisee’s personal circumstances. Prospective franchisees considering the auto franchise industry need to assess their qualifications to see if they match up with those required in this field. Prospective franchisees also need to determine which franchise most closely resembles their own personal business philosophy. One note from current franchisees is to stay open -minded during the process. A franchise can be the right one for you even when at first it didn’t seem to be.
There are several factors that should be taken into account before investing in a franchise regardless of the industry. Below is a look at a few of these items to take into account while researching and evaluating franchise systems.
|Business Format vs. Product Franchising
The vast majority of franchises fall under the category of business format franchising where the franchisor licenses their brand to a franchisee for use, along with a predetermined way of conducting business, and the franchisee can expect a certain level (typically extensive) of business support from the franchisor. But in the automotive franchise industry, there are a noticeable amount of product (also referred to as distribution) franchises. In a product franchise, the franchisor grants the franchisee permission to sell/distribute a product using their logo, trademark, and trade name with, in many cases, some, but not as much structured operational support after the initial training is completed. Another main difference between product franchising and business format franchising is in the area of fee structure. One example of a product franchise is Line-X where a franchisee fee is charged, but there is no royalty fee in lieu of the franchisor’s (or designated vendor’s) sale of proprietary products to the franchisee for use. Another example is Matco Tools where franchisees don’t pay a franchisee fee or royalties, but are subject to initial and ongoing minimum inventory purchases.
The auto franchise industry is one of the most competitive industries in business, particularly in the United States. When driving down a short stretch of road, there’s the potential to see several competitive businesses, franchises and non-franchises, in close proximity to one another. Because of this high level of competition, being granted an exclusive territory like in several other franchise industries is a rarity, but does occur with certain franchise systems.
In many cases, the franchise agreement will grant a franchisee the right to operate their franchised business at a certain location, with no territorial right in terms of exclusivity. Of course there are exceptions like Line-X that do grant exclusive territories in regards to brands owned or controlled by the franchisor. In instances where an exclusive, or protected, territory is granted, the size of a franchisee’s territory will be dependent on one of a combination of the following factors: number of households in the area, natural and manmade boundaries, number of potential customers in the area, etc.
However, in the case of product franchises, or distributorships, since they most often are mobile businesses there will be a defined territory. In these cases, the territory can be defined by a number of factors that commonly include one or a combination of the following: geographic area, prior distributor routes, potential new distributor routes, etc.
The range of investment between franchises can be large due to variations in their business systems and what it requires to execute them. The following charts demonstrate this by comparing initial costs associated with opening one of the 20 example franchises presented. Initial costs associated with opening a franchise include many items such as the franchise fee, training expenses (such as travel and living expenses, not the actual training courses), real estate or vehicle purchases (if applicable), additional funds needed for a specified number of months, and more.
Estimated Initial Investment Ranges for Selected Franchises
Some estimates may not include costs for real estate leases or purchases, vehicle purchases, and/or related items because of their variability from market to market as well as general market conditions.
A sometimes overlooked financial requirement involved in franchise investment is the minimum amount of cash, or liquidity, required of a prospective franchisee by the franchisor. Liquidity is the amount of cash someone’s has immediate access to or assets that can be converted to cash right away such as certificates of deposit or stocks. The amount of liquidity desired by franchisors acts in a similar manner as a safety net in the opening days of the franchise by making as sure as they can that the franchisee has cash on hand to pay the bills until revenue starts coming in steadily. And as the graph below shows, the amount can vary greatly from franchise to franchise.
Desired Liquidity Amount for Selected Franchises
The average length of the franchise agreement for the 20 highlighted franchises is approximately 13.5 years, and regardless of length there will be costs that must be paid regularly during that time period of the franchise agreement. These costs include items such as royalty fees and marketing costs, and are predominately assessed for the franchisee to continue reaping the benefits that come with being a part of the franchisor’s business system. Although fees like these are common, the amount and way they are assessed aren’t universal. The following chart illustrates this by showcasing the royalty fee for selected franchises.
|All Tune and Lube||7%|
|Alloy Wheel Repair Specialists (AWRS)||5%|
|Auto Appraisal Network, Inc.||$95 per appraisal|
|Cactus Car Wash||5.5%|
|CARSTAR||The greater of $850 or 1.5% of Gross Sales (maximum $3,500)|
|Color Glo||4% of gross sales or $150 per month, whichever is greater, $200 for the second full year or $300 a month following a full year of business|
|Honest 1 Auto Care||6%|
|Mac Tools||$900 per year|
|Merlin 200,000 Mile Shop||6.9%|
|Novus Auto Glass||8%|
Royalty Structure for Selected Franchises
Usually the royalty fee is straightforward being collected in the form of either a certain percentage of revenue or a predetermined flat fee. But there are certain instances where how the royalty is assessed by a franchisor can be more complex. One of example of this is in the case of Meineke.
Meineke franchisees are required to pay an annual minimum royalty fee of $20,800 or a calculated royalty based on percentages of gross revenue of their authorized products and services as illustrated below:
|Category of Services||Percentage of Category Revenue Used Towards Total Royalty|
|Exhaust Systems, Wiper Blades||7%|
|Replacement of Engines and Transmissions, Engine Diagnostics, Engine Seals and Gaskets, Transmission Mounts, Scheduled Maintenance||5.5%|
|Oil Changes, Brakes, CV Boots and Shafts, Universal Joints, Belts, Cooling System, Shocks and Struts, Tune up and Fuel Injection Cleaning, A/C, Headlamps, Lift Supports, Trailer Hitches, Bearing and Seals, Front End Parts, Power Steering, Rack and Pinion, Other Merchandise||5%|
|Wheel Alignments, Wheel Balancing, Tire Rotation, Transmission Fluid Changes, Batteries||4%|
|Tires, State Inspections, Towing Services, Emissions Inspections||3%|
Example of a Specialized Revenue Structure (Courtesy: Meineke 2010 FDD)
There are additional ongoing fees that are assessed regularly such as technology fees to cover items like server hosting, internet access, etc. Select fees are assessed on an “as needed” basis such as audit fees or costs for additional training. All prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs involved before investing in that franchise.
Being a part of the automotive franchise industry is an attractive option for future franchisees for several reasons, including the chance to be a part of “a strong network that can deliver high-quality, reliable results through a multi-store operation network,” according to Byers. He adds that the jobs done by workers in this field “will almost always be handled locally where the driver lives. [A great deal of the jobs] require skilled labor – jobs that cannot be exported.”