The Truth About Franchising: Is It Worth It?

Hey everybody, welcome. This is a monthly kind of lecture that I do, uh, for free. Supposed to not be salesy, so today will not be salesy. In fact, Connor and I decided to make it so unsalesy that we don't even have slides. So we're just going to do Q&A and, um, spend time talking through stuff. And the topic is really franchises and franchising and the whole world of that kind of stuff as a path to entrepreneurship. So for those of you that have maybe not heard my story around franchising, like I used to really kind of look down on it. I thought it was like a lesser form of entrepreneurship. And then I kept seeing like my neighbors who drive like Range Rovers and live a really nice life. And I found out later they own McDonald's. Like, so, so I was pretty— that, that changed my mind on the whole thing. Also, I started a lot of businesses and incubated stuff that just was innovative, but it didn't work. So I came to love and appreciate the idea of franchising. And then, you know, my favorite person in the franchise world is, is Connor. So Connor, it's good to see you, man. Thanks doing this.

Yeah, thanks for having me. This is going to be— this is going to be good. I'm excited.

Super fun. Okay. So just in terms of format, we'll go 45 or 50 minutes. The idea is supposed to be a lot of Q&A. I took a lot of the questions that I think Connor hears a lot, and I'll give Connor a chance to introduce himself in a second. A lot of questions about how the world of franchising works and all that kind of stuff. It's fascinating. And we put those just in this doc here. So if that inspires you to think of questions, do it. Otherwise, like, we want to make this super interactive. That's why we're doing it live and encourage you to just type questions in like Ron already did into the chat and like we'll just spend time answering them because the idea here is to just be super helpful and, and go from there. And then, yeah, so I think that's, that's it in terms of kind of the rundown of how we're doing stuff. Did I miss anything there, Connor?

No, I would just reiterate, please do ask questions because I kind of live in franchise la la land all day. So my, my perspective gets a little bit skewed as to what, you know, people find interesting and helpful. So, uh, even if you think it's— there's no, no dumb question. Um, yeah, please, uh, please let me know what would be helpful to talk about, unless I ask the question.

That'll definitely be dumb. Um, so what, um, so why don't you just give us like 1 minute about your journey into the world of franchising and like how you got to kind of be in it?

Sure. Yeah, I got started in franchising, um, really young. I was actually still an undergraduate at the time, and my, uh, I was working for a franchise ownership group in the fitness space, and they wanted to diversify into home services and so had the opportunity to partner with them and kind of become their operating partner in a home service franchise brand. But initially, with the thesis, I wanted to go to law school. I was studying political science. And so I initially had the thesis that I want to do this as a way to, you know, to work and hopefully build a cash-flowing business that by the time I get to the point of wanting to go to law school, it'll be, you know, cash-flowing without my involvement and can help me pay for law school. And Sure enough, you know, a couple of years later we're at that point, but I'm like, why the hell would I want to go to law school? Let's just do more of this. So that's really what I did and what I've done ever since. After that, I got into, into a brand called Smash My Trash. It's in the waste compaction space and 4 franchises in that brand up in Indiana. I lived in up in, up in Indiana for a period of time, but about a year ago moved back to North Carolina where I'm from, and that's where I am now. And so in addition to owning my franchises, I also am a consultant. I help people that are trying to get into franchising. I help them to navigate that process, really to help them source the right opportunities, walk alongside of them as they evaluate them, and then to, you know, to get connected with lenders and things like that. But that is the quick and skinny on me.

Yeah, it's awesome. And you have the bluest background possible today, which is amazing.

I can change it. Do you have a preference? Yeah.

Oh, dang, girl. Calm down. Uh, that's pretty great. Um, so it's interesting, the first 3 questions we've gotten are pretty advanced questions, which is good. Um, so let's see here. So first question for the audience: can you guys see Connor now, or is it just me? Because I'll stop sharing if you can only just see me. So somebody type that in there. Um, cool. Well, hey, let's— let me ask you a question first. Okay, cool. Ron says we can see both. Thank you, Ron. Um, so let's just do like one-on-one for folks that are brand new with franchising, and then we can go to some of these questions. The questions that are coming in are very advanced, which has me happy. So let's talk about that. Um, oh, I'm floating over a Word doc. Yeah, that's where I should live, John. That's pretty great. That's great. Okay, so, um, so like, so question number 1, like in 30 seconds or less, Connor, like what, what is the franchise model versus like a conventional business? Like, how's it set up?

Yeah, so at its core, a franchise is a business where there's a core business called the franchisor. They are the people that own the business that have pioneered the concept, and they've, you know, put the whole apparatus in place. And then a franchise, that is the unit of a business that a franchisee has the ability to purchase, which basically gives them the rights to execute and develop that business model within a predefined territory. So that at its core, that's what it is. And let me know if you have any follow-ups on that.

Yeah. So like examples, there's McDonald's are all franchisees. Do they own any corporate stores? McDonald's?

I don't know if they do anymore. I know they did at one point, but McDonald's was the concept that really pioneered franchising. Subway was another one. They pioneered the area development model in franchising, which is kind of a different thing. But really the QSR, the quick service restaurant industry, was the first industry where franchising, you know, was made prevalent, uh, because that was— as all of these big, big box restaurant chains were developing, franchising was basically the way that they could grab market share more quickly in a more capital efficient way than if they were building up those stores and operating them all internally.

