So You Think You Want to Become a Franchisee?

The International Franchise Systems corporate team gathers annually with Rent-A-Wreck and Priceless franchisees for their convention in Las Vegas.
The International Franchise Systems corporate team gathers annually with Rent-A-Wreck and Priceless franchisees for their convention in Las Vegas.

“I washed cars for Hertz in high school,” says Matthew Allen, a Rent-A-Wreck franchisee in Richmond, Va. “From that experience I had always felt I wanted to have a rental car operation.”

In the mid-‘90s, after realizing he couldn’t afford a franchise with the major car rental brands, Allen detoured into owning several cellular phone store franchises. “I rode that until it became not profitable,” he says. “Then I said, ‘I need to reinvent myself.’ I went back looking for a car rental franchise and then came upon Rent-A-Wreck.”

Allen started with seven cars in 2012 and is up to 86 today. His business is a local market mix of weekend renters, breakdown replacements, and long-term renters in need of a set of wheels.

Regarding the decision to franchise or operate his own car rental business, “I never thought about going independent,” he says. “I felt I needed the support and expertise of people who had done it before.”

Allen’s decision is one continually faced by those looking to purchase their own company across a range of business types: Will you succeed by hanging your own shingle, or should you hitch your wagon to an established brand?

We’ll hear from car rental franchisees regarding their decision-making process, their advice for new operators, and the benefits of joining a system. We’ll also share a few reasons why franchising may not suit your path.

Band of Brothers

The franchisees interviewed for this article — each and every one — credit their “band of brothers and sisters” as the primary benefit of franchising.

“The major reason for being a franchisee, besides the brand recognition and reservations flow, which are important, is having someone to talk to and compare your operation to,” says consultant Jim Tennant, a former Thrifty and Payless franchisee.

Casey Skelton’s career took a left turn into car rental when, as an insurance agent doing business with a U-Save franchisee in his hometown of Starkville, Miss., the owner offered to sell the location to him.

“Early on, one of the best benefits was being able to call other franchisees,” says Skelton, “and they were way more willing to help you than if you were just an independent.”

Tom Mellett’s first exposure to car rental as a profession was working as a service manager at a new car dealership that had a car rental franchise on-site. “The people were lined up at the rental desk all day long,” he says.

Mellett signed on with U-Save in Glenside, Pa., 28 years ago. “The best part going in was the camaraderie,” says Mellett, remembering the warm reception he and his wife received at their first U-Save convention.

A Parent’s Help

In addition to the knowledge garnered from fellow franchisees, newcomers also rely on help from the brand’s corporate parent to get up and running. Understanding fleet — how to buy, what to buy, how long to hold, when to sell, and how to sell — is one of the main ingredients in the secret sauce.

Tom Mellet's U-Save family in Glenside, Pa., consists of actual family members and long-time employees. From left to right: John Hartman (21-year employee), Stephen Mellet (son), Carol Morwald (23 years), Tom Mellett, Kathy Mellett (wife), James Mellett (son), and Rick Eisele (17 years).
Tom Mellet's U-Save family in Glenside, Pa., consists of actual family members and long-time employees. From left to right: John Hartman (21-year employee), Stephen Mellet (son), Carol Morwald (23 years), Tom Mellett, Kathy Mellett (wife), James Mellett (son), and Rick Eisele (17 years).

“I didn’t know how cars depreciated,” says Allen, who was counseled by Rent-A-Wreck on how to depreciate fleet and remarket his units at the right mileage. “Had I known there was a big risk of having these cars wind up in a [financial] hole, it probably would have scared me away from the business.”

His fleet consists entirely of one- to two-year-old used units, and he’s able to use Rent-A-Wreck’s fleet program to purchase cars at closed factory sales, which is virtually impossible as an independent with a small fleet.

Rent-A-Wreck also has a leasing program, which is a good way for new operators without an established credit history in rental to fleet up, Allen says.

Skelton says his first good decision was to hire a seasoned car rental manager, and he also initially took advantage of U-Save’s help in fleet buying and selling. Today, Skelton says he appreciates the freedom U-Save corporate gives him to buy the type of cars that fit his market. As a rural operator, “I work with some niches that may not work in a major metropolitan market or an airport,” he says.

Mellett benefits from U-Save’s buying power with manufacturers by purchasing in groups with fellow franchisees. He has expanded his fleet to 150 units, with a focus on van rentals, as well as dealer and insurance replacement.

Business Basics

Other services offered by franchisors could include legal services, profit groups, fleet insurance, and rate management. For newbies, navigating these waters alone is no easy task.

For instance, “I looked into creating rental contracts myself, but in terms of the legalities, you need a lawyer,” says Nick Mariano, a Utica, N.Y.-based Priceless franchisee who used the legal services provided by his franchisor.

