WCI #267: Non Food Franchising

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This is White Coat Investor podcast number 267 non food franchising if you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help. All right, thanks for what you do out there. Your job's not easy. You may be listening to this on the way home from work. Maybe something terrible happened to you at work today. It does happen in our professions, so if no one said thanks today, let me be the first. What you do is hard. That's why you get paid well for it. Sometimes it doesn't feel like you're getting paid well enough for what you're going through though, so thank you so much for doing it. If you're interested in coming to speak at WCICON 23 in Phoenix, you can apply now to do that. We want you to apply during June. You go to www.wcievents.com to apply as a speaker. Now let me tell you how to become a speaker. Okay? Number one, it helps if your topic is something we want spoken on at the conference and you can look at past conferences to see the types of subjects we speak on. Okay, everybody wants to give this general physician finance talk. You know, the sort of thing that I would give if I came out and gave a one hour talk at a residency program or something. But we can't have a conference full of 40 of those, right? They have to be a little bit niched down. The more topics you apply for, the more likely you are to be selected because we might like you as a speaker, but we might already have three people that want to speak on the first topic you put in there. Plus, if you apply for more, we might be able to pick you up to give more than one talk at the conference, which obviously helps us with expenses because we only have to fly you out one time and only have to put you up one time for the event. So apply for multiple talks and you're much more likely to be picked up as a speaker. It is a competitive process though. We want the best speakers we can get and to put on a fantastic conference. It's going to be great. This last year's was awesome and a lot of that was because of the high quality of the people that spoke at the conference. So. So if you're interested in being one of those speakers. Www.wcievents.com all right, before we get into our interview today, got a great guest coming. I want to give you the quote of the day. Our quote of the day today comes from L. Tom Perry, who said, a well managed family does not pay interest, it earns it. And there's a lot of truth to that. I've been telling my kids that for years and years and years. I ask them if they want to pay interest or earn interest and every time they tell me they want to earn interest. So try to get yourself into that position. All right, let's get our guest on the line. Our guest today on the podcast is John Austinson. John is a very successful franchise broker. He's also an investor, an author and international speaker. He specializes in area that he calls non food franchising. You're probably familiar with a lot of franchises out there, but they all tend to be restaurants. Well, he specializes in other franchises, so we're going to be talking with him today about the idea of a franchise as an occupation, as a business, as a side gig, as an investment. So, John, welcome to the White Coat Investor Podcast.

Jim, appreciate you having me. I love the show and looking forward to our conversation.

Let's start learning a little bit more about you. Tell us about your upbringing and how it affected your views on money.

Yeah, you know, my father was an attorney and we lived paycheck to paycheck. You know, he paid for all four kids to go through private school and you know, invested in assets. You know, I see my siblings as fellow assets. You know, they're now hopefully paying dividends, supporting them in some ways. But no, you know, living paycheck to paycheck, you know, money was always talked about in a vein that I chose I not to want to talk about down the road. So was fortunate to go through college, paid my way through school and worked in consulting across a variety of industries and did the whole corporate run for a number of years. You know, checked the box on getting the MBA back in the day, you know, wanted to further education and could have stayed in the corporate world forever, but like so many, I had that entrepreneurial itch and, you know, wasn't sure where to scratch it, but kind of stumbled into franchising. And like so many others, always thought of franchising as being fast food, being synonymous, and had the opportunity when I left a large public company to step in and serve as president of Shelf Genie Franchise System. It's a large national franchise system across North America. Came in and supported all these small business owners, our franchisees, day to day, and really saw how franchising could be a better path to business ownership for quite a few. And it opened up my eyes to the types of industries that existed out there. So fast Forward ended up partnering with the founder of Shelf Genie. We spun off. We've become franchisees ourselves, investing in different franchises along the way. I've had other partners, we've invested in franchises, so I've had the opportunity to sit on both sides of the franchise table. But for the most part, we have good people running our businesses and allows me to spend 90% of my time helping others get into business ownership and explore this world as well.

All right, before we get too far into this, let's step back and let's assume a listener has no idea what you're talking about with a franchise. Can you give us a quick basic definition of what a franchise is and maybe explain a little bit how it works? Yeah.

So a franchise by definition would be a business that, you know, is providing support to others that are running a similar operation that share the name. So they're providing ongoing support, and then they're receiving some sort of royalty stream or upward payment for that support. So that's franchising by definition. Franchising is regulated by the Federal Trade Commission. You know, you have to cross your T's, dot your I's, you know, throughout. Every franchise system has what's called an FDD or franchise Disclosure document that lists down everything you could ever want to know about a franchise. But no, you know, franchising is not right for everyone. You know, there's some clients of mine that have to explain you're too entrepreneurial, you know, you want to put your thumbprints all over. However, for the vast majority, it is a better path to business ownership because of stepping in. Day one, you're starting on third base, not first base, and that you've got a playbook and you're not testing product market fit like you would be with a startup Instead, you're stepping into a system that's been proven out in other markets, and now it's all about executing. You've got a coach on the sidelines and that franchisor that's providing ongoing support. The better you do, the better they do. So your incentives are aligned. It oftentimes goes overlooked, but you've got other franchisees in other markets, and you're sharing best practices on an ongoing basis. And so, you know, maybe testing new marketing vehicles or finding out where the pools of talent are to hire from. So you're exchanging best practices as well as learnings. And then finally, you're building a business that, you know, like a traditional business, you have the potential to exit one day. So you're building an asset that down the road, you know, should have an increase in value, that you'll be able to sell and have a. Have a nice payday down the road. So, you know, for all intents and purposes, it's. It's a small business, but operating within a system where there's that support, where you're in business for yourself, but you're not by yourself. And Jim, frankly, coming out of COVID we've seen more and more interest across the country in entrepreneurship, and many are opening up their eyes to the fact that this is the better path.