Yeah, so there's like McDonald's franchises, uh, a lot of the Dairy Queens are. Then there's a lot of, um, stuff that is like services businesses, a lot of retail stuff like you— I think UPS stores are franchised, right? Um, then you have things like, uh, Orange Theory, a lot of fitness concepts, F45 are that way as well. And then there's like B2B categories as well, like there's painting franchises and stuff like that as well. Um, anything else kind of— oh, I know there's med spa franchises. I've run across those too.

Yeah, definitely. Yeah, I, um, You know, and I don't work a ton in the food space. It's just not my lane of expertise. So lots in food, but really the other categories where you see a lot of franchises today are like anything in mobile services, whether that's home services, commercial services, home care, restoration, all of that. A lot of those are franchises. You have the fitness wellness category. You have a lot of stuff in youth, youth enrichment, a lot of stuff in pets. And, you know, those take all different forms too. Some of them are going to be brick and mortar like retail franchises, and then some of them are going to be mobile to where, you know, it's a guy in a truck type of a business model. So but yeah, really across the board. But those are really the categories that are most hot right now.

Right on. Okay. Well, cool. So for those who are just joining, encourage you to write questions in. I'm going to start going through these questions, Connor. And I think what's cool about this, again, these are pretty advanced questions. If you're new to this stuff, like, don't let that intimidate you. I'm the only one asking stupid questions today. So cool. So Ron Moon says, is SBA financing easier or harder for franchisees? What are alternative funding options and is there anything else to consider? So maybe start with this. What is SBA? And then kind of talk through, talk through, explain this, if you don't mind.

Sure. Yes. I think what Ron is referencing is the SBA loan program, which is basically a program through the federal government where they are partially guaranteeing the loan. On behalf of the lender. So effectively, it just makes it easier for common folk like you and I to get business credit and otherwise wouldn't. So I think Ron's question is more of like if it's a franchise business versus a non-franchise business, all things considered, is it easier when it's a part of a franchise? And I don't even know that I want to make the distinction that it is easier, but I know that for franchise-specific lenders, which there are some out there, they definitely view franchises to be favorable. And part of the reason is, is like what lenders don't people don't like is they don't like risk. And franchises across the board have a higher— they have a lower failure rate than non-franchise businesses. And then in a strong system, they have a track record of those other businesses operating that they can look towards. So all franchises are viewed favorably. What I would tell you is, is it really important if you're— if it's an existing acquisition, this is less so the case, but if it's a new development, it's really important to work with a franchise-specific lender. And those deals are typically getting done for between 15% to 20% equity at close. And by the way, I know a bunch of those. So if you need help getting connected with a lender, reach out to me and I'd be happy to help. But great question. Yeah.

And it's, it's interesting when, you know, I started my drive-thru coffee chain, which is the next question, by the way, we talk about that. We initially went to try to go get some of the, the construction stuff and all that kind of stuff financed. And because we were a de novo brand new thing without a proven concept, the bank was like, nah, We're not cool. But if you were like Dutch Brothers and it showed up and had a proven model, they would have been like, yeah, we'll fund you. I found out later the same, the same group like, uh, did SBA loans for a bunch of approved franchise concepts. So it's just, it buys you some better financing there. Um, uh, but yeah, I'm glad I'm not in that business anymore. It's super fun. It's out of somebody else's problem. The drive-through coffee space, a little crowded.

Um, cool. Yeah, tell Adam about that. I'm curious.

Uh, so yeah, so Adam's next question about the through coffee space, but my anecdote about that is every— if you go to Scooter's or Dutch Bros or Seven Brew or any of these concepts, including Starbucks, their number one item is all the exact same item. It's a, it's a caramel mocha frappuccino. Like, and they all just have a different name for it, but everybody sells the same thing. It's got like two, two shots of caramel, two shots of chocolate, three shots of espresso, and a bunch of cream and heavy and sugar. Like they all sell the exact same thing. And then you're like, well, cool. Like, how do they differentiate? Well, they all use the same ingredients and the same syrup. Ups from exactly the same people. If you go look behind any of the counters, the only difference is location and, uh, and branding. Like, everything else is the same. Pretty crazy. Okay, um, sorry to get us off topic there, but I found that fun. Uh, this question is from Adam Parrish. My wife and I are considering a franchise in the Raleigh-Durham area in Drive-Thru Coffee. We like the brand and are hoping to get some ideas around here how to make this choice. Do you have any good ROIC, so ROIC cash flow modeling approaches to help, to help screen for a good versus a bad franchise model. For example, Papa John's seems obviously bad, high risk, low return.

Oh, Adam, I don't know if you knew this. I'm also in the RDU area, so hit me up. I'd love to, I'd love to meet up and help out if I can. But so, but your, to your questions about like ROI cash flow modeling approaches, My, my view on this is that there is no rule of thumb that justifies like what a good ROI versus a bad ROI is in a franchise or really in any investment. Because I think that's very dependent on the individual, meaning like if I'm deploying $5 million in capital and I'm not going to be super involved in the business, I have a different standard for what my ROI expectation is going to be than if I'm deploying $100,000 in capital and I'm going to run the business full time. So that's, that's more of like a values judgment that you know, each individual has to make. Um, but you know, when it comes to understanding the cash flow cycle of the business and seeing how that correlates to, you know, um, the investment, uh, what I always tell people to do is like, you should get— when you're conducting like validation and you're talking with other franchisees, identify on the revenue and the expense side, what are the 2 to 4 highest impact variables? Uh, meaning like, my guess is in a coffee business, you're going to look at like labor, rent, cost of goods sold and marketing maybe, and go and talk to all of those other franchisees about those variables. What results are they going to see? And then you're going to notice trends and you can start to use that to build out a picture of what, you know, the cash flow forecast is going to look like in that business. And then the other thing that I would do, thinking about your market, is if you can find, if you can find franchisees that are in markets that have similar demographics to the one in which you're looking to do business, that's always great. And if they're not similar, you just have to evaluate the feedback that you get through that lens of, you know, for better or for worse, yours is going to be a little bit different. But there really is no rule of thumb about what, you know, in our— what ROI would make sense for you or wouldn't make sense for, you know, overall. It's more about, you know, for, for you as the individual. Does that make a lick of damn sense or am I rambling?