“I couldn’t afford to hire a lawyer to show me what I could and couldn’t do and what my contract should look like.”

Skelton took advantage of U-Save’s rate management assistance. “Looking at rates can feel like hieroglyphics if you haven’t been doing it for several years,” he says.

Insurance markets were extremely tight when he opened his first location, Skelton says, and U-Save had one of the few physical damage and liability programs available. “You tend to forget those benefits that you used early on to get you up and running,” he says.

Many franchisees join profit groups, which consist of regularly scheduled meetings in which franchisees share and compare business data, expense ratios, profit and loss accounting, and other best practices.

A Flow of Customers

An essential benefit of becoming a car rental franchise is an immediate flow of customers. This comes in a variety of ways, including reservations from the corporate website, online travel agencies (OTAs), email marketing tools, and local search optimization.

The uninitiated may think that joining a franchise means turning on the reservations faucet and letting customers queue up at the counter. It’s not quite that simple.

Matthew Allen, a Rent-A-Wreck franchisee in Richmond, Va., started with seven cars in 2012 and is up to 86 today serving a local market mix of weekenders, breakdown replacements, and long-term renters in need of a set of wheels.
Matthew Allen, a Rent-A-Wreck franchisee in Richmond, Va., started with seven cars in 2012 and is up to 86 today serving a local market mix of weekenders, breakdown replacements, and long-term renters in need of a set of wheels.

In a franchise system, all reservations that come through the corporate website have a reservations fee, which can be a flat fee or a percentage of the booking total. There is a separate, additional fee for reservations generated through consumer-facing OTA matrixes such as Expedia, carrentals.com, Priceline, Kayak, and rentalcars.com. These reservations come with fees that vary from 10% to 25% of the booking.

While compounded fees leave less room for profit, these reservations are the lifeblood of operations serving airports. The counterbalance is volume, volume, volume.

The local-market model is different. Those operators still rely on traditional channels for business such as phone, email, and walk-up reservations through local direct marketing. Yet over the past few years, neighborhood-focused franchisors such as U-Save and Rent-A-Wreck have also established connectivity to the OTAs.

For local-market franchisees, OTA reservations represent a faucet of incremental business that can be turned on as needed, and, while the fees are high, many see those reservations as an opportunity to capture a long-term customer off the online matrix.

Mariano mentions the “billboard effect,” the percentage of renters who see the brand and city listed on the Expedia or Kayak matrix, but then book directly on the corporate website, resulting in a much cheaper fee to the operator.

“My challenge is to get them to call me the next time they rent,” says Allen, who goes the extra mile to encourage customer loyalty. “They like the way they’re treated; the cars are clean and run well. Then they don’t need to shop around. The idea is that we’ll wow them with our rate and service, and they’ll book directly either on our website or over the phone the next time they need a vehicle.”

After U-Save upgraded its website and reservations system technology, Mellett’s operation realized an increase in internet reservations, yet they only account for 5% of his revenue.

For Skelton, web traffic is a greater part of the pie. “Four or five years ago, I was getting two or three internet reservations a month,” Skelton says. “Now we start our day by looking at our manifest that came in online. We went from a handful a month to several every day.”

Still, more than half of Skelton’s reservations come direct to him, and a lot of business comes from direct marketing.

Mellett is the beneficiary of email marketing blasts generated by corporate every other week. He also takes advantage of U-Save’s online ad creation program, where users can plug information into various template options and sizes, download the file, and send to the advertising medium.

While all web-based reservations come with a price tag, for those going the independent route, the flip side is starting a website from scratch — marketing your rentals through community outreach, organic search, and paid ads — and then understanding and managing pricing. Building this type of car rental business is certainly possible, but takes much more resources and potentially years to develop.

Of course, any car rental company — corporate, franchisee, or independent — that takes reservations from an OTA is subjected to its fees. The reality for independent car rental companies is that, with few exceptions, they do not have the ability to connect to OTAs.

Real-World Challenges

At the onset, it’s easy to overlook some of the finer points that make up a franchise business. Issues such as branding, handling of complaints, no-show fees, and competition with corporate stores may start as text in a franchise handbook but soon become real-world challenges.

“After becoming a franchise, I was surprised by the branding requirements,” says Sharon Faulkner, executive director of the American Car Rental Association (ACRA) and an operator in the corporate, independent, and franchisee arenas.

Faulkner references exacting requirements such as outside signage (in one instance the required size violated town rules), wall colors, counter dimensions, shuttle bus requirements, and uniforms, on down to the key tags. And once those requirements are satisfied, they can change — such as a painted pole that needed to be repainted to the original color three months later, Faulkner says.

