How does the franchisor make their income?
This is a question that we wish more people investigating purchasing any franchise would seriously consider.
In a broad sense, feedback from other franchisors aligns with our experience - that franchisors rarely make money from granting new franchises. This is because the initial fees often don't meet the additional costs involved in selecting, training, store set-up, additional support during the initial months of operation etc.
Consistent with most service-based franchise systems in Australia, the Party Plus franchisor earns income predominantly from ongoing royalties from franchisees (based upon turnover) and commissions from strategic service providers (based upon bookings).
In the 5 years to June 2009, 4% of total income was from sales of goods or services to franchisees (printing, artwork. uniforms), 10% from initial franchisee fees and training, and 86% from ongoing royalties/commissions.
2008/09 figures are 3%, 0% and 97%.
Apart from strategic service providers like marquees, jukeboxes and cocktail machine suppliers, no income is received in the form of fee or "kick-back" from any supplier.
Those figures show it's therefore strongly in the franchisor's interest to focus heavily upon existing franchisees ... as royalties are the ongoing and reliable income.
Our business model for franchisees is therefore based upon a simple question - how can we get the best benefit for the franchisee to drive their profitability (and as a result, turnover)?
What is the ideal size for a Party Plus store?
In an ideal world, a Party Plus store is about 300-350sqm, however we have some stores that are smaller than this.
Small vs Large - what's the difference?
A smaller store usually has lower rent than a larger store.
A smaller store has a potential growth and expansion problem as the business activity and turnover grows.
A larger store can have the "my goodness, this place is like a barn" factor during the early stage of business development. However is has ample capacity to be filled with more stock. That creates a better buying experience for your customers, and therefore greater turnover and potential for profits.
Why not start small then relocate?
This is absolutely possible, and at critical points of growth, smaller stores would certainly consider this.
However, the true cost of relocation needs to be considered well in advance. In many cases, the full cost of relocation in 5 years may still be more costly than paying higher rent from day one of operation. For example, if you need to relocate after 5 years, you have the following costs:
- stripping the existing store back to the way it was originally leased to you
- completely fitting out a new store
- removal of store contents
- relocation of services (eg phones, internet)
- lost sales during the changeover/closed period
- losing customers because they can't find you after you've moved
None of that is insurmountable - but usually that total cost will be far more than having a larger premises from day one.
A key factor with all aspects of owning your business is projected cash flow and ensuring you have sufficient working capital to see you through the early stages of development.
Location and premises options are always talked through in full with potential franchisees long before we get to the stage of signing leases.
What Are The Advantages Of Being A Party Plus Franchisee?
Party Plus are the first franchised party stores in Australia, with enormous group buying power and the strength of group advertising. This gives Party Plus franchisees a large competitive edge over stand-alone business, as well as offering a secure investment, good profits and an enjoyable workplace.
Why Should I Consider A Party Plus Franchise?
Party Plus franchise stores offer an exciting opportunity to operate your own business in the growing leisure and service sector. Western Australia is now six stores strong and dominates the market in WA. Master Franchisees are sought for eastern states capital cities.
What Does A Party Plus Store Do?
Party Plus stores hire all party equipment including chairs, tables, glassware, crockery, catering equipment, tarps, BBQ's, CD & Digital Jukeboxes, marquees and much more.
Party Plus stores also retail a massive range of balloons, streamers, table-covers, napkins, scatters, plastic plates, cups, cutlery, party novelties & more ... Party Plus stores are the true "one stop shop" for all party needs, making them the leader in the party industry.
Can franchisees use their own suppliers - Are they required to purchase from the franchisor?
Yes. From a purchasing of goods and service viewpoint, in most cases we have worked out it's best for a franchisee to deal directly with a supplier. This is usually under terms that we have negotiated for the benefit of all franchisees that are equal or better to what they could obtain through other buying groups or by direct negotiation. Terms may mean price and/or account payment arrangements
Are franchisees required to purchase from the franchisor?
Sometimes; in most cases the franchisor does not supply to franchisees directly.
From July 2009 the main goods and services purchased directly from the franchisor are restricted to items that contain our trademarks and logos etc. These include changes to artwork for printed materials, some printed materials (eg price lists) where we can obtain significant cost savings through bulk purchase, other items where minimum purchase requirements mean we need to purchase in bulk (eg printed bags). Over the past 5 years such purchases have represented less than 4% of the franchisor's total income and this is decreasing each year as we outsource more.
Are franchisees required to purchase from other suppliers?
No. The franchisee is not required to purchase from specific suppliers if they can obtain the same items of the same standard or specifications from other suppliers.
For retail stock and most hire equipment items, Party Plus franchisees purchase from suppliers that are completely independent to the franchisor. Like most franchise systems, we have specified "core items" that all stores must hold. These are specified by brand, size, specifications etc. We have suppliers in place that offer attractive supply terms and conditions as well as continuity of supply of these items. Most stores then add to this range according to the demands of their customers in the local area.