I think I understood it. I mean, the key takeaway for me there is definitely when you're considering a franchise concept like go cold outreach and talk to other franchisees and see what they're saying. Not what the— not— no offense— not what the franchise broker is saying or what the franchisor is saying. Like, you should listen to those things, but obviously go get— go talk to other franchisees and see what's going on under the hood.

And if I could piggyback on that real quick, just so that everybody's aware that the franchise— in a franchise disclosure document, the FDD, the Item 19, that's where you're going to see financial performance. Disclosed on behalf of the franchisors. So franchisors, what is listed in the Item 19, that is all that they're allowed to share with you in terms of financial performance. So the better feedback that you're going to get about the financial performance of that business is going to come from franchisees, both because they have more latitude in terms of what they can share with you, and also they're not necessarily incentivized to, you know, fluff their numbers to present a more rosy picture. So that is, that is the most important part of the franchise diligence process is validation.

100%. Okay, let's move on. Tyler Castleberg asks, for food franchises, which I know is not your jam, but hopefully we can talk about it. At what scale, number of units can you typically hire a GM to manage the day to day of the portfolio?

Yeah. So, yep, not, not my jam, but I think that like the main advantage of the QSR industry overall is scalability, you know, because, uh, it's the most duplicative business model that you're ever going to find, because running a QSR business in one market and another really isn't going to differ very much. From the friends that I have in the QSR space, a lot of them have managed— have GMs in every store. Um, so, you know, I think that's the first question. I don't know if what you're referencing is a high— is a, uh, you know, a layer above that, like a middle manager type role. I don't have insights into that, but I think that if that's what you mean, it's a great question to ask because part of what I work with people through as they're doing these deals is to think through that and think through what are the increments of, of number of units that an area manager or whatever the next level of management is, what is the number of units that they can sustain? And typically it's going to make sense to acquire you know, the territory rights in those increments. Meaning if like if this is a concept where one territory manager or one area manager can manage 6 locations of this franchise, a lot of times you're going to want— unless you're only going to do 1 or 2 and you're going to run them— a lot of times that means that you're going to want to plan to build those out in increments of 6 or whatever that increment is. So good question. We've got another QSR question. We're QSR heavy today.

Uh, for a QSR franchise, how would you— and I think this applies to any franchise, frankly— how would you reduce risk if you're bringing it into a new area? So like a new geography. So think of franchise with single digits or low double digits locations currently and all in one state. How would you evaluate it for viability?

Okay, so kind of two, two different questions here. One is talking about like a hedge on risk and one is talking about the evaluation. I'll hit the second one first and plays on what we were talking about earlier to Adam's question about the coffee concept. So when you evaluate it for viability, you're going to look internally and externally. So internally at the mechanics of the business model itself, how is it performing, you know, between the financial performance, what does their marketing look like, the systems and everything else. Like you can look internally within the four walls of the business that they've built and answer those questions. Externally, that's where it's going to be a little bit more nuanced in a concept like this where It's single digits or low double digits currently all in one state. I was helping somebody very recently. They were looking at a very interesting franchise concept, but all of the locations are in these West Coast affluent urban markets. And this guy's at like a tier C market in the Midwest. And I'm like, you have really nothing to look at there. This is not a good idea. So like I was telling Adam, I would evaluate when you're looking externally and you're looking at the different markets, you need to identify, first of all, the closest market that resembles yours and then start to draw parallels and say, okay, if this market has, you know, 20% more favorable demographics, then I'm just going to again run the feedback that I get through that lens and understand that, you know, my revenue may be lower, these expenses are going to be lower and stuff like that. So just take it with whatever grain of salt makes sense given the market differences.

Is there— I mean, is there a level in which, say, you're getting into a franchise brand early, that some of those franchise brands should compensate you for that risk? I mean, so a story I heard, by the way, was, um, back probably 12, 14 years ago at this point, one of the early franchisees for Orange Theory was in Dallas, and they couldn't find anybody to take the territory. So he basically negotiated— because it was so early in that brand, he negotiated all of Dallas-Fort Worth for basically nothing. And then supposedly a few years ago they bought it back for like $100 million or something. I don't know. This is all apocryphal, but like, I think is, you know, it sounds like there's a different world if I'm buying like a very established, like into Orange Theory or McDonald's now, which are very established versus like a relatively high-risk, relatively unproven franchise brand.