Now, I think you've explained well the benefits of franchising. You get to start with a playbook. You get to start with a model that's worked. You've got maybe a mentor there to help you. Let's talk about the downsides of franchising. You mentioned one that maybe you can't make all the changes you want because the franchise doesn't allow you to do that. What are the other costs? I mean, presumably you've got to pay a percentage of profits to the overarching company. What's typical there? How much do you typically Pay? Is it 3% or is it 30%?

Yeah. So first off, you're paying a franchise fee to get access into the franchise system. And that tends to be, call it 50,000 for the first location or territory, and then typically it's 40,000 for the next, 30,000 for the next. You see people build these little empires through additional locations. I'd say the majority of the deals that we do with our clients are between 125,000 and 300,000. That's probably where 75% of our deal flow falls. And that would be all in investment, including working capital. Well, a piece of that is that franchise fee. So if you were to just start a business on your own outside of franchising. You're not paying the franchise fee, but that's essentially what you're paying to get access to the brand and the systems. And essentially getting a running start on day one and then ongoing, which you're referring to, is called a royalty most often. And that tends to be 5 to 7% of revenue, of top line revenue. So that gets baked into the P and L, your profit and loss statement, you know, and that's the cost of doing the business. Now, you know, the question you always want to ask is what kind of support am I receiving for that? You know, is the franchisor going to be innovating? You know, what are they doing for me? In a lot of cases, they're providing services that you would have had to pay for on your own if you didn't have that. So it is a little bit of a trade off. But of course that's something you always want to really investigate before you sign up is make sure that you're getting what you're paying for.

All right, so your focus is on non food franchising. Can you compare and contrast food and non food franchising and explain why you focus on non food?

Yeah. You know, There are roughly 4,000 franchise brands in the US today and you have new businesses franchising all the time. Roughly half of those are in the food space, oftentimes at fast food. And my personal opinion is that they're easier ways to make money that may be less capital intensive on the front end, that may require less, you know, 24, seven type operations, maybe smaller staff. So I just feel, you know, they may not require perishable inventories. My personal view is that they're easier ways to make money. And what I found is about 95% of my clients would agree with me. Now, 5% are passionate about food, but I'd say 95% are interested in opportunities outside of the food space. And yeah, those can include areas like auto or home and property services, or, you know, I always say that people are willing to spend on anything related to things they care about. Kids, pets, health. Health and wellness is a huge area. Their homes, you know, B2B services. There are a lot of different industry niches that have great returns, oftentimes better than food, with maybe less capital upfront, less risk as well, maybe a little less trendy. So yeah, that's, that's where I focus. Instead of trying to spread myself too thin, I really focus on all those businesses in those other categories.

Now can you name some of these franchise brands that we've heard of just so we can get a concrete picture in our minds of what kind of businesses we're talking about?

Yeah, and oftentimes, you know, if it's a brand that you've heard of, then they're probably sold out in your market just because we're seeing a lot of demand out there. But we work with a lot of development companies across the country that represent emerging brands. And so they fit our criteria for, you know, great leadership team, strong profit model. They operate in unique niche competitive advantages and so ones that, you know, you may or may not be aware of today, that you will be pretty soon, I think, like Costa Oil or Brothers Gutters, you know, in the gutter space. We just had a Wall street attorney buy into the gutter space. You know, no background in that, but he loved the financial model, loved the different benefits of the business. We just had a pharmacist buy into a garage remodeling business. Hello, garage. And I'd say home and property services have been probably the most popular area of any coming out of COVID the past couple of years. You know, lots of interest there, tons of demand in the market from a consumer standpoint, you know, koala insulation would be another example there. Two years ago they had five locations, today they have 250 locations. It's a $52 billion market. No other national player in that space. You know, we work with businesses. We just had a PhD from the University of Arkansas by a business called the Exercise Coach. It's a fitness business, but it caters to those 50 and above who are largely underserved in the fitness space today. And yet they have disposable income. They really care about their health. You know, Foot solutions would be another one that we've seen some with a medical background taking interest in. And that's custom orthotics and insoles using 3D printing. You know, they do a lot of business with Medicare, but really it's for any foot ailment. And so a lot of our clients like the idea of having a physical location, a brick and mortar retail style presence. Others say, hey, we like the idea of not having a physical location. We much rather run a services business where we can operate remote, scale up at our own pace, if you will. So that's, that's just a little bit of color. But the fun thing, Jim, is over 90% of our clients end up in an industry, in a business that oftentimes was not even on their radar. It's certainly not one they seriously considered. But once we start peeling back the onion and understanding their setup and their financial situation and the role they want to play in the business, how much of a role they want to play in the business, we're able to take that feedback plus what we see resonating with others with similar backgrounds and really played matchmaker and introduced opportunities that could be a fit that they hadn't considered.

If you're just tuning in, we're talking with John Austinson of Fran Bridge Consulting. He's an expert in non food franchising. So John, who are these people? Who buys franchises and why do they buy them?

Yeah, well, I certainly do myself. Roughly half of our clients, you know what we see and when I refer to our clients, I mean that's the data set we're working with. But we do have purview and views into what's going on in the market. A whole but you know, I'd say roughly half of them are what we call owner operators. They're looking to leave the corporate world or the medical field and run the business day to day, at least out of the gate. And then the second model which most franchises allow for and lend themselves to as well is called semi absentee or semi passive or we'll call it our executive model. And that's where they're putting manager in place day one that's going to run the day to day operations. They're taking more of a mentoring and coaching role from the sidelines now. Nothing is ever exactly turnkey or entirely passive. They still have to have some role in the business, especially if they don't have the right general manager in place. You got to get the right person. But you know, from an age bracket, demographic standpoint, you know, it's we've done deals year to date with those in their 20s, all the way through their 60s. Certainly the sweet spot I'd say is 30s through 50s. That's where most of the deals are happening. But it's across the country. We hear all the headlines about people moving to the South. I mean, I'd say markets like Atlanta, Dallas, Florida, Charlotte, Raleigh, they're as hot as anything. I mean brands are going very, very fast in those markets. But we're doing a lot of activity in New York and California and some of those states that get bad press from people moving out. Maybe they're not as business friendly. There's still a lot of activity from an entrepreneurial standpoint on the ground. So really it's a large swath and again some of our clients are current business owners, and they're looking to build out that portfolio. And their current businesses may be franchised or not franchise. You know, we've got case studies of both, but they're looking to add in additional pieces to that portfolio that either serve to complement their core business or businesses or diversify from them.