Why isn't the franchisor more directly involved in the supply of goods and services?
Answer #1 - to avoid potential for conflict of interest and perceptions of "double-dipping", and to ensure transparency of pricing.
Answer #2 - to avoid operating a second business unit (wholesale supply) in addition to the franchise business. That would divert resources and attention from the primary franchise business activity.
We've seen both of these models operate in other franchise systems. Some have been successful. Many have either failed or caused significant problems and disputes.
For Party Plus, we prefer to be the franchise experts and let others be the wholesale experts.
Are larger equipment items owned by the franchisee?
Based upon driving franchisee profits, our broad rule of thumb is that it's often better to control large assets than to own them outright. That can mean more working capital is available to grow the business.
For most franchisees, larger and specialty equipment is provided by strategic service providers. The provider is negotiated and approved by the franchisor, and the local store acts as a booking agent and receives a commission.
These providers are external businesses that usually specialise in a single line of equipment - eg we may approve a marquee specialist provider, as opposed to a marquee provider that also does lighting, sound equipment, catering and dance floors. Our strategic service providers are required to not compete with Party Plus, have appropriate insurances and indemnities in place to cover our franchisees and their customers, follow our proven systems and procedures, and have proven their reliability over a number of years.
We actively work with franchisees on an ongoing basis to see how they can best meet their profitability goals. We jointly examine availability of alternate supply arrangements using commissions etc for larger hire equipment items such as marquees, jukeboxes, cocktail machines, and we compare to see whether purchase of equipment is feasible and cost effective. For example, while a particular item like a jukebox may show a high usage and turnover, the costs involved in financing, additional wages for delivery, set-up, late night call out fees, maintenance, music royalties, insurance, rapid depreciation and obsolescence in an increasing MP3 marketplace etc may limit the profit upside. (note: this is a hypothetical example only)
Is Party Plus in states other than WA?
At this time we are establishing the Party Plus franchise within Western Australia and currently have 6 showroom locations.
While there are general plans to move to other states we do not have a specific timeframe - but we are always open to options and possibilities.
For new markets, and even in Perth metro area, something to think about is the potential purchase and re-branding of an existing existing party shop should it meet our requirements. While that is likely to be a more costly route initially, it also means an immediate and larger cash flow from presumably an established customer base.
In addition, there is the possibility of Master Franchise opportunities in other states.
What's the average turnover & profitability of a Party Plus store?
Every bona fide franchisor in Australia gladly abides by the Franchising Code of Conduct - a lengthy document administered by the ACCC that protects the rights of you, our franchisees and the franchisor.
The short answer is that we are prohibited from answering questions on turnover and profitability directly until we have followed various requirements under the Franchising Code of Conduct.
We recommend you get very familiar with the terms "turnover" and "profit" and discuss them at length with your professional advisors. (Indeed, also get clear on "cashflow".)
The following represents the franchisor's experience and position regarding turnover and profit.
Our first response to anyone who asks about turnover is always the same - to the owner of any business (whether franchise or not), turnover (by which we mean "sales") is merely a starting point number that really has no importance in its own right. What's really important to you, the business owner, is profit.
So why do people always ask about turnover?
It's difficult for most people to accurately assess the price to pay for a business. As a purchaser, you want to make sure you are not paying too much. And as a seller, you want to make sure you're getting a fair price.
Typically accountants and business brokers will try to find an easy way to establish the value (by which they mean "sales price") of a business. There could be a number of reasons for this including:
- to make it easier for their clients to understand a complex subject
- it may be a difficult or complex business to assess
- the cost of calculating a real value or price would be too expensive for a casual enquirer
because they don't have a rigorous, logical or sound model to use for calculation
The most common method used to determine the selling price of a business is:
- to take a known figure about a business (turnover)
- possibly apply an arbitrary number to determine profit (in the absence of more rigorous financial scrutiny)
- apply an arbitrary average figure for either that industry or for all businesses in Australia, bearing in mind that thos ebusiensses may have nothing in common (often called a "multiple"). (Note: for many retail businesses in "good times", the "generally accepted" multiple is usually 3-4, and in "poor times" it can be as low as 1)
- state a sales price (which they state is the "value" of the business).
That common method is clearly nonsense, is crude, and potentially over- or under-values the business to you or the vendor. But it's quick and easy and is used every day in Australia! It also completely ignores future potential of the business, risk/reward, and personal factors relevant to the purchaser.
A far more important question is about profit. In broad terms, profit is what you the business owner want to make to compensate you for your investment of money and time, and the added responsibility and risk of owning a business.
Of course profit is heavily determined by turnover (sales), as it is by Cost of Goods Sold (the cost of those sales), fixed costs (eg rent) and variable costs. But again, even that is misleading, as the stated profit of a business may not take into account your personal circumstances.