Yes. So that concept is true. And I actually know that specific situation you're talking about and that your story checks out on that. And it's a good— it's a good example. All of this is a supply and demand equation. It's very simple. So if a franchisor is, you know, is more nascent and they're trying to get the momentum going, you know, sometimes, a lot of times they will be more incentivized to be more flexible in that regard. And I think as a new franchisee, you're going to be in a better position to ask for more favorable terms. I strongly discourage people not to think like that, frankly. Like, I think that if you are, because you have this inverse relationship between if a brand is having to really be all that flexible and give you the best terms possible, that kind of to me calls into question like, you know, the merits of that opportunity too. So I would rather see people end up with fair terms and the strongest brand possible than, you know, great terms and a very mediocre franchise concept. Because ultimately it's like if the business model doesn't work, um, it really doesn't matter if they're giving you a sweetheart deal. You still have to run the business.

In investing, we call that a value trap. It looks— it looks like it's so— it's so cheap it's bad.

What is it that Warren Buffett said about how you eventually realized after he went through the cigar butt phase about it? It was better to buy wonderful companies for fair prices rather than fair companies for wonderful prices. And that's exactly what I'm— you know, what I would agree with in this concept.

I think that guy knows what he's talking about. Okay, let's do Dave Miller. He says, is it normal for brands not to include profitability margins in the franchise disclosure document? The FDD is getting that anecdotal data from curated owners selected by the franchise. The only way seems like a great way to subject myself to survivorship or selection bias.

Yeah. So normal. I don't want to call it normal because I think it— I think it's ridiculous, but it does happen if that's what you're— if that's what you're asking. So in an Item 19, franchisors have a lot of latitude for how much they want to disclose and how thorough they want to be, with the catch being, like I said, they're limited to— they can only talk with you about what is in the Item 19 because that's what they're prepared to back up in court. So there are some, some brands that don't disclose an Item 19 at all. Like, you know, we're not, we're not going to share any numbers with you. You know, that's on you to go, to go figure out. And yes, you will see brands that don't include profitability margins. That can be for a number of reasons, you know, but you're definitely— you're not given a lot of tools to work with there. And so to answer the second part of your question, yes, that is the best way for you to get that data is directly from the franchisees. But yes, great way to subject myself to survivorship or selection bias. That is true. But it's, it's, you know, true based on where you're getting that information, meaning if you're only going to The mistake that I made when I bought my first franchise is I only talked to the franchisees, you know, that the franchisor connected me with, which, you know, was stupid in retrospect, obviously, and everybody shouldn't do that. But if you're getting a wide range of data, talking with a wide array of franchisees, you know, that is how you hedge against the selection bias, is simply where your inputs fall. But yeah, that's what I'd say there.

Great answer. Okay. Aaron or A-Rod, depending what— it's, it's A-R-O-N, so I'm gonna, I'm gonna go Mr. Shaughnessy here. Did you ever see that skit, the Key Peele skit where they— yeah, yeah, I have a, I have a very Anglo friend and I call him A-A-Ron. It's terrific. Okay, um, all right, from Aaron: How is buying an operating franchise different than starting a new location?

Love that question, Aaron. And I talk with people a lot of times because I am— I kind of left this part out, but I did a search before I knew kind of what a search was. So I bought the second brand that I got into. I bought an existing location to get started and I bought, you know, multiple locations since then. So a lot of the people that I work with are like either like searchers or search adjacent. And so I have this conversation all the time here. So all that being said, like, I'm a fan of franchising, I'm a fan of of, of ETA, entrepreneurship through acquisition. And so if the two align where it makes sense and you have a great opportunity to acquire an existing franchise location and a great brand, go for it. Um, the qualifier that I will put on that is that, um, sometimes people have unrealistic expectations for the availability of— you have a lot of variables, right? You have to have a deal that makes sense, um, in a brand that you want to be a part of. And it's very important not to Ignore the latter there because I see resales, franchise resales all the time that are profitable, that are trading for a turn and a half of cash flow. And I still would never touch those with a 10-foot pole because they're in brands that suck and I don't want to be a part of. And so that is the trap right now that I'm seeing people that are acquisition-oriented falling into is frankly ending up in mediocre at best franchises. Because by default, that's where they found the best deal. So that is the challenging thing, is that you have this inverse correlation between the quality of the brand and the number of good resale opportunities that tend to be available because so many of those are going to be traded internally. So usually when I work with people on— unless you find like that stars align, like, you know, if you have a deal on the table that works, go for it. But usually the best path for somebody that is acquisition-oriented is to use acquisitions as a growth strategy. But buy your way in the door and utilize acquisitions when the wind is at your back and you're internally, and you're going to be spoon-fed deals if you want to, versus when the wind's at your front and you're going to probably have to overpay to get somebody to talk to you because it's more convenient to sell to somebody who's an existing franchisee. So I'm a fan of, again, both paths to entrepreneurship, and if they overlap, great, but you just have to be careful and not let the fact that it's an existing business cloud your judgment towards the fact that it's still a franchise.

An anonymous attendee asks, what is a good qualifier for an ideal candidate for franchising? I'm torn between continuing in my financial career versus starting in franchising. So I think this person is trying to figure out like who should be a franchisee, who should do this.

