Overview of the Auto Franchise Industry
“The auto repair industry is positioned for continued growth over the next few years. The industry is strong and projected to grow at a compound annual growth rate of 3.4% through 2018.”
~ Danny Rivera, president of Meineke
Auto franchises are a segment of the automotive aftermarket industry. The automotive aftermarket includes all products and services purchased after the first sale of an automobile. This includes replacement parts, accessories, lubricants, appearance products, tires, collision repairs, the tools and equipment necessary to perform the work, etc. Major divisions of the auto franchise industry include:
- Aftermarket Parts and Accessories
- Maintenance and Repair
- Cosmetic and Paint
- Car Washes and Detailing
- Rental Agents and Dealers
Yearly Revenue for Auto Franchises in Billions (*estimate)
There’s almost 32,000 auto franchise units among over 100 concepts currently operating in the United States. According to IHS Economics, these franchises are expected to make nearly $44 billion dollars in 2016, up from $41.92 billion in 2015.
While mechanical and technical ability is a feature of the industry, interpersonal skills are a very sought after attribute for franchisees. “We’re in the people business,” says Danny Rivera, president of Meineke. “The people we interact with are the most important part of what we do. Whether it’s the customers who come into centers or the team that helps run your shops, people are the key to success. The centers that excel in our business are the ones who maintain this mindset.”
More Older Cars (and Cars in General) In Use = Good News for Auto Franchises
“The [auto] service industry has grown dramatically over the past 20 years. The U.S. market is forecasting 17 million new vehicles to be sold in 2016 and the used vehicle market is expecting to see 31 million vehicles exchange hands during 2016.”
~ Michael Riley, senior vice president of Ziebart
There has never been more cars on America’s roads. In fact, according to IHS Automotive (a division of IHS Economics), U.S. vehicle owners bought 42% more cars in 2015 than they got rid of in 2014. Those sales set a record for car sales in the United States with 17.5 million cars and light trucks sold. In total, there are approximately 260 million registered cars in the U.S.
But despite the fact Americans are buying cars at a rate last seen before the Great Recession, there are also more older cars on roadways than ever before. According to an IHS Automotive survey, the average age of a car operating in the U.S. is 11.5 years – a record high. Furthermore, about 14 million vehicles on the road are at least 25 years old. It’s projected that the number of vehicles that are older than 12 years will rise by 15% over the next five years.
How do these seemingly contradictory facts exist together? For one, many people are keeping their older car while buying a new one, instead of trading it in or selling it off. Also, because cars are being built more durably, the used-car market has become more robust, keeping these older cars in rotation.
This is very good news for the auto franchise industry. Simply put, newer cars simply don’t need as much maintenance. In addition, drivers of newer cars tend to get their vehicles serviced at a dealership. The number of older cars in use, not just the total number of cars, represent the vast majority of the market for auto franchise franchisees.
In an interview with USA Today, Mark Seng, global aftermarket practice leader at IHS Automotive, noted the impact the volume of older vehicles in operation has on vehicle maintenance shops, like franchises. “As the vehicle gets older, [these shops] get nearly all of that repair business, as opposed to that dealer channel.”
Franchise vs. Independent Operation
The evolution of the auto maintenance industry has coincided with a dip in the number of independent auto shops openings when compared to auto franchise openings.
The equipment and skills now needed for auto maintenance and repair has necessitated specialized knowledge – and not just on the technical front. For instance, changes in insurance structures for repair payments have put pressure on independents. According to auto franchise executives, the economics of insurance-paid repairs can put significant margin pressure on an independent owner.
Being part of a franchise system can help keep auto shop owners keep abreast of developments in the industry through training and franchisee conferences. For example, Ziebart requires its franchisees to successfully complete an 8-week training program, which includes instruction on include technical skills, professional sales and marketing, business management, and in-store experience. In addition, franchises offer software programs that help franchisees ease administrative pressure.
Also, the competitiveness of the industry is a concern for independents. There are only 24 hours in a day, and some independents find themselves struggling to balance business building tasks such as marketing, while doing the auto-related work at hand. For some, the solution has been converting their independent auto shop to a franchise.
Sean Atta is one of those franchisees. Sean converted his shop to a Midas in 2015 to take advantage of the franchise’s customer retention program, website, and search engine marketing. “These are important but time-consuming and expensive tools that you don’t really have an opportunity to utilize as an independent operator. Now that the Midas support team is taking care of these key tasks for me, I can concentrate on taking care of my customers,” Sean commented.