Let's talk about the other end of it. I'm not sure if I'm using the right terms here. I think the right terms are franchisor and franchisee. Right? What possesses a franchisor to use this model instead of just opening another location themselves, hiring managers themselves, why are they opting to franchise and bring in somebody else that's essentially another owner?

Yeah, great question. We work with a lot of businesses that are thinking about going through the franchising process, and for some it's the right move, for some it's not. But I think it's a very wise thing to at least scale and start thinking of your business as a franchise because you start putting best practices into place when you put that headset on. But no reasons you would choose to franchise are you can typically scale at a much faster rate because you're using other people's money, so you're not taking on as much debt, let's say, or, you know, equity partners. As a business owner, you always want your employees to have an owner's mentality, right? So here as a franchisor, you can open up in other markets where people know the local markets, they've got skin in the game, they're going to act as owners. And so those would be some of the reasons, you know, from an exit standpoint, this oftentimes is unknown, but private equity loves franchising. If you Google private equity franchise acquisitions, acquisitions are taking place every week right now. You know, I get PE firms reaching out all the time, wanting to know what we're seeing on the ground. There's so much money on the sidelines, and they love the franchise model for the same reason a lot of others love the model. So it does set you up for maybe a more profitable exit, higher multiple down the road as well. So those would be some of the benefits as to why someone would choose to franchise. Now, I always tell them, from my experience, you know, all these are great benefits, but you will wake up one day as a franchisor and realize you've got kids all across the country that have expectations of you and you're trying to keep the kids playing nice and happy. And it does change your day to day role. And you do need to make sure you've got staffing in place. Just support those owners and really set them up for success.

So I presume you work with two different types of transactions here. People who are just starting, they're buying a building, they're paying the franchise fee, just getting going. And then there must be people who are exiting. They bought a franchise a few years ago and now they're trying to pass it on to somebody else. You mentioned the franchise fee to get initially is 50,000, maybe less for repeat branches essentially. What do a lot of these franchise businesses sell for later once they've been developed a little bit when they're turned around and selling the business to the next owner?

Yeah, a couple of thoughts on that. First off, people do tend to hold onto these for quite a while, but no, we certainly do resales. I'm invested in a driveway repair business here in Atlanta which is just taken off and done. Great. And we recently bought out two other franchisees that were in our market to expand our kingdom. So it does create kind of a natural exit to roll ups or to other franchisees. At times you'll see private equity come in and buy a large swath of franchise locations. I'd say that's not common, but it does happen. It happened with orange theory, recently happened with pods. Or they'll take them corporate. They'll essentially buy the rights back from the franchisee and take them corporate. Most oftentimes though, you are seeing them out there on the open market and typically the franchisor is helping facilitate the process for that exit. Yeah, they'd love to find someone else that can step in and run the business well and, and so they'll support you. They probably have a lead list of those that have shown interest in that business over time in that market. So you kind of have a natural starting point if you're looking to sell. But no, there was a study done recently that looked at franchise businesses versus non franchise businesses done by the Riker School of Business. And what they looked at was exits over a 20 year period for about I think it was 2000 businesses in like kind industries, franchise versus non franchise. What they found were the franchise businesses traded at an average multiple of one and a half times non franchised. So there is that value seen from a resale standpoint in the future buyer. And so it depends on the industry as far as the multiple goes. Depends on if it's a recurring revenue business, you know the type of model. Obviously there are a lot, there's a lot that goes into A lot of times the larger you build a business, the better multiple you get as well. But very common. I'd say from an EBITDA or earnings standpoint, I'd say three or four times earnings is very common sometimes you definitely see above that. You know, at times it can be a little bit below two, but that's kind of a good rule of thumb.

These tend to be six figure transactions then for the most part or most of them, seven figure transactions.

It depends for one location I'd say most often the majority of the ones I see are more six figure deals, but we certainly see them in the seven figures as well, especially if it's multi location.

Now I think a lot of people worry that they're just buying a job when they do this. Is that a legitimate concern? Should people be worried that they're just buying a job, that they're leaving corporate America and now they're buying a job as a manager of a franchise?

I mean you certainly can buy a job if you think about it that way. But you know, if you're an owner operator, then yeah, you're shifting your efforts into, into running a business here, you know. However, you know, most people don't think of it as buying a job because they are, you know, oftentimes even if they're running the business day one, over time they're going to pull themselves back to maybe their higher payoff activities and put a manager in place that's running more of the day to day and maybe they're more strategic or working on referral agreements, going after the elephants, you know, in their town to get, go sell to. And so I think over time, oftentimes I see people step in, run it full time and then start to scale back and potentially then bring in that second opportunity. Very, very common. We do a lot of repeat deals with clients where they are building out that portfolio. So no. One thing to think about even as an owner operator though, you know, you're building cash flow as you would the W2 income, let's say. But as a business owner you're also able to write off expenses. You know, as a W2 you can't do that. So there are a lot of travel expenses or other expenses that you can tag to the business that you benefit from being able to write off. Then of course you're also building an asset that's going to have exit value down the road. So you know, as a W2 you can't really sell, sell, sell yourself down the road. So you know, there are a couple of Dimensions beyond just that, cash flow equivalent.