Yes, great question. And I think that the prerequisite to that question is, should I be a business owner? Owner, you know. And so that's kind of the 3 questions I take people through is, first of all, should I be a business owner? Second of all, should I be a franchise owner? Then third, and then if so, you know, which franchise should I, should I pick? Um, so obviously business owner, that's a broader conversation. If you have determined that you should be a business owner and then the remaining question is, should I be a franchise owner? Um, a couple things is, do you, uh, like the idea of executing over innovating? Um, that's the reason franchising has been a good path for me is I really don't care. I'm so I'm so industry agnostic. I have no passion about the window cleaning industry or the trash industry or anything. I'm passionate about business. I'm passionate about driving revenue and building teams and seeing all that, you know, grow together. And so franchising was great for me because it filled that gap and gave me, you know, the lane to execute all of that on. So are you industry agnostic? Do you like executing over innovating? I think for people like me that like to have their hands in a number of things, franchising is a great path for that as well. Is, you know, operating within the structure of a franchise system, it expedites your path, I think, to being able to take your eye off the ball a little bit because you're kind of outsourcing some of the visionary, like, stewardship of the long-term, like, you know, brand and the business stuff to a franchisor. You know, I don't have to attend industry conferences, as an example, for any of these businesses. Um, I'm, you know, I'm just executing. So, um, So yeah, I think those are a few characteristics that I think make sense.

Uh, are all franchises brick and mortar? Are there online franchises also? That's from Gabe.

Um, there— yeah, so there are online franchises. Uh, I don't know that I would really recommend any of them, meaning like franchises that are like, you know, um, yeah, just don't have like, you know, a tangible operation. Um, but, uh, no, they're not all brick and mortar. Um, a lot are in mobile services, which— that's what you know, the big encompassing term that I use to walk through, you know, home services, commercial services like what I'm in, in the waste industry, home care. There are some pet businesses that are, that are mobile, don't have brick and mortar, some youth enrichment businesses that don't have brick and mortar. Excuse me. So lots of options that are not, are not brick and mortar. And there's a whole other conversation around, you know, the advantages, disadvantages of brick and mortar versus non-brick and mortar. But yeah, there are options there.

Yeah. So there's some that are like totally virtual, like you say. Then there's some that are like pretty location agnostic. Like I see the ServPros everywhere, which is like a disaster remediation franchise. So those are all over the place. And then like the junk hauler type folks, like my buddy bought one of those here in San Antonio. Junk Luggers is what I think it is. Um, and that he has no location whatsoever. There's just a bunch of trucks that sit in front of his house. Yeah, yeah, then they drive to the dump.

That's exactly right. So, um, yeah, and I would just say too that, um, just so that people are aware, like, most of the activity right now, greater than 50% of the activity in the industry right now, is not brick and mortar. It is these service brands, some of which are hot garbage, by the way. But so I'm not saying it's exclusively a good thing, but, you know, that just gives you a lay of the land here. Like, we're not just talking about retail locations here.

There are a lot of franchises that are Well, with it, with how expensive real estate is now, how much the landlords are going to hang it on you and how the population is aging. And by and large, we have this K-shaped recovery where the rich are doing really well. It's a good time to be in home services and potentially a bad time to be getting into stuff that sells to mere mortals like myself.

So, well, that's what I say is mobile services like, you know, pets, wellness and kids. Those are like the areas that I like to hang right now because that is where people with money are spending outsized amounts of money.

Yep.

You know, so, yep.

Cool. All right. So what's your advice for getting into food franchises? As I said, as a semi-experienced entrepreneur, I'm inclined to buy a portfolio with an existing GM in place. But do you see problems with starting more than one?

No, no problems starting more than one. And again, like to qualify my take of don't. My overall take on the food business, again, the pros of it, you're not going to find a more duplicative business model. Everybody's got to eat. I get it. Really, the two— again, this is anecdotal because I've never been in the food business, but the two huge advantages, the two huge value creation mechanisms in the food business is, first of all, scale, which again is a function of it being so duplicative. And second of all is real estate. And so most of the people that I work with that are, you know, they're looking to invest somewhere between, you know, $100,000 and $3 million. They're not at a point of scale where they're really catching a lot of the advantages that come with the scalability of the industry, but they're catching, like, all— still catching all of the disadvantages of the industry. So which, you know, are lengthy. So, you know, to the question about like, are there problems with starting more than just one? I would say the inverse. I would say that like, that is, there are problems to starting with just one, you know, because you're not, you don't have any economies of scale and stuff like that. So, and I would say too that I have, I've helped people get into what I would call like food adjacent franchises, which is where they're selling It may be a food product, but really what they're selling is an experience, and food happens to be the underlying product that they're selling. But the economics of the business look completely different. The staffing model looks completely different. So I'm not saying that there isn't opportunity in the industry. It does not get me excited right now. But again, it's in full disclosure, not my lane of expertise. It's the same reason that I don't invest in real estate personally unless I'm investing in like a fund or something. Because I know that there are people out there, friends of mine, that are real estate people. Like, that is their thing and it's not my thing. So I don't want to compete with that. It's the same thing with the food industry. It's just not— I'm not an expert there and I don't want to swim in a lane, you know, where I can't be competitive.

Is there a sweet spot for a number of franchise locations? For example, when you're— I think this is when you're choosing a franchisor. For example, fewer than X isn't established, proven enough. More than X is big and such— is too big and saturated.

Um, so this is a great question because I used to say that there was, and now that I— now I say that there wasn't. Um, I used to say the sweet spot was 50 units open. Um, and here's what caused me to change my thing on that. Um, my first brand is called Shine. Um, uh, wonderful people, less than wonderful franchise. We'll put it like that. Um, Shine had more locations when I got into it. Shine had more locations open than Smash My Trash did at that point. Smash My Trash has been, has been an awesome franchise, you know, on a number of levels. And so what that brought into picture to, you know, what that brought into focus for me is that you really can't quantify that because there are so many other variables. How, how well capitalized is the franchisor? How sophisticated are they, what are they building out, you know, really what does the trajectory of that brand look like where, you know, in Smash My Trash's example, they, you know, grew from 4 locations to, you know, over 200 in the span of like 3 years. But like, you could clearly look at that and say, okay, this brand doesn't have a lot of locations right now, but their trajectory is so strong that I view that now to be more favorably than the number of locations that are already open. So, sorry, that may be a chicken shit answer, but that's how I think about it.

