Car Rental: Franchise or Independent?



Is Car Rental - The Business for You?


In the following pages we are going to look at the decisions that need to be made before starting your own Vehicle Rental Business.



We will explore the different business models from franchises and agencies to standalone operations.? We will investigate the potential pitfalls and identify the opportunities.



The subjects covered, whilst not being too in depth, will give the reader an insight into the workings of a vehicle rental operation. We will brush upon subjects such as marketing, staffing, daily procedures and accounting and also look at Insurance and fleet funding.



Chapter 1 - Fleet


The most important aspects of any vehicle rental business are the vehicles. If you don't have any vehicles you don't have a business.? When you look at the wide variety of vehicle rental operations in the UK market you can see just about every brand of vehicle available for hire in one form or another.? The large international companies normally have an association with two or three large manufacturers and they structure their fleet deals around a guaranteed volume of vehicles per annum.



The manufacturers approve of these arrangements as they are getting public exposure to their products, the more cars that the rental companies operate the more their cars are seen on the road. The public's perception of a "popular" choice of car is enforced by the rental company's flooding the market.? We can see examples of this with makes such as Kia and Hyundai, the brand awareness of these vehicles was greatly enhanced when several of the large national rental companies started to operate them earlier this millennium.?


One of the first things to consider when choosing your fleet is how you intend to fund them. There are several options and each of these options has it's own benefits and potential problems.



Cash Purchase.


If you are in the fortunate position of having a large amount of cash to invest in your fleet and business you will need to think very carefully about what type of vehicles you intend to buy. You will no doubt be aware that some vehicles depreciate much faster than others and also that some brands of vehicles, to some extent, will command better rental rates.?? One of the best examples of this was the New Mini. When BMW introduced the New Mini there were a few "switched on" independent rental companies who saw the potential of the product and ordered several before the launch date. When these vehicles were made available on the rental fleets they were commanding rental rates which were over 100% higher than comparable vehicles on the fleets. When the Mini's had been operated on the rental fleet for six to nine months they were sold, and in a lot of cases, for more money than that which they were initially purchased!


?At the other end of the scale there are cars which appear to offer excellent value for money but turn out to be anything but.? Some of the Korean brands were available https://www.hertz.com/rentacar/reservation/ at highly discounted rates and were, on the face of it, bargains.? The companies which purchased large volumes of these cars suffered in two ways, their customers did not like to drive them and their resale value, as a percentage of their cost, was abysmal.


?We can therefore be certain that buying cars for your rental fleet is a very difficult business and is one of the main contributing factors in making, or not making, any money.


?If you are like most people involved in the rental industry and don't have your very own version of Mystic Meg's crystal ball then the intelligent thing to do is to try and minimise your exposure to falling vehicle values.?


?The most common way of doing this is to find a dealer with whom you can negotiate a buy back deal.? These deals are fairly straight forward and there are numerous dealers who will jump at the opportunity.? The deals are basically structured as follows: You purchase a car(s) from the dealer at price X, at the same time you agree to sell the car(s) back to the dealer at price Y in say 6 months or 12000 miles.? This enables you to work out fairly precisely what the car will cost you over a pre-determined period and the dealer knows that he will have some good second hand stock to sell in a few months time. The small print may take a bit of work as you would need to agree terms and conditions regarding the car's return standard; what if the car is damaged or goes over the agreed time and mileage.


?The Buy back deal removes the risk of falling prices and provides you with the added benefit of showing the purchases as an asset in your accounts.


?One of the more popular cash purchases is that of vans.? When you purchase a van for your rental fleet you have more scope with regards to the period of time that you can retain the van on fleet. Most people that hire vans do not expect them to be brand new and do not expect them to be the latest model etc. Unlike a car, a five year old van is still commonplace on numerous rental fleets.


?Operational Lease (Ops Lease)


In recent years we have seen the emergence of a lot of companies who specialize in providing vehicles to rental companies.? These specialists purchase vehicles in large numbers from manufacturers and then lease the vehicles to the rental companies at a fixed monthly rate over a fixed term.? The specialist suppliers are able to make money as they purchase in very large numbers; benefitting from the economies of scale, and the rental companies are happy because they are obtaining fleet at a pre-determined price and therefore do not have to carry the risks associated with the vehicle purchase.