Now your job is to connect franchisors and franchisees. Obviously you're not working for free. There's some sort of commission or a cut that you get on a transaction or what. What does that tend to be? What's the typical commission on these transactions and who pays it? The seller. Like in real estate or how's that work?

Yeah, you know, it would be the seller. So the franchisor, you know, our clients never pay us a nickel going through a process. You know, we never get compensated by them, but it is a commission on the back end. And that's very much like an executive recruiter type model, you know, and we've got agreements in place with literally 5, 600 franchisors across the country. And they're pretty even across the board. We're not swayed one way or another. That, that never comes into our thinking with the franchise brands. None of that ever gets passed on to our clients in any way. For them, the franchise fee is the franchise fee. It doesn't change, you know, if you were to go directly to a franchisor versus working through us, you're paying the exact same thing for them. It's just a sales and marketing cut. So, you know, it varies. I mean, I won't get into the exact amounts, but yeah, I mean, we, we do well, but you know, we also bring incredible clients to them that become new owners. So we've been very fortunate that, you know, we do more, more deals than about 99% of others in the market in the U.S. and so, you know, we've got those relationships with the franchisors that I would say are more important now than ever. Because in a market like Salt Lake City, let's say, you're going to have multiple people wanting the same opportunity at the same time. And so what we're able to do is work our relationships time and time again with the franchisors to best position our clients ahead of other candidates in the market.

When I think about an executive recruiting model, I think more of, you know, a third of their first year salary as opposed to, you know, a 5 or 6% real estate, you know, commission on transacting a property. So presumably that it's, it's a significant chunk of that franchising fee for you to bring them someone they want to be in business with.

Yeah, no, it's a meaningful model and you know, but we love help helping people. I mean, that's a big piece. I've had clients reaching out. I was on the phone with a client this morning that you know, purchased a little while back and just seeing their success, I mean that's what, that's what gets me going. And I've only had one client where it hasn't worked out for them in our time of doing this. In most cases they're coming back by an additional locations. And in that one instance where it didn't work out, you know, he lived three hours outside the market. He could have kept running with the business, but it was one of those businesses that it really helped to be in the market. That ground game, you know, grassroots out of the gate I think would have helped him, gotten him off to a faster start. So it's a few months in, he chose to throw in the towel. But again that's very rare based on kind of what we've seen.

So let's talk about leverage for a minute. How leveraged are most of these purchases and where are people getting financing for them?

About a third of our clients use debt. So SBA loans are most common within that. About a third of our clients are paying out of pocket because right now there is record levels of cash sitting on the sidelines. People are nervous about the stock market. Only so many good real estate deals to be had. So we do see some people paying out of pocket. About a third of our clients are using what's called the Robs program or portfolio loan. Rob's program is where they can tap into their 401k or IRA. They set up the business as a C corp and they actually self direct their retirement plan to purchase the business. And so it's a unique model. We've got a partner Fran fund that helps her clients with this process. Portfolio loan we could would be where you borrow against your, against your brokerage account, your non retirement brokerage account, which can be really compelling. I do that personally. I'm paying like 1 1/2% interest. It's variable, it'll go up over time obviously, but right now I'm paying one and a half percent and then I either invest in franchises or I invest in some private lending deals that I do at 12 to 14% return. So it's a total arbitrage play, you know, if you think about it that way. So that's a circular way to get back to the SBA loans that you're asking about. In most cases people are putting down somewhere between 20, 25% of the purchase. You know, I'd say the average loan that we're doing is probably 200,000. Again we've got partners that help our clients through the process, A to Z. But you know, if you were taking out a $200,000 loan and you know, putting in say 50,000 and then the nice thing is with SBA now you are personally guaranteeing it. I mean there are some caveats to it, but you are able to pay it back early. So once your business is up and cash flowing, you can pay that down. The rates I've been seeing are probably in the 6% ballpark. I would guess that's going to go up. Obviously with what we're seeing in the market today, you know, it's not going to be as low as your home mortgage. However, from a historical business lending standpoint, they are still relatively low.

Let's walk through a little bit of a, of a case study if you will, of maybe an average franchise deal. What's it look like? I mean you buy it, what's your revenue look like in the first couple of years? What kind of expenses do you tend to see? What kind of profit do you typically get? Can you, can you walk us through what an average deal might look like? Not a spectacular one, but not a disaster either.