Hold on, let me translate that one. It depends.

It depends. Thank you.

Yeah.

Yeah. And like, that's going to be a theme in a lot of ways that I answer questions. So many questions that I think people want a quantitative answer to are just more qualitative. And so that may not give you as much clarity as you were looking for, but I would rather— I'd rather leave you in the dark and also be rooted in reality. So.

Well, and I think it's, it's— I think it's also just to be real with people, like franchising changes both the amount of risk you're taking and the quantity of risk you're taking and the type of risk you're taking. So like, like obviously, like because when you start a franchise brand that's more proven, like, you know, there's demand or you start working with a franchise brand, you know, that's more proven and people are going to come eat at your McDonald's. Your, your risk profile changes a bit differently as well. Like you have to operate it well.

It's not—

it's different than if you kind of start a CPA business or something like that. So, you know, it's important that franchising isn't a path to eliminate risk. It's still entrepreneurship, which is inherently risky. It's just, it's just different.

That's exactly right. Franchising, I think, gives you like, it gives you a toolkit, it gives you ammunition, but you still have to— and it gives you like guidance on how to aim, but you still have to, you still have to fire.

So from Gabe, can a franchisee hire people to run and operate the business after a certain period of time, or do they have to be the face of the business, as in working full-time with franchise indefinitely.

Michael, can I jump back real quick? And that the, uh, just your point on risk, like you were talking about, like risk and how, uh, franchises aren't always a hedge on risk. Franchises are never neutral on the subject of risk. A good franchise is a hedge against risk, and a bad franchise is an amplifier of risk for a number of reasons. So that's just something to keep in mind. It's not a clear-cut there. Um, okay, Gabe's question about can a franchisee hire people to run and operate the business after a certain period of time? Or do they need to be the business? So this is going to vary. There are two things, like two facets to this question. The first is like what is actually viable, and the second is what the franchisor allows and what they permit. There are franchises out there. I have a newsletter coming out about, you know, the five types of franchises to avoid, and one of them is what I call the indentured servitude franchise. And that, that is the franchise that literally mandates that you own and operate the business forever. And this is literally— it's, you have the upside of a job with the downside of a business, which is so colossally out of whack that nobody should ever touch that. Um, so that's thing number one. Like, there always has to be— like, you can't, you know, again, if they're, they're going to mandate that you run that business forever, that's just, it's just impractical. Um, and that's even if you only think you want to run one business forever. Still, you know, do that because it's the best decision that's there. Um, not because you're mandated to do that. Okay, so with that said, there are a lot of franchises out there that would like to see you be the owner-operator for a period of time initially to get to get things rolling. In most cases, I honestly think that that's advisable, particularly in these non-brick-and-mortar brands. These are hard businesses, and you don't get a pass on that because it's a franchise. Um, that said, there should be an off-ramp where after you have gotten the business up and running, you've learned the business. Not only— yeah, you— not only do you learn the business, you learn about yourself as a business owner. There should be an off-ramp to where then you're able to hire a manager, and whether you want to move into executive ownership, which is, you know, opening the business and not working in it, or whether you want to scale up, you know, multiple units or multiple different franchises, you should have the latitude to do that. But again, the two variables there is, is this a business model that's going to be conducive to that? And does the franchisor allow that, or what are their expectations?

Super good. Okay, just looking at time, we have about 10 more minutes left and we have 17 questions. So, yeah, well, we've gone through 19, so we're making friends here. So, okay, so let's try for the next 10 minutes, you and I will be— we'll, we'll, we'll go lightning round for the next 8 to 10 before we wrap up. And then also we'll give people an opportunity and let them know how to reach out to you if they want to discuss these questions directly with you.

Sounds great.

Okay. My dumb question. Adam Parrish wants to know, my dumb question on SBA, how can we think through what could go wrong? Like if we do a HELOC against 100% fully owned home, If our franchise fails to be profitable and service our debt, what's the worst that could happen? And what is the likelihood that could happen if choosing franchise model opportunities?

I am not going to give you a likelihood. That's just not a question that I'm skilled to answer. And honestly, like, I think I would defer this question to Heather Anderson. I think that's just more of a generic SBA question that really isn't going to vary that much based on franchises.

Yeah, your lender and your lawyer should be able to tell you what, what this is. Uh, mostly your lawyer, um, who hopefully if you hire a lawyer to do an SBA borrowing, that person's done those things a lot. That's my recommendation. Have a lawyer who knows a lot about SBA when you hire them, not, not Cousin Jimmy.

Yes.

Uh, what are the health and fitness franchise models besides gym and health clubs?

So I talked about there's med spas, There's med spas and there's a really wide range amongst med spas. Some of them are more like umbrella companies. Some of them specialize in, you know, one, one, you know, service over the other. Yeah, like, you know, very niche things like lymphatic drainage massages right now. That's something that I had never heard of, but they're making money. So that's nasty. Well, there's— yeah, there are a lot of very niche things in wellness that you'd be surprised at how much people spend money on.