?To summarise, if you are going to purchase your vehicles outright you need to either be VERY cautious about what you are purchasing or ensure you get a buy back deal.? Vans are not as bad as they can quite easily be retained on the vehicle fleet until such times as they are written down to s sensible level on your books (see accounting section).


?Ops Leases are one of the most popular ways of sourcing rental cars and offer one of the best options to avoid the risk of depreciation.? Ops leases are normally paid monthly in advance and as such are kinder to cash flow than vehicle purchase.


?Chapter 2 - Insurance and Damage


?Once you have sourced your vehicle fleet you have a legal obligation to ensure that it's adequately insured.? Obtaining insurance for vehicle rental is quite simple, obtaining a good level of cover for a sensible price is quite the opposite.?


?When looking to obtain your cover you need to take several things into account; Level of cover - third party or fully comprehensive. Uninsured Loss recovery, Monthly or annual premium,


?Level of Cover


All Rental operations are legally bound to ensure that the vehicles are covered by an insurance policy at all times.? There are several companies who will offer insurance cover for your vehicles whilst on rent but you need to ensure that they are also covered when parked up or being driven by your staff or yourself.?


?As well as the normal decisions such as comprehensive or third party etc you will need to give some thought to the other types of cover which are relevant to the business. Contingency cover for example. Contingency cover ensures that in the event of you hiring a vehicle to a customer and it subsequently turning out that the customers has provided you with false information, to the extent that he would not be covered by your normal policy, then the contingency cover would come into effect.? Conversion cover is another element which is exclusive to vehicle rental. Conversion is when a hirer rents a vehicle and does not bring it back. As you have handed the vehicle and keys to the hirer it can not be technically reported as stolen.? If any of the hirers details were false then it may be obtaining by deception but not theft. Conversion cover was developed precisely for this eventuality.


?Insurance Excess


Most rental companies now charge all of their customers an insurance excess.? The excess is a predetermined figure for which the hirer is liable in the event of an accident. The excess figures in the UK are generally somewhere between ?250 and ?650 but I do know of one case of an American Visitor to the UK being liable for a ?14500 excess when she hired from Europcar.


?The rental companies operate the excess policy to try and ensure that the customers take care of the car and to try to cover the cost of smaller items such as broken windscreens, tyres, mirrors etc. In most cases the rental companies offer the facility for the customer to reduce the excess by paying a small fee or waiver.


?The level of insurance excess that you set for your fleet of vehicles will be in some way dependent on type of vehicles being rented.? If you are hiring a van you should ensure that the excess is very high for any damage sustained above head height. If you have a sports car you will want to try and ensure that the car is driven in a responsible manner and therefore charge an appropriate excess fee.


?When setting your excess levels you should also try to make sure that you remain competitive within your local area as you do not want to scare too many customers away by applying too large an excess.


?Choosing a Broker


There are numerous insurance brokers in the country and just about all of them will tell you that they can provide cover for car rental.? The unfortunate reality is that vehicle rental cover is a specialised segment of the market and you should only deal with brokers that are familiar with the business.? One of the best sources of information for rental insurance, and pretty much anything else rental related, is the British Vehicle Rental & Leasing Association or BVRLA.? You will find their website quite easily if you enter BVRLA into a search engine.


?When you have chosen your broker and he has given you your quote, you need to spend some time looking at the levels of cover.? It is not unusual for insurance companies to put restrictions in the small print which stop you from renting to specific groups of people such Professional sportspeople, publicans, members of the armed forces, etc.? It's something that you need to read very thoroughly.? Age restrictions are another detail that vary dramatically from insurer to insurer. Whilst most insurers will not cover anybody under the age of 21 I have seen policies which would not cover drivers under the age of 26.? The opposite end of the age spectrum is also variable.? 70 years of age is generally the upper limit but once again, is not something that can be taken for granted.


?Administering Insurance and vehicle damage is a potential minefield in the vehicle rental business. You must ensure that your systems for monitoring, costing and charging damage are well written and followed to the letter.? If you have a vehicle returned with a chip in the screen and you do not make the necessary charge you are in effect giving the customer a several hundred pound discount.


?When you are operating your rental business you will undoubtedly find that some customers will wish to use their own insurance to cover your rental car.? In the case of large blue chip companies this is not normally a problem and all you would really need to do is obtain a copy of their insurance certificate and agree, in writing, the procedure in the event of an accident.? For smaller companies and private individuals you should be very wary of allowing them to use their own insurance. You need to establish excess levels on their policy and what would happen if your car was written off; who would the insurance company pay, the insured/policy holder or the owner? I know of several occasions where rental companies have been left very much out of pocket through allowing customers to use their own insurance.