Yeah, you know one, that one that comes to mind that we've had three of these deals go through in the past two months. I mentioned the gutter business. I think that'd be a good example. You know, 47 year old wall street attorney outside of Boston, John just purchased. We had two brothers in South Carolina purchase that a background in the insurance space. We just had a corporate executive in the sales and marketing space in New Jersey purchase. So it's kind of a good representation there. But white collar background. They none of them had a background in home services or property services. They said wait a minute. We really like the niche these guys operate in. It's a $6 billion market. We like the leadership, the run, you know, the model. They've proven out. We like the culture and then we like the financials. All in investment. On this one, if you were to do two locations, which is average location being defined as the territory of, call it 250,000 to 300,000 in population. The franchisor works with you to define that territory. So you purchase two your all in investment, you're between 160 and 200 all in. Really the biggest variable is do you finance your truck or do you purchase it outright or do you lease it? That would be your biggest variable cost. So let's just say 200,000 all in. On the high side, what they're showing is average revenue as of last year for inception to date and they've got over 100 locations. Average across their franchise owners was 1.2 million this year. Their new FDD just came out. Franchisors come out their new FD FDD typically every spring. Their average is now 1.7 million. I mean the business is thriving. So that's your average revenue. They're doing 31% on the bottom line if you're running it as an owner operator. So 31%, call it, you know, we'll just round down, call it 550,000. Now if you're paying a general manager to run the business, including incentives, you're aligning your interest, you're probably paying them, let's call it 100,000. So you're still dropping 450 to the bottom line. I always tell my clients, let's go conservative. Even if that's the their average across a large swath of of owners. Let's go conservative in our assumptions. Some businesses, you have faster break evens, you can get out of the gate faster, some are slower. These guys, I mean back in 2020, you know, I remember a couple of case studies where one guy did 800,000 in the first year, one did 1.2 million, one actually hit 2 million in their very first year. So you can get up and running fairly quickly. So that's a 31% bottom line. I'd say typically in that space, home and property services, you see somewhere on average around 20 to 25%. So that one would be a little bit higher than average. You know that I mentioned the fitness concept earlier. You know, let's just look at that case study really fast. That's all an investment. You're probably 200,000 including the build out, including your working capital. It's not a huge footprint, but you've got some high end tech machines in there. So 200,000, they're averaging, you know, lower revenue, it's about to 60 per location and they're dropping about 40% to the bottom line. So healthy margin, recurring revenue type operation. But you know, you're probably going to want to open up a couple of those to get to where you want to be from a number standpoint. And you don't have to open up all of them day one, you can open them up maybe every six months, every nine months. Oftentimes you have a phased approach to scale. So those would be two examples. And I'll just mention one more gym that may be helpful just switching to another industry. There's an Oil change business that we think about electric vehicles. Electric vehicles get all the headlines still when you look at 15 years down the road, given the average age of cars is 12 years on the road. Still less than 10% of cars on the road are projected to be electric. Still a long Runway for the oil change industry. There's a model right now that we've been doing a lot of placements with that is truly a semi passive executive model. The guys buying into it don't have any background in the auto space, but it uses prefabricated buildings that are backed by an investor group that operate out of unused parking spaces in a retailer shopping center. So you get great road frontage and convenience. People get to stay in their car. It's a 10 minute oil change in and out. You know, all an investment on this because you're leasing the building, you're leasing the space. Even though it's technically brick and mortar, you're able to get in for 1 4, 4150 per location. And they're kicking off 335 in top line revenue with about 130 dropping on the bottom line. So again strategy here would be let's open up three of these, put a manager over all three of them and you know, run it from an executive model standpoint.

Right. But you're, you're, you're talking about getting your money back within a year in a lot of these six months to two years. I mean that's, that's a fantastic investment.

Return with the oil change. I mean that's their average. Some of these have been open several years, so it's not necessarily year one, but you are able to get it back and then again you're building an asset that you're going to be able to sell down the road. So Jim, I found it's really eye opening to people once they extrapolate, hey, here are the type of returns that you can get. And it's not just pie in the sky, it's not just back of the napkin. These are actual, the data has to be audited. You know, T's crossed, I's dotted. Because you're regulated by the Federal Trade Commission, you're looking at a large swath. It's not a guarantee of success. It doesn't totally de risk it. But you're able to go in with a much eyes, with a very eyes wide open view into what to expect from a return standpoint.

Okay, so how do you make this as passive as possible? I mean if you are having any management role whatsoever, Here you can only scale so big. The more passive you go, the more you can scale this. So. So what's the secret to making these completely passive?

It comes. We do have two or three concepts that are. Can be completely passive, where the franchisor will actually run the business as a corporate model, corporate location. You know, that's definitely a rare case, but we do have a few of those. By and large, it's semi passive, and I stress that it's semi passive. You know, you have to expect to have some level of involvement in the business. I. I don't want to miss misguided people, but, you know, a couple of things that we're doing to help our clients, because we have that request coming a lot of, hey, I'd love to get into franchising, but I really don't. Anytime, you know, having that general manager, we're partnering with a recruiter. This is out of the gate. This is new news. But we're partnering with a recruiter that's going to help our clients find general manager candidates for them to then interview. So it's going to kind of take some of the. Some of the work out of that process. A former client of mine, guy named Nathan Bocock, great guy. You know, right around 40 years old, he built up the two men in a Truck franchise. He bought in, acquired additional locations. It's a moving service, it's a franchise. But he has about 10 locations, doing over 30 million a year in total. And he and I have done a couple of deals together the past few years where he's like, hey, I want to expand and diversify my portfolio. I've introduced him to opportunities that he's bought into. And in every case, he puts a young general manager in place. I mean, they don't have to be young. It's just kind of how it's happened. But he actually gives them some equity. He says, hey, I want you to actually be an owner, not just think like an owner. And yeah, he sourced these guys through church. Oftentimes, you know, it's. It's not. You know, he just kind of gets to know guys and says, hey, I trust you. You know, go make us proud. And sometimes even in other cities, he'll. He'll position them. And I mean, in every deal we've done, he's come back and bought additional locations. I mean, just had a lot of success. So anyway, that's a long way of saying he is now on working with us to coach our clients. So when we have a client sign a franchise agreement, we Bring Nathan in for a couple of coaching calls that we fund and Nathan will, you know, share his learnings, best practices and how do you align interest with the general manager, what's worked, what hasn't. So again, just trying to help the clients get out of the gate strong and be able to be as semi passive as possible.

Let's talk about location for a minute. Where should one open a franchise? Should it always be close to where you live? Should it be in your town, your city? Should you look at other states? Are you looking for cities that are growing? Are you looking for tax free states? What's your advice on where, where to open it?