Others caution about the need to keep accurate records. That’s common sense in any business, but in franchising, it mitigates the potential for disputes with the franchisor, such as taking coupons from customers that must be submitted to corporate for reimbursement for specific dollar amounts. “When your accounting doesn’t match their accounting, you need to be on point to find out why the numbers don’t match,” says Kris Tucci, a Dollar and Thrifty operator serving Syracuse, N.Y.

Tucci also recommends having a clear understanding of the process for handling complaints, and the franchisee’s ability to resolve them. A customer who calls the corporate 800 number to complain about a transaction at a franchised location may get a different resolution than if it could have been addressed locally, Tucci says.

Budget San Diego, a franchise location of Avis Budget Group, is part of the San Diego International Airport's consolidated rental center opened in January 2016.
Budget San Diego, a franchise location of Avis Budget Group, is part of the San Diego International Airport's consolidated rental center opened in January 2016.

Brad Meyer, a former Dollar, Thrifty, and Hertz licensee in Arkansas, Alabama, Indiana, and Michigan, counsels the need to master pricing through rate management. “Small operators have to carve out time, either themselves or someone in the organization, to dedicate to rate management on a fairly constant basis,” he says.

And then there are no-show fees, a fact of life for reservations taken through corporate or OTA channels. Paying a fee for a customer that doesn’t show up is a hard pill to swallow for franchisees, but they can be mitigated through better utilization and rate management, Meyer says.

Franchise systems with a mix of corporate and franchisee locations — especially in the same market — have encountered competitive issues within the brand. Whereas corporate may have an incentive to lower prices to drive volume or market share, this could conflict with franchisees’ profit expectations. This is not a consideration with neighborhood-focused brands such as Rent-A-Wreck and U-Save, as they manage only a few corporate locations.

Like a Marriage

Franchising is a form of marriage. Marriages are never perfect, but the ones that prosper have mutual understanding, open lines of communication, trust, and respect.

“They [potential franchisees] have to understand that the franchise system is a two-way street,” says Bob Klyce, an Avis, Budget, and Payless franchisee serving Birmingham, Ala. “You have to support your franchisor. If you think you’re an independent businessman by being a franchisee, you’re not. You are part of a system, and you have to accept that to be successful.”

“When you get involved in a franchise, make sure that your visions are similar,” says Sean Cox, a U-Save franchisee serving Colorado Springs, Colo. “You have to understand your own business well enough to know if you’ll be competitive in their marketplace.”

“Do your due diligence. See what programs they offer; speak to other franchisees,” says Marty Mehalko, a long-time Rent-A-Wreck franchisee serving northern New Jersey. “They [the corporate parent] want you to succeed. If the franchisees are successful, that sells more franchises.”

“A good franchise system can help an owner-operator succeed,” says Steve Landrum, a Mississippi-based U-Save franchisee who made the switch from a family-owned independent car rental company. “Then again, a good franchise system can help an absent franchise owner fail slower.”

Landrum references the franchisees who are absentee owners, the ones who may have been successful in another business and thought they could get by without learning the rental industry. “They hire a manager and are never there, and in two years they’re out of business,” he says.

Certainly, there are a few good reasons to stay single, and also forgo franchising:

“People who are very independent and don’t take direction very well, that kind of person probably shouldn’t be a franchisee,” says Tennant. “As a franchisee, you need to conform to their (the franchisor’s) requirements.”

“If you’re someone who thinks outside the box, wants to reinvent the wheel, and disturb the current marketplace, franchising is not for you,” says Rick Eddy, a Budget franchisee in San Diego. “But if you want something that comes with name recognition built in, reservations, computer support, and a community of like-minded entrepreneurs, then go for it.”

When couples exchange vows, they aren’t thinking about the possibility of divorce, though it’s an important consideration in business partnerships. What are the parameters of a breakup?

Gil Cygler was a Dollar franchisee in New York City before hanging his own shingle as AllCar Rent-a-Car in 2003. (Cygler sold to Enterprise in 2015.) Of his separation from Dollar, “It was an amicable divorce,” he says.

Cygler says potential franchisees need to understand separation terms upfront. For those continuing in car rental after separating, look for answers on issues such as who owns the location’s phone number, how corporate accounts will be treated, and should the new company indemnify the previous brand, among other things.

All told, each operator in this story made the franchise relationship work for them.

Casey Skelton sums up a universal refrain: “The support of the system and the relationships you build with fellow franchisees is worth the royalties to me.”

Comments

  1. Arthur Stephen [ September 10, 2016 @ 10:42AM ]

    Very informative and just in time. Any advise on auto rental business in the Caribbean?

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