?Chapter 3 - Franchise


?Whether you're operating your own rental company or looking to get into the business, you will always be presented with opportunities to purchase a Franchise or Agency. Whilst, on the face of it, some of these offers look just too good to be missed, the reality is quite often very different.


?You must bear in mind that large rental companies only franchise for one reason, to make money! If you are being offered a vehicle rental franchise in a specific town or location it is almost certainly because the rental company can not make any money operating it as a corporate site; you don't see franchises being sold at the major airports or any major gateway locations.


?I have been involved in the Vehicle Rental business for over 25 years and I do not know of ANY rental operations that have made money by operating a rental franchise alone. The companies that do make money are either diversifying into other lines of business or are cutting corners with regards to the franchise operating procedures.


?What does a franchise have to offer? The theory is that you take on a vehicle rental franchise for an established system, fleet supply, added number of customers, purchasing power, known brand etc.? In reality, you have to promote the franchise brand, losing your own brand in the process. Deliver vehicles on behalf of the franchisor on the franchisors terms but at your expense. ?Employ an adequate number of staff to ensure that you can honour the commitments made by the franchisor; regardless of whether they are profitable. Pay the franchisor a royalty or percentage of revenue on all of your business; again with no regard as to the profitability.


?You are generally also required to acquire a high percentage of your vehicle fleet via the franchisor. The franchisor will undoubtedly take a profit from supplying the vehicles But you will be the one responsible for paying for these vehicles if the Franchisor should lose an account and the cars are all parked at your premises without customers. ?


?Franchisors do not tend to treat franchisees as partners they treat them as customers, as a revenue stream that should be exploited at every opportunity and as a captive market that is committed for the period of the franchise.


?At the time of writing this, the country has just slipped into recession and looks set to stay there for several years.? With this in mind, I would not be surprised to suddenly find several of the large vehicle rental operations changing their franchising policy and making additional sites available for sale to budding franchisees, their rationale being one of getting somebody else to carry the costs of operating the location in these uncertain times.


?As you may have gathered, I am not a great fan of franchises. The principle is good and I am sure that if you were able to find a franchisor with the required intelligence and foresight that's prepared to support his franchisees, that an exceptional business would result. The main problem in finding this ideal franchisor is that most of these large companies who offer franchises tend to employ your stereotypical "yes" men as business development managers, those who do not have either the required intellectual level or foresight required to make this system work.??


?I would not recommend anybody to take on a franchise from a large corporate body unless they are able to write their own terms, even then they should ensure that they have the best solicitor that money can buy to thoroughly inspect the franchise agreement.


?Chapter 4 - The Agency



The vehicle Rental Agency is not that dissimilar to a franchise. In fact a lot of the cons are just as relevant but there are not so many pros.


?The way in which a vehicle rental agency works is that you, as the agent, provide staff and premises.? You are responsible for the cleaning, delivering and collecting of the hire vehicles. Everything else is supplied by the rental company.


?You are normally paid for your services in the form of a luxury car rental ft lauderdale fixed rate percentage of income.


?There are a few inherent problems; if there is no work to do you still have to pay for your staff and premises. You have no control over your income, either the volume or the rate.


?Agency agreements tend to be shorter than franchise agreements and you will therefore always be wondering whether the rental company will renew your agreement as each year goes by, or will they think that they can make more money by operating the business themselves.


?I am of the opinion that a Vehicle Rental Agency is only viable as an add-on business. It's not something that that should be undertaken as a sole business enterprise.?


?Chapter 5 - The Independent Company


?To operate a car rental operation as a stand alone, independent company is by far the most satisfying and most rewarding way to operate.


?You have the freedom to be flexible in the way that you operate and can tailor your operation to the requirements of your customers.?


?You should not be under the misapprehension that you do not need strict rules, regulations and procedures; these are just as important as they are for any large multi-national operation, You just get to choose what they are and how they can work best for you.


?To be a successful independent company you need to have good standards. You need to gain the trust of your local community and market your business effectively.?


?You need to operate in a professional way, providing clean, well maintained, vehicles. You should also seriously consider joining the BVRLA as this will add credibility to your business.


