How You Get Paid Matters

This goes beyond the type of customer. The same person can pay you in many different ways

A handyman and a water remediation company both service home owners. Same customer type. However, the handyman is paid the day the service is completed while the remediation company is paid 90 days later by an insurance company. That’s a big difference.

• One has no cash flow problem

• One need financial planning acumen

There is no “best” way to get paid. There is only the way you prefer.

We will examine the different ways a business can get paid, examples of those businesses, and what kind of person is right for that business model. If you are going to find a franchise that is a good fit for you, be sure you choose the way to get paid that best aligns with your strengths.

Ways to get paid

Cash by Customers

When I say “cash”, it isn’t meant literally, it just means they transmit funds to you right away. A customer could pay with cash, credit card, ACH, or check. Maybe you even barter a little bit- as long as they give you bushels of wheat the same day, it is cash. This is the simplest business because you provide the product or service and get paid right away, sometimes you even take a deposit before you perform the service. This type of business will usually have the highest level of competition but often the least sophisticated competition because it is the easiest to manage.

Examples include:

• Food

• Retail

• Home improvement

• Pets

• Beauty

Who is this good for?

• Someone who enjoys customer service

• Someone who wants to manage a robust marketing plan

• Someone who wants to get customers quickly and are ok with dealing with large volumes of customers

Insurance

Getting paid by insurance means you own a needed business that offers some sort of remediation in the case of an emergency. This means your business is recession resistant and its growth depends more on your management abilities than the swings of the economy. The market size is usually massive and although there are many competitors, there is usually still demand for new entrants.

It is going to be 60-90 days between doing the work and getting paid by an insurance company. In fact, it could be longer if the insurance company contests the paperwork you submit. Also, during times of major catastrophes like hurricanes or flood, you will both have the most hours to pay for your crews and you will have to wait the longest to get paid. I have spoken to owners who didn’t get paid for 6-12 months after a hurricane because of the massive backlog of claims the insurance company was working through. If you can’t manage cash flow planning, you could easily run out of capital before you have a successful business.

To gain jobs in these kinds of industries you need to be on an insurance’s approved vendor list and you have to have the homeowner choose you. This means you may not be able to take jobs with certain carriers if your franchise isn’t on this list so you have to ask, at a regional level, who the top carriers are and if the particular franchise you work with is on their list or how they can get you on the list of approved vendors quickly.

To grow quickly you will need a lot of working capital because you have to pay your labor, rent, and other expenses for the 60-90 days before you get paid. Alternatively, a franchise may work with a factoring company. Factoring is a type of loan that uses your submitted claims as collateral. However, the interest you pay on these loans can add up to a large amount of your revenue which will significantly affect your margins.

Regardless of how you finance your growth, you need financial acumen to forecast the maximum amount of hours your labor can work without you running out of cash. The complexity is both a strength and a weakness. The strength is that your unsophisticated competition will not last for long. The weakness is that the real competition are highly motivated and savvy business owners.

Examples include:

• Roofing

• Water and mold remediation

• Contents restorations and storage

• Crime scene cleanup

Who is this good for?

• Someone more operationally focused.

• Roofing is the exception where roofing franchises only do the sales and almost always outsource the work. Roofing owners need to be comfortable with hard core sales and door knocking.

• Someone who enjoys networking

• Someone who has financial acumen

• Someone who is ok getting the occasional call in the middle of the night

• Someone coming in with a large amount of working capital and is ok not being paid right away

Businesses

Most business to business (B2B) franchises operate by invoicing the client once the service is rendered. This means you may offer your service and get paid 30-60 days later. Although the cash flow challenge isn’t as high as when being paid by insurance, it is more complicated than being paid in cash. There is often an aspect of following up with business owners who are also dealing with cash flow management and who may wait the full 30 days, plus the 7 day pre-penalty period. Usually the bigger the company you are servicing, the longer you have to wait to get paid.

Some B2B franchises operate on a cash basis so you need to ask specifically how the services are paid when you are researching that particular franchise.

Examples of services paid on a net 30 basis:

• Marketing

• Consultants

• Managed IT services

• Janitorial services

• Highrise window washing

• Staffing

Who is this good for:

• Someone who enjoys sales and is ok with cold calls

• Someone who wants a more professional and long term relationship with their client

• Someone who is ok with not generating revenue right away

Recurring vs One Time Payments

The Spectrum

There is a spectrum between recurring, contract based revenue and once in a lifetime purchases. Image a spectrum where the far end on the “recurring” side of the spectrum is multi-year contract with a business paying monthly. On the far side of the “one time” end of the spectrum is installing a pool in someone’s backyard.

Along the spectrum, going from most “recurring” to least: multi-year contracts, annual contracts, month to month contracts, reliable referral partners, reliable repeat customer, sporadic customers, one off with the possibility of selling a maintenance contract, and single projects.

Multi-year contracts:

• IT services (sometimes)

• Road maintenance

Annual contract:

• Janitorial services

• Consulting

Month to month:

• Fitness

• Pest Control

Reliable referral partners:

• Chiropractors

• In-home senior care

Reliable repeat customers:

• Specialty grocery stores

• Oil Change

Sporadic customers

• Entertainment

• Food

One time project with a possibility of a maintenance contract

• Autobody shops- fixes a car after an accident but the service was so exceptional, the car owner returns for oil changes from then on.

• Turf- install the turf and quarterly maintenance fees for the life of the turf.

One Time Project

• Pool construction

• Window replacement

Why wouldn’t you want to only start a business with long term, locked in contracts? These require a long sales cycle, you need extremely skilled sales people, you usually need an impeccable reputation, and there will be incumbents that had the contract before you. All this means it could be quite some time before you land your first job and the next one will likely be a long time coming. This makes starting very difficult but once you have proven yourself and have won several contracts, now you have the upper hand over any future competitors.

The less recurring jobs can be won with great marketing and a likable sales person. The market for these products or services is usually bigger so you will have more “at-bats” and it will be easier for new companies to gain market share. This is great when you are getting started but you will have more competition in the long term.

High Cost/Commitment vs Low Cost/Commitment

The higher the cost, the better sales people you need and the better the service you need to provide. The lower the cost, the better the marketing needs to be. Depending on if the business is experiential focused or not, the overall service can have a large impact but usually it just needs to be good enough to fulfill the service at a customer’s expectations. Of course, these can be affected the amount of competitors in the space. Below is a simple comparison of the importance of sales, marketing, and service quality in recurring revenue, repeat customers, and one time purchase businesses.

Conclusion

As you begin your franchise research, you need to think through which revenue model you prefer.

There is no “better” business model here. There is only what you prefer and what plays to your strengths. Go through the models outlined above with your strengths in mind and you can quickly find the right model for you.

As long as your are in a growing market, the jockey is often more important than the horse so be sure you are setting yourself up for success. Don’t pick some sexy business that doesn’t play to your strengths. Regardless of your initial excitement, you will learn to love the thing you are very good at and you will hate the thing you fail at.