For example, consider 2 identical businesses with identical profit. One is purchased and paid for in cash, the other is purchased and paid 100% by loans. While profit before interest and taxes is identical ("EBIT"), profit after interest will be very different - and cashflow will be completely different again depending upon repayment of debt, distribution of profits, marginal tax rates etc.
For example, consider a business that is profitable but is 100% leveraged. That business may have to:
- pay debt from that profit
- pay tax from that profit, and
- repay debt principal ... irrespective of profit.
That may all result in negative cashflow, even though the business is highly profitable.
Comparing Turnover and Profits between stores
For the same reasons as above, comparisons and averages are not particularly meaningful. While we report to franchisees each month on store turnovers, this only provides a broad comparison. We know, for example, that once certain turnover levels have been reached, certain different or new circumstances will most likely occur in that store. For example, it would be likely that a certain staffing level would be required to service the number of customers once a certain turnover level is reached.
However we have stores that have lower profitability than other stores yet significantly higher turnover - perhaps because their rent is higher, or they choose not to work in the store as much and employ more staff, or their monthly interest bill is much higher and they locked in high interest rates … the list is endless.
As with most retail franchises in Australia, turnover is the basis of monthly royalty and combined marketing fund calculations to the Party Plus franchisor - it's a convenient way to share the load between differing stores having differing demographics, age of store, rents, staffing etc.
But to you the business owner, turnover doesn't tell you much that is meaningful. Even profit doesn't tell you a great deal until you apply your own personal circumstances (eg debt servicing, whether a store is run under management or by the owner etc).
With any business, the real test is “does the total financial and lifestyle package meet your expectations”?
Having said all of that, as you start to investigate Party Plus and we have spoken with you a couple of times, we fully disclose the range of financial performance experienced by our franchisees.
What are the ongoing costs?
As with most store-based franchises, Party Plus franchisees pay monthly royalties and fees based upon Turnover. These fees are:
- The monthly Continuing Franchise fee is 5% of monthly turnover
- The monthly Marketing Levy paid to Franchisee Marketing Fund is 3% of monthly turnover.
What is the continuing Franchise Fee – how is it different to the Franchise Fee?
Before we answer that, it’s important to recognise that all related parties to a franchise system deserve a good deal – customers, franchisees, suppliers, franchisor. Certainly franchisees and franchisor have gone into business to make a fair return on capital, time and “sweat equity”, and they expect a return either immediately or over time.
As with other a successful franchises, the Party Plus business system is based upon a proven model that has been trialled, tested, modified and constantly updated over a number of years. The franchisor has invested significant sums into that development and continues to expend sums to protect and expand the brand.
Like most franchisors, we know that if we ask new franchisees to pay in advance for the full development cost of the franchise, as well as the initial and ongoing training and support, updating of systems and procedures, compliance visits, conferences, franchise meetings, one to one meetings with support staff etc, no-one would be able to afford a franchise.
We therefore structure franchise fees as a part payment up-front (the Initial Franchise Fee) followed by a Continuing Franchise Fee for the duration of the franchise agreement (10 years).
What is the Marketing Levy used for?
This is used entirely for network-wide franchise promotion, marketing and advertising, and is administered by the franchisor. Typically this will be spent on network-wide telephone numbers (eg 1300 numbers), websites and online marketing, print media (eg Yellow Pages), and one-off promotions or campaigns.
Marketing Funds have a bad name within some franchise systems, and there can be a perception that the franchisor is not spending these funds for the benefit of franchisees. While Marketing Levies are technically “income”: to the franchisor, in Party Plus we recognised this potential for dispute many years ago. That’s why our Marketing Fund and processes are fully transparent - we operate separate bank accounts and bookkeeping records which may be inspected by franchisees at any time (with reasonable notice).
Are there any other fees?
On occasion the franchisor will see an opportunity to embark upon a specific marketing campaign that cannot be met by existing Marketing Funds. In such cases the franchisor will request franchisees join with them in funding such an opportunity.
Of interest, we did this with an initial television campaign in 2006. Franchisees showed such a good return on their additional investment that this has been followed up with subsequent campaigns, again funded by franchisees.
We strongly encourage Party Plus franchisees to be members of professional and local community associations, to engage in their own personal and business development, and to conduct local area marketing initiatives. However there are no other fees are payable to the franchisor.
What does a Party Plus franchise store cost?
You can be in your own new Party Plus store for $42,500 franchise fee plus fit-out, equipment, and stock making a total ingoing cost of approximately $150,000-$180,000* plus vehicle. Party Plus stores are completely fitted out for you and a full-time and intensive four week training period is included.
* While certain costs are known, the big variable with a Party Plus store is the fit-out of the premises. These costs are always examined and fully discussed with you before any commitments are made.