Buying an Auto Franchise
“Align yourself with a team that not just promises success, but delivers with the tools, training and guidance to make that happen.”
~ Jason Ryan, president of Maaco
Please note: the provisions and fees illustrated below are some of the most common and not a complete listing. All financial figures come from the Franchise Disclosure Document (FDD) of each respective franchise dated 2016. Please review the FDD of a franchise for all of the provisions and fees related to investing in that particular franchise.
What is the normal process?
The first step is getting in touch with the franchise by filling out an online profile either with the franchisor or on a franchise portal. Then, a franchise representative will contact you to start the process and send you additional information for your review, including the Franchise Disclosure Document (FDD).
Many franchises will invite you, as a prospect, to a Discovery Day. The Discovery Day usually involves the prospect traveling to the franchise’s corporate headquarters and spending the day learning more about the franchise opportunity and visiting with franchise executives. Some franchises use a Discovery Day as an open house toward the beginning of the process, as kind of an information session. Other franchises use a Discovery Day like a formality after the prospect is certain the buying the franchise is the right option for them.
After approval, the time to open is typically dependent on how long it takes for the franchisee to acquire financing, find a site within the granted territory, secure a lease, complete build out of the facility, complete the franchise’s training program, and hire employees.
How long does it take?
Start-up time varies by individual candidate. The opening process for some auto franchises is as short as 4 to 6 months, where others can take between 12 and 18 months.
Initial investment costs for auto franchises vary widely because of how many areas they cover.
In the graph below, you can view the initial investment ranges for 10 sample auto franchises covering a wide range of services. The ranges are an average provided by the franchises in their respective FDDs.
Estimated Initial Investment Ranges for 10 Sample Auto Franchises
A nearly universal part of the initial cost in buying a franchise is the franchise fee.
The franchise fee is a payment to the franchisor that covers the right to use the franchisor’s system (including trademarks and proprietary operating system), as well as services the franchisor provides to new franchisees such as help finding a location, training materials, etc.
The franchise fee can vary for franchisees within a single system depending on whether the franchise offers discounts of veterans, or other demographic groups, or if the franchise fee is dependent on the size of the territory granted, among other factors.
Other common items included in the initial investment of a franchise include:
- Travel costs for attending training
- General office supplies and equipment
- Industry-specific equipment
- Leasehold improvements and construction, if real estate is needed
- Signage and décor (signage only, if a mobile franchise)
- Professional fees (e.g. legal, licensing, accounting, etc.)
- Grand opening advertising/marketing
- Initial insurance payments
Don’t forget to plan for the ongoing fees when considering a franchise purchase.
The first item you’ll research in regards to ongoing fees is the royalty. Royalty fees serve as payment for continued use of the franchisor’s system. The manner in which franchises assess royalties vary. Examples of how royalties are collected are provided below for each sample franchise.
7.5% of total gross sales
2% of each month’s Gross Sales
5% of Gross Revenues
Under the Non-Product Supply Franchise Agreement, 5% (or 4% of Gross Sales if you pay the Royalty on or before the due date)
Typically, none. In certain situations, the franchisor may charge 5% or 12%.
4% of gross receipts of the Center for the first
The franchisee is required to pay the greater of an annual minimum royalty in the amount of $20,800 or a calculated royalty based on the percentages of Gross Revenues on the identified categories of Authorized Products and Services
8% of Gross Revenues from glass repair products and services, from glass replacement products and services, and from any other products and services sold under the Novus name, or the "Minimum Monthly Royalty Fees," whichever is greater
8% on all products except those listed in Item 6 of the franchisor’s FDD, which are 5% of total weekly gross sales
Royalties for Selected Auto Franchises
(Click on the Franchise Name for More Details on the Franchise and Its Costs)
Other regularly collected ongoing fees for franchises include items such as advertising and proprietary software. These items are in addition to normal business operating costs like utilities and payroll (if applicable). There are also other fees are charged on an “as needed” basis such as audit fees, or for additional, non-mandatory training.
Prior to investing, prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs. Also, prospective franchisees should utilize the listing of franchisee contact info within the FDD to ask questions of those who have gone through the process already with that franchisor.
For more information on a number of business services franchises, please see our auto franchise profile page.