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Automotive Franchise Finance
If you love cars and dream of working in the automotive industry, an automotive franchise could be the right career move for you.
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While many people thought that cars would have been superseded by hovercrafts or teleportation by now, the reality has proven otherwise. More so than ever, motor vehicles are our primary means of transportation. The 2011 figures from Allianz show that there are 0.72 vehicles per person nationwide. Of this figure, passenger cars make up 77% of the total amount of vehicles.
With more and more vehicles on the road, demand for automotive services continues to rise. People are no longer content to allow their car dealership to service their vehicles and are keen to trust their vehicles with automotive franchises willing to compete on both price and service.
Automotive franchises have proven to be a steady business model in an industry with ever increasing demand. If you have ever dreamed of turning your passion for cars into a career, you may want to consider investing in an automotive franchise.
Costs and profitability
How much does an automotive franchise cost in Australia?
As with any type of franchise in Australia, the cost of an automotive franchise will vary significantly depending on its location and whether you are looking to start your own franchise in a new location or purchase an existing franchise as a going concern.
As a guide, an Autobarn franchise will cost between $250,000 and $500,000, while an Auto Masters franchise has a similar range of between $200,000 and $500,000. A Bridgestone Select franchise will cost approximately $350,000, while a Midas Australia franchise requires an initial investment of $120,000. If you are interested in a car detailing franchise, the initial investment will be around $66,000 for a mobile detailing franchise like Waves DETAIL PRO.
What other costs do I need to consider?
As with all franchise arrangements, an automotive franchise will incur ongoing royalties and other fees. Royalties are typically calculated as a percentage of ongoing business takings, with different types of franchises charging fees ranging from 2-15%.
An additional franchise expense that many people don't consider is the transfer fee should you decide to sell your franchise. In the case of Auto Masters, a $3,000 transfer fee applies should you wish to sell your franchise after the initial ten year contract is over. Keep in mind that the potential buyer will need to go through the same approval process as you did when you first purchased your automotive franchise.
Setting up your automotive franchise could also incur the following expenses:
- Working capital. You've paid your franchise fee and are ready to start your new automotive franchise, but you still need to have the cash on hand to fund your ongoing expenses. Lenders will be reluctant to include working capital in the amount of your loan, so you'll need to ensure you have the funds to support your business in the short term before it begins to turn a profit.
- Lease security deposit. An automotive franchise will undoubtedly involve the leasing of appropriate premises, and most commercial leases require a security deposit. This can be as much as three months' rent in advance as well as GST and other outgoings.
- GST. You don't need to factor in GST on the purchase price if you are purchasing an existing automotive franchise. However, GST is payable on franchise fees to start up a new automotive franchise, although this can be claimed back as a tax credit on your next business activity statement.
- Legal costs. Independent legal advice is a must before entering into any contract, and the purchase of an automotive franchise is no exception.
How profitable are franchises in the automotive services sector?
The car manufacturing industry in Australia may be going through some tough times, especially following the closure of big name manufacturers like Holden, but aftermarket retailers and other automotive franchises are going from strength to strength. After all, regardless of whether a car was manufactured in Australia or overseas, Australian car owners will always look locally for car repairs and ongoing servicing.
Similarly, the ongoing economic downturn that has persisted for the past decade has caused more people to turn to automotive franchises to repair and service their existing cars rather than purchasing new cars.
As with any type of franchise, the individual profit levels will depend to a small extent on the location of the franchise and to a large extent on the passion and motivation of the franchisee. As a guide, keep in mind that when you begin negotiations with an automotive franchisor, the franchisor is required to provide you with details of current franchisees. The best way to determine the profitability of your chosen automotive franchise is to get in contact with existing franchisees in a similar location and ask them about their experiences.
Finding finance
What options do I have to finance an automotive franchise?
Automotive franchises often appear on lenders' lists of approved franchises, making it much easier to obtain finance and even giving you access to lower interest rates and favourable loan terms. Autobarn, for example, has previously been on the approved franchise list of some of Australia's largest lenders.
Keep in mind that the approved franchises for different lenders will change over time, so it is a good idea to make enquiries as to which lenders, if any, are currently looking favourably upon automotive franchise finance applicants.
Finance your automotive franchise with one of the following options:
- Franchise loan. A franchise loan has a lot in common with a business loan, except when it comes to the term of the loan. While a standard business loan could potentially extend to a 30-year loan term, the term of a franchise loan is directly linked to the term of the franchise agreement. As such, it rarely extends further than ten years. A franchise loan will include enough money to purchase and set up the new franchise but will not cover working capital.
- Franchise loan where the franchise is on the lenders' approved list. You may only be able to borrow from 50-70% with a regular franchise loan, but if automotive franchises are on a lenders' approved list, the loan amount will be closer to 70%.
- Business loan. If you have residential property that you are willing to offer as security, you could borrow up to 100% of the amount of the business and secure a loan term from 25-30 years.
- Obtaining finance for a low-cost franchise. Low-cost franchises, such as a car detailing franchise, can be difficult to finance. Franchise loans and business loans tend to have minimum loan amounts between $100,000 and $250,000. Anything less than that and you may be better off comparing personal loans.
- Savings or equity. If you have enough equity in a residential property, consider refinancing your mortgage to gain access to that equity. Similarly, personal savings can go a long way towards financing your own franchise business.
- Personal finance. In some instances, a person's parents or other family member or friend might be willing to provide an informal personal loan. Ensure that all parties are clear on and agree to the terms of the loan, including interest rates and the loan repayment schedule.
- Franchisor finance agreement. Rather than requiring potential franchisees to obtain outside finance, some franchisors will offer their own finance schemes to help new franchisees get started in their own business.
What should I consider when comparing my financing options?
- Approved franchises. Some lenders will offer more favourable terms to specific types of franchises.
- Loan amount. What is the total amount that you need to borrow, taking into account all startup costs?
- Residential property. If you have residential property to offer as security, a business loan may be a better option than a franchise loan.
- Personal savings. Many people don't have much in the way of savings, but if you do, this could drastically reduce the amount that you need to borrow.
- Interest rates. What is the current interest rate, and how does an individual lender compare to the industry average?
- Loan term. If you only need a short term loan, a franchise loan could be the best option. Otherwise, a business loan will have a term between 25 and 30 years.
How do I get approved for finance?
When applying for finance for an automotive franchise, consider the process as being similar to applying for a job. Not only must you sell the idea of the franchise business, you must convince the lender that you have the knowledge, experience and qualifications necessary to successfully manage the business, turn a profit and ultimately meet your loan repayments.
Plan well in advance for the finance application process and ensure that you have detailed financial information for yourself and for the new franchise business in addition to the completed loan application form and a comprehensive business plan for the new business.
Summing Up
Australia may be in an ongoing financial downturn, but if there is one industry that has benefited from this, it is the automotive industry. In tough financial times, Australians are more likely to move away from having a car dealership regularly service their car and will look to nearby automotive franchises who are willing to compete on price and service. If you've ever dreamed of building a career around your love of all things automotive, consider investing in an automotive franchise.
Pictures: Shutterstock
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