Hey, I certainly do have clients that are moving from California to Texas into Nashville. You know, we, we see that happening. Obviously business friendly states are easier to get up and running and do business and maybe a few less regulations. But you know, we look heavily at the demographics of the area and this is something that the franchisor really has expertise on. They know, hey, can we operate in small markets? You know, are we better in small markets maybe where there's less competition or are we better off in big cities? And you know, they'll define their locations and territories by population or number of addressable households with an income of at least this or a number of addressable businesses that meet these criteria. They have access to all that information in their systems and so they're able to work to help define those locations with, you know, with franchisees. But they know based on trial and error what to look for in new locations. So it varies. I'd say more oftentimes than not, you know, you are looking more towards big cities or areas that you anticipate growth, people moving in, not moving out. But again, we're doing, doing a lot of business in states like upstate New York or you know, western Massachusetts or areas that you don't think of as hotbeds for attracting new, new relocations.

Okay, so I'm kind of interested in franchising, right. I come to you and, and I'm like, well this sounds great. I can make a lot of money with these. Maybe I can scale back on whatever else I'm doing. Maybe I can give myself a little bit of financial freedom. But there's so many, right? There's hundreds of these companies, these franchises out there that, that I can choose from. How do you select which one at least to start with?

So you can certainly go out there and google around and get some information. The challenge is going to be your, every brand's putting forward their best foot you know, online and you're going to see their marketing messages and you know, you may see like in the case of the installation, oh, they've got five locations, you know, that that's a little too small. I need something more proven. Well, they may have a ton of Momentum and have 100 locations opening up in the next six months, but you don't have insight into that or the background of the CEO necessarily. So you know, again we, we love engaging with clients and what we've done is, you know, we've taken out the food and the lodging franchises, you know, we don't deal with the hotels. That's just a different game as well. But then we've taken those and you know, apply different screens to them. Again we work with all these different development groups that work with the franchise brands and YSA development groups that, you know, they'll come in and kind of represent on the sales side these different, you know, emerging brands. Allowing the franchisor to then focus on their new franchisees and setting them up for success rather than having to always sell new franchises. So anyway, there's partners that we have in the market that have already done some of the screening as a first step and, and we do a lot of business with them. And then personally, you know, I draw my experience as a franchisor and franchisee. I mean I network, I go to events, I get to know these franchisors, understand what their growth projections are, you know, what's their competitive advantage in the market, what types of franchisees are they attracting, are they attracting many franchisees, you know, what would be relevant to a market. And I, so all of that goes through into the selection that we have. Like I said, we work with over 500 brands. You know, any given time there's probably 30 to 40 that I'm really excited about introducing my clients to. But it has to meet some of my clients criteria. So we get to know our clients, you know, through a series of a couple of calls, get to know their background, their skill set. They may be coming from a totally different industry, but they're open to this industry. You know, all these different things of do they like a large team, small team, brick and mortar or you know, non fiscal location, you know, what's their, where are they looking to invest, you know, financially, are they looking to build a portfolio? What's their timeline for being in business? All those come into play and then we also bash that against what we see taking place in the market. You know, I'd be hesitant to buy into a Franchise system that hasn't sold a franchise in six months. However, I would love to take a hard look at one that sold 50 locations in the past three months. There's something that's resonating with others, oftentimes with similar backgrounds. So all this data points come into place and what we'll do is, you know, take clients through typically 8, 9, 10 opportunities that match the criteria we've discussed with them in the market that are available in their market. The client works to narrow those down to two or three, maybe four opportunities. We then make the introductions and then they start the process of having a few calls with the franchisors, hearing all about different dynamics of the business, financials, the ins and outs, the branding, the FDD review. They get to do what's called validation, where they talk to other owners in the franchise system, hear about their experience. What was your ramp up? What kind of support are you getting from the franchisor? Anything you do differently really. With the goal of an eyes wide open approach, ultimately culminating what's called a discovery day where they meet with the franchisors team on at the home office, get to meet all of them, they need to make sure it's a match both ways and then they get the offer to join the franchise system. So, you know, we're serving as a sounding board holding our clients hands through the entire process. You know, if they get off the call and say, hey, I don't think that's the right fit for me, no harm, we let the brand know. But what will happen is they're going to say, there's something that I heard on that call that I really like. Hey John, can we look at some other opportunities to kind of fit this criteria? Because they're thinking, our clients thinking evolves as they go through this and you create a framework and lenses through which to analyze option A versus option B. You know, it's this muscle that you haven't necessarily used in the past. How do you analyze business? And so that's what the process looks like and kind of how we help them narrow down so they're not overwhelmed in this universe of noise out there.

Now, what role does passion play here? I mean, a lot of people choose their career. You know, a lot of our listeners are doctors. They feel passionately about medicine. This is, you know, they feel it as a calling. For instance, what role does that play when choosing a franchise, if any?

You know, I, I do have clients who say, hey, I am passionate about pets. I've got five dogs. I want to do something pet related. Well, there's a lot of businesses that cater to the pet industry and probably some they hadn't thought about. So we introduced kind of that world of pets that they know that's where they want to be. We don't try to talk them into something else. But the vast majority come and say, hey, I'm open minded, here's what I want, here's my long term vision. I just hear this day in, day out through would be entrepreneurs across North America. Some that have never owned a business before, some that have, they say, hey, here's what it looks like from a hot 30,000ft. Help me break it down to what tangibly, you know, could fit that mold. And in some cases I say there's nothing that will fit that mold. But in a lot of cases it's hey, here's what we've seen be successful. For others that you may not have considered, you know, let's, let's at least consider it, maybe have a conversation with them. And inevitably, Jim, you know, even once we review opportunities with the client, what was ranked number three in their mind? After they talk with them, they say, hey, that's now my number one. And so I just encourage people to come in with an open mind. From a passion standpoint, there are times the passion comes into play. I'd say majority of my clients say, hey, I'm passionate about a lifestyle for my family, you know, the work life balance. And I may have to work hard and initially, but longer term I see what this can lead to. That's more of where the passion lies versus hey, I'm passionate about this industry. I will say though, you know, it is fairly common for people to come and say, hey, I know I don't want a physical location, I want to do it remotely. Others say, hey, I really want something that has a physical location. So you know, there are some criteria that we can apply that take out large swaths of opportunities, but by and large, passion, it's more what they're passionate about versus the business itself.