Yeah. So yeah, if you could think of it, somebody's probably franchised it. All right. Can you talk a little bit about the role of private equity in franchising? I heard an anecdote about how Dutch Bros is PE-backed and makes it much harder to compete against other— as against— as another coffee chain. Dutch Bros is actually a public company. They were PE-backed and they raised a bunch of money and then they, they went public and raised money like '21, '22 when money was the cheapest. So, but yeah, and then like Scooters is PE-backed as a drive-through coffee chain and we have Scooters here in San Antonio now and it's, yeah, it's a superpower when you have really cheap capital behind you. Yeah, but, but also PE is buying up franchised locations and rolling them up. Is that right? Also, Connor?

That's right. Yeah. John, if you want to come to the Holdco Conference in a few weeks, we're going to talk about this for about 40 minutes. This topic exactly. So So really exciting stuff. But so private equity is coming in. They've always come in on the franchisor side. They've come in on the franchisee side as well. And basically what you've seen is you've seen the same private equity activity and it came into QSR, you know, for decades. It's now matriculating into things like fitness, wellness. You're seeing a lot of consolidation in those brands and that's matriculating into the service brands. Basically, when private equity enters a franchise system, it accelerates consolidation because the highest performing franchise owners have more dry powder to work with, and typically valuations go up just because they're, you know, the rising tide lifts all boats to some degree. But basically, you know, in a brand like Orange Theory, for example, I think they've gone from like 800 owners to 150 owners in the course of like 8 years maybe. And that is a function of private equity getting into that system. And, you know, the big, big fish eat up all the little fish. And, you know, overall, everybody can win if it's executed the right way. Okay.

Um, David Tart asks, we have a gym fitness business called MyoMass in Jacksonville, Florida, that has been operating for 3 years. Does it need to be profitable before selling franchises? We feel it's a unique concept that is differentiated, had great customer feedback.

Um, yes, and David, I'm not picking on you, but the, the equivalent to that question is, hey, I've never flown a plane before, should I get licensed before I sell tickets to passengers? Please, please, please, yes, before you think about franchising a business, make sure that it is operating internally because operating, you know, well internally, first of all, and that you have the resources to support franchisees, you know, after that. Because to be honest, to not do that is not only strategically a misstep, but it's reckless and irresponsible in my opinion, because people are sinking a significant amount of their net worth into this business. So yes, please, please, please hold off. Yeah.

And there's actually a whole industry of folks that are franchisor consultants that like help you put together your franchise if you want. I've actually talked to some of them. So if you want to email me, I can actually give you the names of the ones I thought were actually responsible and respectable. The good ones are the ones that will be like, I don't think you should franchise this yet.

Yes, yes. Yeah. But there are plenty of people that will take your money and tell you that you can do this for $50 grand and they're full of shit. So please don't do that.

Uh, that's— you'll spend that just on your first couple months of lawyers.

Yeah.

What's the best marketplace to find a franchise for sale? Any other helpful tactics for finding an acquisition? So I guess this is if they want to buy an operating one.

Yeah, this is, this is challenging. There isn't an efficient, um, you know, there isn't an efficient marketplace other than just BizBuySell. And again, the, the core challenge here is that so many of the good ones are going to get taken up internally. I've helped a couple people, which is really, you know, as a consultant, which is really just when stuff fell in my lap. But again, usually the good ones are snatched up internally before they make their way to me.

Besides being a good operator, what are some other very useful skills needed to succeed in franchises?

Um, great. I would say, um, yeah, besides being a good operator, I mean, any— most of the skills that I would mention are kind of encompassed in being a good operator, but I would say I would just say having the discernment to know when you need to execute versus when you need to innovate. I think a lot of people get in and they're overly indexed on one side of that or the other. Don't pay money to buy someone else's system and then not follow it. I mean, that's just— that's a waste of money. If you really want to innovate something, don't buy a franchise. So I just think that discernment is important.

All right. How do you know the difference between a good franchise brand and a bad or mediocre franchise brand?

Yeah, great question. Tons of, tons of variables there. First thing, the numbers have to work. So, you know, look at the unit economics, look at the Item 7, which is where the investment's broken down, and the Item 19. You know, obviously cross that, reference that with the franchisees that you talk to, but very simply, what does the investment profile of this look like? Then you're going to look at, you know, the growth trajectory in the system. If it's a system that's got, you know, a strong growth trajectory, more people are getting into it, that is— has a baseline layer of validation too. And then talking with the leadership and deciding, hey, am I aligned with this vision? Am I a good cultural fit? All of those are things I'd look at.

In your opinion, what are the top franchises in large suburban areas?

So I'm not going to talk about specific, specific brands, but in terms of large suburban areas, really any of the concepts that we talked about between home services, you know, wellness, pets, youth enrichment, I mean, assuming that there's strong consumer markets and they're affluent, all of those can do well in that kind of archetype of a market.

Let's see here. I'm kind of jumping around because we've got 9 left, so. Uh, what's the best way to forecast how quickly you can open multiple locations for a given brand? I'm looking at some B2B brands and it's clear I wouldn't want to live off just one location. Secondary questions: are there better verticals for scaling?

Yeah, so, uh, the first thing, um, that you can do is talk with the franchisor and just say if it's the brand that brings in a lot of multi-unit operators, how are they, you know, what, what does their timeline look like? And then also talk with franchisees. That have, you know, opened multiple locations because you want to think through both the financial side of things, thinking about your cash flow situation, how quickly you've gotten to break even, and then also operationally, how feasible is that going to be? And that's going to vary completely dependent on the industry and depending on whether it's brick and mortar or not, and also depending on how well-capitalized you are. Some groups that come in that are better capitalized, they're going to obviously be in a better position to scale more quickly than those that are coming in a little leaner.