?One of the other advantages of operating an independent business is your chance to exploit the niche markets.? Vehicles with tow-bars are always required and the national companies very rarely operate them.? You can also consider offering roof racks and top-boxes as there is always a demand during the summer months.?


?Another niche that should be explored is accessible vehicles. To convert a normal car to one that has hand controls is fairly inexpensive when compared to the rates that you can obtain from the insurance companies.


?Marketing of your independent rental company should be localised and relentless. You should try to get your company name displayed wherever possible.? Don't waste your money by spending hundreds of pounds on newspaper and radio advertising. All you need to do is sponsor the local schools, fire service, police federation etc..? as the opportunities arise


?You should also develop a website. All companies, regardless of their line of business, should have a web presence. You do not need to spend thousands of pounds and your site does not need to be all whistles and bells. You need a basic site that tells your customer exactly what they ant to know.


?If you enter "monthly car hire" into google you will see that the company that is listed number one in the natural search is an independent company using a website that took the developer 45 minutes to put together.? This company draws customers for long term rentals from all over the UK and has occupied the number one spot for several years.?


?Chapter 6 - Staff


?Your staff are the most important aspect of your daily operations.? You could have the best cars, the best premises, the best marketing etc. but if your staff are useless you are wasting your time and your money.?


?Any member of staff that is dealing with your customers is an ambassador for your company. They should ALWAYS look clean and tidy and must always be courteous.? Now I am not an advocate of "the customers is always right" he's not, in fact sometimes he is a total idiot and should be thrown out on his ear! Your staff must be given the authority to decide which category the customer in front of them falls into. If you do not have the confidence in your staff to allow them to make this decision then you need to either train them or replace them.


?When it comes to employing drivers and valeters I would only make one suggestion; don't look for qualifications, look for reliability.?


Staff pay is another area which can have a big influence on your business.? One thing you should never do is base your staff's salary on turnover! Performance related pay should be geared towards profit and/or efficiency. Remember the old quotation "Turnover is Vanity, Profit is Sanity".



You should ensure that your staff are paid at a rate at least equivalent to the going rate.? If you expect your staff to look after your business you should be prepared to look after your staff! ??




Chapter 7 - Marketing



Another very important aspect of your business is the way in which it's marketed. If you were to purchase a franchise then this is all taken out of your hands as there are acceptable and non acceptable ways of promoting the business. If, however, you are an independent company you are able to "think outside the box" as they say in the world of marketing. If you are starting your company from scratch you should ensure that your trading name is memorable and marketable. So what is a memorable and marketable name?, One of the best examples has to be Virgin. If Richard Branson was to be credited with a single act of genius it should be his selection of the name Virgin as a brand to develop and market.? Selecting a name for your business is important, It needs to be easy to remember, so not too long, easy to spell and ideally relevant to your business. There are several other examples of memorable names: Easy, as in easy car rental etc., Budget, Says what it is, similar to thrifty. Whatever name you decide on, make sure that you take some time over it's choice.



Once you have decided on a name you should decide on and image.? You do not have to spend a fortune developing an image and most of it will revolve around a logo and a colour scheme.? You must ensure that when you have decided on your logo and colour scheme that you stick to it. Everything must be done with image in mind.? All customer facing staff should wear a polo shirt? or similar with your logo displayed. Any vans that you are running must have your logo clearly displayed. The premises must have the logo displayed and your website must have the logo displayed. The key to effective marketing is consistency, you need to deliver a consistent message and image.



One of the most cost effective forms of local advertising, in my experience, is leaflet drops. It is fairly inexpensive to have 10,000 leaflets printed and they are fairly easy to distribute. You should make sure that that your design is not time limited i.e. avoid terms like summer special or winter madness. You should ensure that your leaflet accurately reflects you corporate image, It's no good having a corporate image built around the colour blue and then printing white leaflets.



You should distribute the leaflets at car parks, in newsagents windows and in as many local shopping areas as possible. Hotels, Garage service departments, Train station, Filling Station windows, in fact anywhere that you can get some exposure.