Now there's another, another person with a say in this process. The, the franchisor. How selective are these companies in choosing their franchise partners and locations? I mean, I presume you can't just go to them and say I want in and I want to do this in my hometown. They may not be cool with that. How selective is that process? Is it competitive, is it hard or, or what do you typically see?

Certainly a two way partnership. I mean the clients that we work with are sharp folks. I mean you know, we've gotten accolades, you know, from the franchise world on the types of clients that we bring to them. And so, you know, we haven't run into that too often where they say, hey, you're absolutely not a good fit. I'd say if it's a sales oriented business where that the business lives and dies based on a sales orientation. You have no sales in your background. You don't want to hire someone to be a salesperson, you know, manage a salesperson. I say, sometimes those are easy disqualifiers. When we say, hey, it's just not going to be the right fit. But in a lot of cases, there are transferable skills. Again, you know, I think about the medical profession and the doctors, many of whom are listening. You know, you've learned how to work with others, you've learned how to work with clients, if you will, how to negotiate, you know, on the back end of, you know, reimbursements or what have you. I mean, there's a lot of things that you've done that will be applicable though, may look a little bit different, but these skill sets that you've honed over time. I always say that if you care about people, I mean, that's the biggest thing. At Shelf Genie, we'd have candidates go through the process and they'd say, wait a minute, you're marketing, making our phones ring, you're answering the phones, you're setting appointments, you're supporting us on the technology side and product development. What do we do day in, day out? And my answer inevitably was get involved in your local market, some grassroots, whether it be supporting the little league baseball team or getting involved in the chamber of commerce. But then really your most important thing is going to be around people finding and hiring the right talent, incentivizing them, you know, supporting them, and then making tough calls when needed. You know, I'd say that's the biggest thing is just your ability to work with other people. And you know, that sounds commonplace, but for some people it's tougher than others. So I'd say with the franchisor, the biggest challenge we're running into right now is again, where you have multiple candidates wanting the same opportunity at the same time in the same market. They're not going to let you open up in a market that it doesn't make sense in. You know, if it's a mosquito business, you're probably not going to go sell it in. Do you have mosquitoes in Salt Lake?

Not a lot. It's probably not going to work great Here.

Right, right. So it's a little bit of a more regional business. So, you know, they're, they're going to want you to be successful. I mean, again, your numbers get rolled into their item 19 of their FDD. So, you know, and. But you know, if you're going to be too difficult to work with, if through the process you haven't been able to follow the development process to lead to that point of agreement, they're going to say you're not the right fit. From a culture standpoint, we don't see you kind of abiding by the system. So that does happen. But it's definitely more rare from our experience.

Most of the time you can get what you want.

Most of the time.

All right. People are always interested in hearing horror stories when these deals go bad. Can you share some stories? They don't have to be ones that you were personally involved with, but where somebody got into franchising and it worked out horribly.

Yeah. Again, the one example that I have from our clients where literally didn't work out was, you know, the example where he lived three hours outside the town and just didn't have any connections in that. In that area. And it was a business that lend itself to that. But I'll give you an example from my personal experience. I had two partners and I always say the partnerships are great until they're not. You know, my partnerships I'm involved in now, I couldn't be more thrilled. I mean, we've just got, you know, if you're going to partner up, make sure it's the right person. And one of these two partners was one that I've done a lot of business with in the past, really trusted him, he trusted me. But we brought in an operating partner that equal on equal field with us. We're each one third owners of the. Of the business. And long story short, the operating partner ended up not being who we thought he was. And it was a situation where he wasn't running the business well, but he was reporting back to us essentially that things were going better than they were. And, and once we really dug in, and our fault for not being more hands on probably early on, but once we dug in, we realized, oh gosh, he's really put us in a hole and we're going to have to put in some additional capital, which is not ideal. And he wasn't able to. And so that created a little bit of attention as well, that he'd kind of run the business poorly and then couldn't put in additional capital. That really created some rifts, especially between him and my other partner, but ended up, you know, that we needed to remove him and really get him out of the equation. So to incentivize my other partner who wasn't planning on being an operating partner, I ended up selling my equity to him in the business at a fairly low rate. So I took a loss on, on that deal and, you know, try to set him up to be motivated to run the business, which he hadn't planned on doing. So, you know, that was a. The horror story, I guess. And you know, it doesn't sound as bad now, but you know, when you're living in the moment, it's, you know, there's some drama and I don't like drama.

How about if I want to get involved in some of these famous brands, I want to be a Chick Fil a location owner. Can you help me to accomplish that?

Well, Chick Fil a, actually Andrew Cathy's a good friend here in Atlanta, so I might be able to pull some strings over there. But Andrew, of course, took over for his dad this past year for Dan. Kathy. You know, Chick Fil A is probably the hardest one to get into. It's just such a unique operator model that they have with that business and culture wise and everything. But great, great business here in Atlanta. We have a lot of folks over there. The food industry is a different animal. Again, you know, what I'm focused on here is the non food. You know, if you were to get into Wendy's and want to acquire 78 Wendy's, I mean, it's just a different level. You're dealing with a lot more private equity buyers that are owning hundreds of locations. You know, I've got a friend that runs Atticus Franchise Group and they've got over 100 sonics. He's got over 100 massage indies, you know, and I know others own quite a few Makos or Meinekes. And so it is a little bit of a different realm, you know, and that's not where we focus. You know, a lot of the brands that we work with are ones that you've heard of. I mean, they're household names. But you know, typically they're either resales or you're buying into smaller markets that they haven't developed yet. The benefits of buying into a brand that you've heard of is that they've probably been around for a while. There can be some brand awareness in the market, but you may go in and be franchisee number 741. You're not going to get quite the same hands on attention. You're not going to get a seat at the table. You'll probably have to work around some other prime locations of existing franchisees. With an emerging brand, the challenges, the opportunity is you get to go in and get choice territory, you get more hands on treatment. The challenge is maybe they haven't seen every situation or encountered everything in the past that you may encounter. However, most of my clients, and this is where we do our investing too, prefer that emerging brand opportunity given they've got the leadership, the financial model, the competitive advantages, all those things in place. But we'd rather get in early on, get the right market, you know, really get a seat at the table in a lot of cases as well.