Um, somebody gave us a compliment. Good stuff, they said. Interested to hear your thoughts on transitioning from a 9-to-5 corporate job to first finding the right franchise and then running it. Challenges, pitfalls, and how to get started.

Yeah, um, well, in terms of how to get started, shameless plug, you should come and work with me and my team and we can help you do that. But, um, challenges and pitfalls, I think that one of the main And we can go on about this for hours, but I think one of the main challenges that people have when they're transitioning from a 9-to-5 to owning a business is a little bit of shock due to the width of your responsibilities, because most jobs are going to be a lot more narrow in the scope of what they do because you're a specialist. If you're working on a team of hundreds or thousands of people, and when you're in a business, even though it's a much smaller scope business, your responsibilities are going to be a very wide scope. Now, I think that's a very good thing because you're going to get, you know, kind of kicked in the teeth early on. You're going to learn learn a lot because you simply don't have a choice, and you're going to be a stronger business owner because of it. But that's a challenge that everybody is going to face when it's their first time owning a business.

Do franchisors typically provide, mandate, or recommend business systems like payroll, HR, accounting, ERP, etc.?

I have one that does and one that does not, so that's going to vary. A lot of them will have, you know, recommendations for who to use, but I would say the most frequent one that they're going to mandate would be the accounting software. So a lot want to have QuickBooks. So that they can— that's kind of how they, they see their numbers that then they would go and disclose in their item 19 at the end of the year. But it depends.

How do franchisors get involved in existing store acquisitions? Like, do they have to approve transactions and do franchisees market their business on their own?

Yes, they do. They do have to approve it. And a lot of franchisors have a right of first refusal as well. So if you bring a buyer that they don't like, that they want to block and match their offer, a lot of times they'll have the option to do that. But marketing, yeah, most franchisees will either market themselves internally. If they're going external, they might hire a broker very similarly to non-franchise businesses. But part of what happens in a franchise system is you kind of get to know everybody. And so, you know, if somebody is ready to sell, a lot of times they'll go and talk with the other franchisees that they feel are most likely to sell. And let the conversation progress from there.

Last one, and then I think we'll move to close at that point. Are there any books or I guess I'll also add to this, any good resources on franchising that people should dig into? So you have stuff too as well besides the people writing books, right?

Yeah, definitely. Yeah. Well, I think everybody here will be, if you're not already on my newsletter, we'll, uh, stick in there. And that what we're gonna have— we have some really good stuff coming out that I'm really excited about, um, just resources on an ongoing basis. But, um, uh, but yeah, books. The Dark Side of Franchising is one that everybody should read before they get into— I can't even remember the author's name, but it's, it's well done. Uh, just shows you kind of the downfalls that sometimes are not, uh, are not talked about enough. A lot of the discourse around franchising is, um, it's, it's never as good or as bad as what it's going to sound like, you know, because people are either completely allergic to it in a way that I don't think is fair or accurate, or people that are incentivized to sell you stuff are going to have an overly rosy picture of it. And so Wisdom is going to be somewhere in the middle. But yeah, that's, that's really the main book that I would recommend. Really, podcasts are the main medium through which I consume content. And there are— yeah, there are a lot of good podcasts out there about franchising.

Terrific. Okay, well, we're, we're coming up on time. Let's— we'll go ahead and close there.

So how—

first of all, thank you for doing this. Like, yeah, definitely, there's a lot of questions. Hopefully you had fun. I had fun asking them.

This is awesome.

I laughed at my own jokes. So thank you for doing this.

Certainly, certainly.

So, so could you— let's do the salesy part here. Like, if people want to explore franchising, like, how can you help them?

Yeah, certainly. Um, well, like I said, the newsletter will be sending out, you know, more information about, uh, just about franchising in general. Um, if you are in a position where you are either currently evaluating franchises or you are prepared to do so, you can reach out and, you know, on my website and we'll send all of this in a follow-up email to here today. And you can book a call with either myself or someone else on my team and we can talk you through a little bit more about what our process would look like. My services don't cost the individual anything. It's everything is paid through the franchisor. and a success fee on the back end if you move forward. Um, but yeah, the, the key there is if you are, um, capitalized, if you have a net worth of at least $200K and at least $75,000 in liquidity, we can help you. And then if you're ready to move forward, um, you know, pretty expeditiously, the, the process moves more quickly than a lot of times people think. And so, you know, our goal is to go from our initial concept, uh, to a franchise agreement. It's somewhere between 60 to 90 days. Case. So, um, yeah, if I can help you there, reach out. If you have questions, feel free to, to email me, and we'll, we'll include that in the follow-up email as well. Um, but overall, just feel free to use myself and my team as a resource if you have questions about franchising. If you're not ready now but you, you know, you're thinking about it in the future, um, you know, I have a member of my team, Braden, that's literally all he does is just, uh, helps to facilitate resources for folks. So don't hesitate to give us a shout whenever and however we We have helped.

Awesome. All right, you rock, dude. Thanks for doing this, and we'll, uh, send out the recording to everybody and your contact information. I think we're gonna email that to everybody as well. So, uh, thanks for doing it, Connor. We'll see you next time.

Thank you, Michael. Thank you everybody for coming. I appreciate it. Have a great day.