I’m Patrick Findaro; co-founder of Vetted Biz and managing partner at Visa Franchise. In this article, I will walk you through an industry in which many clients have invested through the years and that is; Business Services and business for sale.
As an industry, business services is varied; insurance, payroll, book-keeping, and accounting… While there are many other kinds of business services, the ones that we have just mentioned are the primary ones to invest in; whether it’s a franchise or an existing business for sale in this particular industry.
Our analysts in Miami, Florida explored 1.3 million SBA loans of which around 100k were to business service companies. Our analysts’ work covered loans that were given over the last 30 years as part of the Small Business Administration program. We’ve been able to compile a lot of data and we used a few other third-party sources for some of the information you’ll find in this article. Our team also used over 150 franchise disclosure documents in 2020 and 2019 for different services in the business services industry.
The business services industry was estimated to be worth around $10 billion in 2019. There are 28 million small businesses throughout the United States, of course, with various sizes and number of personnel. In Florida, we have 2 million small businesses. The numbers of small businesses is high but the number of opportunities that come with them is even higher.
There are many small businesses that you can serve whether by presenting insurance services or accounting or payroll. These services are highly needed by small businesses and in many cases highly required by federal state or local law. In terms of the investment amount, it’s generally going to be on the low end especially when you compare to food and beverage or coffee businesses. When you compare to coffee shops; they might cost you anywhere from $200k up to over a million dollars.
The average business for sale or franchise is going to be around $100k. Some of the pros and cons with business services is that it might take more time for you to start developing that book of clients when you compare it to a restaurant that opens up or a barbershop that opens up. The consumers might be willing to spend around $30 on a haircut or $12 on a meal. However, convincing a small business owner to switch insurance or payroll providers or switch their book-keeping can take some time.
There are ways that you can pass through this whether you’re starting an existing business or going the franchise route. One way would be to buy as an asset purchase or buy outright the company that is already in that space if they’re retiring or moving.
By examining the data that we have collected, I found that a leading franchise with 91 units that was founded 16 years ago in the business services area had a first-year franchisee of $85k in sales. The same example grew to reach $174$ in sales in its second year, $336k in the third year, $520k in its fourth year, and $939k in the fifth year.
It takes time to build a base of clients and the gross profit averages range from 44% to 47%. This franchise has an absolutely pretty high gross profit and when it comes to net profit, it totally depends on how the business is run.
It’s very important to understand gross profit and for this, there are ways that you can leapfrog and get to 300k in profits faster. That would be by going out and buying an existing business; and existing book-keeping business, an existing insurance practice… If you choose to go the franchising route, there are ways to roll that existing business into a franchise system. By doing that, you can have the marketing, lead generation and that ongoing support. In this context, and in case you don’t want to be doing the book-keeping, some franchisors will take care of many of these aspects allowing you to dedicated all your focus to sales, marketing, and client relationships. In this case, the franchisor is the one selecting insurance coverage, providing the payroll work, or book-keeping.
That would be an advantage, it can be plain to your strong suit; if you’re more the type of businessman that’s more focused and better at managing people, sales, and marketing then it would be best to take the franchise route. However, if you come from the accounting world and you were working for a large corporation and you know ins and outs or you have close people that can help you start your book of business then the franchising route would probably not be your best fit.
When it comes to the numbers, over the past 10 years, our analysts have examined 560k loans issued under the Small Business Administration program (SBA). The franchise success rate was 11 to 1 for business services; for every 11 SBA loans paid back in full for someone that was operating in the business services industry, one was charged off for franchise business services.
As for non-franchise, the numbers showed a higher success rate; for every 12 loans that were paid in full, there was one that defaulted and presumably, the business failed. Those averages are both stronger than the overall industry averages for both franchise businesses and non-franchise businesses over the last 10 years.
The records for the last 30 years are more accurate for franchising; given the unique franchise identifier code that we can use and the name that is used in the SBA loan record. For business services franchise, the success rate is 5 to 1; this means that for every 5 franchisees that paid their loan in full, 1 defaulted. Personally, I don’t like those odds; if I’m going to start a franchise, I would be more comfortable with 10 to 1 or 20 to 1. That’s why it’s important to understand the industry and its fundamentals and then take a deeper look at the actual franchise and talk to franchisees, look at the FTD, take a look at the Vetted Biz profile. You can see how many closures there has been over the last 3 years.
The 5 to 1 success rate is not necessarily a concern but it shows how much it’s important to be highly mindful on the individual businesses that you’re evaluating to see to see their success rate. However, 5 to 1 is better than the overall franchise success ratio over the 100.000 loans that have been issued under the SBA loans program to franchises over the last 30 years.
One notable thing for franchises, insurance, and payroll services etc. is that the average franchise royalty is quite higher compared to food and beverage for example; it’s right around 10%. Part of that is because the franchisor might be providing the service and supporting in terms of the product where you’re more focused on the client service, sales etc. Then, the marketing fee is pretty standard across different franchises at 2%.
The Business Services section of our website can be found by selecting the “Industries” tab on our website, choosing “More” then selecting “Business Services”.
At the beginning of the page, you will find some statistics and as you scroll down, you will find a few of the different franchise opportunities that we’re working with.
You can also find and existing business for sale just like this one which also happens to be a franchise:
Let’s check one of those and see what details and information a franchise page on our website has to offer.
This is a franchise called “Estrella Insurance” and I did a live stream with their head of franchise development a couple of weeks ago. You can find the live stream by clicking this link.
Our franchise page starts with the review section which presents a description and some key numbers related to the franchise. Then, we there is the “Metrics” tab and the “SBA Loan Data”.
The “SBA Loan Data” shows details such as loan eligibility for SBA financing and the additional requirements that you have to go through to get that SBA financing.
The page offers general and specific details from when the franchise was founded to the value of its initial investment. There are also key figures that show the royalty percentage of revenue; the average, as I mentioned, the average for business services franchises and it’s 10.4% in this case. You can also find a video section.
In this section, we will check the page of a franchise that is for sale:
You can find a very detailed layout of the business and some numbers that demonstrate how it has been performing, the number of employees, and the reason why the owner wants to sell.
This could be an option if you’re looking to enter a business services space and you want to start with an already existing book of clients with cash coming in from day one. It can be a great option to buy an existing franchise business.
If you reached the end of this article, I want to thank you for your time and attention. Check our website vettedbiz.com and I hope that you will follow the coming articles.
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