All right, our time's running short, but you've got the year of 30 to 40,000 high income professionals, mostly docs. What's one thing we haven't yet talked about that you think they should know?

Yeah, you know, I think, you know, just from a high level, we're having conversations across North America with all sorts of backgrounds. I mean, many in the medical field, many, you know, coming from the corporate world or in the legal field or you know, in some cases existing business owners. So there's a desire, I believe in everyone to be a business owner to say, hey, do I have what it takes? But, you know, and they want that idea of financial freedom and independence, you know, that you so often talk about on your show, Jen. They just don't know where to start. And so we've just seen success story after success story in case studies. And again, not everyone moves all the way forward. You know, they'll go through the process and decide it's not right for them. That happens all the time. But I think it's a really good idea for people to at least give it a consideration because there are a lot of unknowns in franchising. Once you really start realizing the benefits that can be had, you can quickly determine is that a possible fit and if so, let's at least dip a toe in the water, check it out and see if it could be a good path. You know, we see families going into business together, oftentimes couples, you know, we'll purchase a franchise together. We just had two brothers as I mentioned, you know, or a brother in law. That sounds a little scary. Maybe not a brother in law, but you know, a lot of times it is, hey, a good friend of mine, we want to partner up and he's got relationships with all the commercial real estate agents. In town, you know, start thinking about in your market where the needs, you know, where are people being underserved today? And maybe it's the service just isn't that great. And you say, wait a minute, we can do that better. You know, oftentimes it's a fragmented industry that you step into with a brand, with a white collar approach the technology and just really differentiate. So start having those thoughts as well as thinking about your connections in the market and what would help you kind of get out of the gate fast.

All right, John, if someone wants to hire you as a consultant or a broker, what's the best way for them to get in touch with you?

Yeah, as a first step, I'd come out to our website, Franbridge consulting dot com. That's F R A N Bridge consulting dot com. I'd say as a first step, sign up for our newsletter. You know, we deliver great content every month and we've got a book coming out in the third quarter. And so, Jim, I'd extend the offer to all of your listeners that, you know, if you'd like to get a copy of our book, it's called the Book on Non Food Franchising. It'll be releasing in the next few months. We'll make sure to get a copy to, to everyone that signs up. But yeah, if this is area that you want to take a next step in and actually have a conversation, I'd be happy to get on a 10 or 15 minute call and hear a little bit more about your background and kind of what you're looking to do and help you think about does it make sense to jump into the process and take next steps?

All right, we've been talking with John Austinson, a non food franchise broker. Thanks so much for coming on the show, John.

Thanks for having me, Jim.

All right. I hope you enjoyed that interview. Obviously, bringing on a guest like that, he wants you to hire him. That's why he comes on a podcast like this. We get pitched a podcast interview like this about five times a week and we take almost none of them. I think we can count them on one hand or less. All the people. The whole time we've been doing this podcast that reached out to us that we brought onto the podcast. Most of the time we're reaching out to them, but this one I thought was interesting. You know, I've been a big fan of ownership. Whether it's owning your practice, whether it's owning your home, whether it's owning, you know, a small business on the side, you are far more likely to become wealthy when you own stuff, whether that's in your portfolio, you know, stocks, real estate, bonds, et cetera, or in the ways you generate money. It's just a much more likely path to building real wealth and certainly to building any sort of passive income. I don't know how many people in our audience would be interested in franchising, but I know I've gotten questions about it over the years and I was interested in learning a little bit more myself about it. And so that's why we brought him on. All right, what else do I need to tell you about? We got a scholarship, right? We give away money. We're giving away tens of thousands of dollars to medical and dental students. All you have to do. And other pre professional students. All you have to do is apply. We get, I don't know, seven or 800 applications a year. You can apply whitecoatinvestor.com scholarship if you are interested in being a judge for the scholarship, you can't be a student, you can't be a resident. You have to be a high income professional of some type. You can be retired, that's okay. But if you would like to be a judge, apply@scholarshiphitecoatinvestor.com Put the word judge in the in the subject line and we'll let you help choose the winners of this scholarship. Nobody at the White Coat Investor chooses the winners of this scholarship. We're completely divorced from it. We just help fund it. But it is our audience, our volunteer judges that decide who wins the scholarships each year. So please, if you're interested in winning that, you got to be a full time student in good standing. Go ahead and apply. If you're interested in judging it, please also shoot us an email. We would love to have you help us to judge this contest. If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial Officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a free educational email series and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success. But as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help. Thanks. For those of you leaving us a five star review and telling your friends about the podcast. Our most recent one said Amazing podcast. I am generally not a podcast person, but I've never missed an episode of this podcast. Between Dr. Dali's blog, podcast and books, I've gone from financially illiterate to comfortable managing my own finances without a financial advisor. The content is listener driven and covers topics of varying complexity so people at all levels of financial literacy are able to learn something from each podcast. I find myself just as interested in this content now as I was six years ago when I first found his blog. If you haven't listened yet, get started now. 5 stars. Thank you Alpheus06 for that great review. For the rest of you, keep your head up, keep your shoulders back. You've got this and we can help you can be financially successful. All it takes is a little bit of effort, a little bit of knowledge, and a little bit of discipline. See you next time on the podcast.

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