When it comes to marketing your new business on the internet you should not only think of websites.? There are all types of ways of marketing your business online.? You should sit yourself down and write a Press release announcing the opening or revamp of your business. You can submit press releases to agencies online and most are either free or not far from it.? You can also look at article Marketing, you write an article about you and your business and submit the article to a company such as Ezine or Hubpages



?Telephone Sales are another way of generating a good customer base. You must first get a good feel for your local area. Drive around the industrial estates making notes of any companies that have large car parks, Hired vans or several new cars on the premises. It is a good idea to systematically call each and every company but this is very time consuming and the results are rarely instantaneous. When your company is established, it would be a good idea to employ a full time sales person but you must ensure that they are good at their job and very focussed. There are a lot of, so called, salespeople who have no idea of the principles involved.


?Chapter 8 - Accounting


?In this chapter I would like to look at the act of accounting for your car rental business.? If there is one part of the business that tends to be overlooked by the new owner/operator, accounting has to be it.


?I can not over emphasize the importance of a good accountant / book keeper.


?Car Rental is a fairly marginal business. By this I mean that for every ?1000 you generate in income, you will probably only be retaining something like 10% as profit.


?With margins this small you need to be very efficient and very financially aware. You need to know exactly what you are spending and which areas of the business are costing you money.?


?You will eventually need to offer credit accounts, especially if you intend to service the lucrative business sector.? You must ensure that the credit accounts are operated on your terms, do not offer extended credit facilities on the promise of more business.? Your account customers will need some training, they must learn that if they are late paying that you will put a stop on their account.? There is absolutely no point in doing business that you are not getting paid for.


?Suppliers also need to be monitored. I was once told that the easiest people to rip-off are your best customers. I do not recommend swopping suppliers every five minutes as building a good business relationship is generally beneficial for both parties, but don't get complacent.


?Your accountant should produce monthly management accounts in the form of a profit/loss statement.? You should examine these accounts carefully and look at the percentages. You should check your Gross Profit as a percentage of your income and your net profit as a percentage of income. If the month on month figures vary by too big a margin you will have to investigate as to why.


?The two biggest costs when running a vehicle rental operation are fleet & staff. Your total fleet costs should never be more than 50% of your income; if they are you have a problem!


?Your staff costs will be dependent on the type of operation that you are running. If you have to deliver lots of vehicles over long distances you will need more staff than a town centre retail operation where the customers come to you.


??Chapter 9 - Daily Operations


To operate an efficient and profitable vehicle rental operation you need to ensure that your have daily procedures in place to monitor the business. The following items are the bare minimum that should be addressed every day without fail:



Overdue Vehicles



You must check the status of every vehicle on your fleet that is past it's due back time.? Most rental operations will run a 1 to 31 drawer, which is basically a drawer in a filing cabinet with 31 files. Each file represents a day in the month. When a vehicle is checked out a copy of the paperwork is placed in the file for the day on which it is due back i.e. if it's due back on 5th March it would be in the file numbered 5.? Each day you must go through the file relating to that day and check the status of each vehicle; charging the customers if they need to extend the hire.


Utilisation



You may of heard the term "utilisation risk", a term that should not be under estimated. Utilisation risk is the biggest risk that your business is confronted with on a daily basis.? You can have every single cost under control and state of the art marketing but if your utilisation is not running at the correct level you will lose money!


You can not make a blanket statement as to what is the correct level of utilisation as it will vary from operation to operation but it must always be monitored and when you have you management accounts at the end of each month will be able to simply see the difference that slight adjustments to the vehicle rates, utilisation etc will make to the profitability of the operation.




The following calculation can be made on any vehicle individually, any selection of vehicles or all vehicles. The information required is:



Days sold / Days available = Utilisation



(Average daily rate - Average daily cost) X Utilisation = average daily contribution.



The final thing to say on utilisation is regarding vehicles which are damaged or mechanically faulty.? In the rental business time really is money and you should put as much pressure as possible on your repairers to get your vehicles back on the road. If the vehicle is in a garage or bodyshop it is costing you money.



Chapter 10 - Summary



?Fleet - Only purchase cars if you can get a buy back deal from the supplier and only operate vehicles that people want to drive.


?Insurance - Go with a specialist Broker and check your level of cover carefully


?Franchise - Don't do it unless you can define your own terms of business.


?Agency - Only good as an add-on business


?Independent Operator - The most satisfying way to operate. You truly are your own boss.


?Staff - choose your staff carefully and empower them so that they take responsibility for their job.


?Accounts - Do not under estimate the importance of the accountant.? You NEED to know how your business is performing.


?Daily Operations - monitor utilisation and over due hirers. Ensure that VOR (vehicles off Road) are chased and repaired as soon as possible.



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