Situation: A plumbing company wants to broaden their market and is intrigued by building maintenance agreement models. They have looked at one franchise offering that would cost $120K in purchase and monthly fees the first year. The up-front investment per new customer would be $10-50K with no guarantee of closing a maintenance contract with the customer. What are the pros and cons of maintenance agreement models

Advice from the CEOs:

• Don’t look at just one company’s maintenance agreement model. Investigate companies that provide similar services.
  • Ask the company who their principal competitors are, and what companies have similar or differing models.
  • Investigate each of the competitors. One of them may be more appealing for a company your size.
  • If the company is unwilling to share this information, be VERY careful.
• You should be able to talk to the franchisees since you would not be competing in their territories. Tell them you are evaluating the company and its model and want to learn about their experience. Ask about training, processes and procedures, and any upside or downside that the current franchisees have experienced.
• As you evaluate this and other offerings, calculate worst case scenario in terms of risk and expense. Is this something that you can afford? If not, the model doesn’t look good.
  • Can you write in exclusions to your maintenance agreements to limit your liability for large ticket items?
  • Analyze the potential of your market. Conservatively estimate the number of clients that you could generate, and what you would earn. Do a cash flow analysis of your upfront expenses, risks and revenue.
• Watch for red flags in the agreement models. For example, in one model the vendor is responsible for the maintenance of a building; however, they can’t require any tenant to use their services. This means that they would effectively be guaranteeing the work of other companies, or the impact of this work on the building’s services, with no control over the quality of the other companies’ work. This could expose them to significant potential losses.

Key Words: Maintenance Agreement, Franchise, Investment, Pros, Cons, Red Flag, Due Diligence, Worst Case, Scenario, Market Potential

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