MBA2078 Guest Teacher – Jon Ostenson – How to Select a Franchise

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Hey oh. Welcome to the $1 RMBA Show. Power up your business every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja and today's episode is a guest teacher episode. On our guest teacher episodes we bring on an expert to teach their area of expertise and today we have John Austinson teaching you how to select a franchise. We were excited to bring John to teach this topic because franchising and buying a franchise business has been a highly required request a topic. Some of us have the entrepreneurial itch but want to start a business that has a track record of success. They don't want to go through the haul of product market fit and making sure they have something that people want. Maybe you're not interested in building your own systems. You want something that's proven that you can take over and see it grow and make you financial returns. If that's you, buying a franchise is probably right up your alley. But how do you choose the right one for you so you have the highest chances of success? Well, that's why brought on John Austensen to teach his lesson. John is a top 1% franchise consultant and leads Fran Bridge Consulting as their CEO and we have him here on the show today. There's a lot to get into, so let's get into it. Let's get down to business.

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Today's guest teacher, John Austenson, is a franchising expert. He literally wrote the book on franchising. And I know you're thinking, are you talking about like, Subway or Domino's Pizz? No, he actually specializes in non food franchising, which is the title of his book. There are thousands of options when it comes to buying a franchise business, from lawn care services to coaching services to franchises that start at only $75,000. But the most important thing here is knowing which one to choose that works for you. You're a unique individual with unique experiences and skills. How can you apply those into your new franchise business? Well, that's why we brought on John to teach his lesson. I'm going to pass to him now, but I'll be back to wrap up today's episode and give my takeaways. But for now, take it away, John.

Hey, everybody, this is John Ostenson, and today we're going to discuss franchising. Who is buying, what are they buying, why are they buying? And then also, how are they buying? There's a lot of great activity going on in the small business world today, and a lot of it's being done within the world of franchising. Yet there are oftentimes a lot of unknowns. So we're going to unpack those today, really complete your understanding and help you understand. Is franchising potentially a path for you now or down the road? So first off, let's talk about why franchising. You know, first off, I'd say franchising is not right for everybody. You know, I find that some clients, buyers are too entrepreneurial. They, they want to put their thumbprints all over everything. They don't want to stay between the lines. And I have to tell them that. However, for so many, franchising does make a lot more sense and It's a better path to business ownership. And some of what people are attracted to within franchising include the proven playbook. You've got an operating plan on day one, it's been proven out in other models. You're not questioning product market fit. Instead it's all about executing. And so knowing there's a path to profitability and be able to execute on that from day one versus trying to determine is the startup even profit profitable potentially is a great, great way to go. Secondly, you've got a coach on the sidelines and that franchisor, the better you do, the better they do. So they're supporting you in all sorts of facets, whether it be marketing, whether it be coaching you up, helping your team train them up, you know, supporting the systems and the operations on the back end, you know, they're bulk buying. If you have an inventory carrying business, you know, vendor agreements, there are a lot of benefits to having that coach on the sidelines. Third, you've got other franchise owners in other markets that are living the same thing day in, day out. They may be testing new marketing vehicles or figuring out the best place to find good talent. And you're constantly exchanging these best practices and learnings with others in other markets. So you know, in a way you're in business for yourself, but not by yourself. And not to be too cliche, but you're starting on third base instead of first base out of the gate. And then finally, I would say while franchising doesn't totally de risk business ownership, when you look at the stats, over 90% of franchise businesses are still in business five years later, whereas most startups, you know, the vast majority will not continue down that path of being in business five years later. So you know, the numbers don't lie. It definitely does de risk the situation. Part of that's because early on you really get to determine, is this business the right fit for you? You get to go in eyes wide open. Two of the ways in which that is done is every franchise system has what's called a FDD or Franchise Disclosure Document. Franchising is regulated by the Federal Trade Commission. Every franchise system is required to have the FDD, which includes all the information you can ever imagine about the business, including what they call the item 19 within that FDD. The item 19 shows the average financial performance of all the other owners within a franchise system. So you're able to understand if you were to come in and perform average or above average, what those results could look like. Second, you're able to Go through what we call validation, which we' a little more deeply. Later with validation you get to talk to other owners that are currently operating the businesses across the nation. And in that case you're also able to hear about their experience and the support levels they've gotten and then what are their financial ramp ups. So you really get that eyes wide open going in and finally oftentimes it goes overlooked. But you know, as a business owner you've got incoming cash flow, you're able to write off expenses, but then you're also building an asset that's going to have exit value down the road. An interesting study done by the Rinker School of Business recently that looked at 2,000 business transactions that took place over a 10 year period. They looked at both franchise and non franchise businesses across a wide array of industries. Comparing like kind industries together, what they found was that franchise businesses trade at a multiple of one and a half times non franchise businesses when the owners go to sell. So there's going to be an exit value down the road. You're building an asset, not just a cash flow. So that is why people choose franchising. So who is getting into franchising? Who are these franchise buyers? Roughly half of those that we work with are what we call owner operators. They're oftentimes looking to make the jump from maybe a corporate position and they've always wanted to be a business owner and now they're making that jump and they're going to run the day to day operations. The other half are looking at what we call an executive model or semi absentee, semi passive. These are different terms that we use and they're oftentimes keeping their day job job or maybe they're an existing business owner and they've got other businesses to tend to and so they're not able to put in their full time focus running the day to day operations. However, they're willing to invest in a manager on day one, a general manager oftentimes that will run that day to day business for them and you know, they're able to leverage maybe their relationships in the local market and you know, provide the coaching and expertise from the sidelines supporting this general manager. So that's another very positive benefit. And oftentimes those owners find that because they have the franchise support system, they're more comfortable turning the keys of the business over to a day to day manager. So that is who is buying. And we really see it across a wide variety of age groups. Year to date we've done deals with those from their 20s all the way to the 60s, I'd say on average we're seeing probably late 30s to early 50s. It's really been that sweet spot where a lot of people are saying, hey, maybe now's the time to scratch that entrepreneurial itch. And I think Covid certainly led a lot of people down that path to question the path they're on and say, hey, maybe now's the time to make that move. So what are people buying? You know, we work with a whole variety of different industries, from automotive to health and wellness and fitness to anything related to the aging population. You know, what are those macro trends that come into place? Anything related to kids, pets, health, things that people are willing to spend their money on even in a recession, even in a pandemic. Oftentimes, you know, we joke that the non sexy businesses have become the new sexy. You know, we see clients getting into things like roll off dumpsters or the servpro type model, water mitigation, mold remediation. Those are not glamorous businesses, but they're not going anywhere and they're going to be needed day in, day out. And oftentimes these businesses are Amazon proof. That's one of the things that people are attracted to with franchising. Oftentimes you're bringing in technology, maybe a white collar approach into a blue collar industry. And there's just some neat models out there within the oil change world. Using prefabricated building with unused parking spaces, making it super convenient for the customer, but then also creating a great setup for the owner. We see we've done three recent deals in the gutters business. Now who are these people that are buying a gutter business? Well, one was a former Wall street attorney outside of Boston. Another was a former sales and marketing executive in New Jersey. Another was two brothers that had an insurance background down in South Carolina. And so what we find is typically our clients don't have a background in the industry that they're moving into. And oftentimes over 90% of them end up in an industry they didn't even have on their radar. But it's really fascinating once you pull back the onion, the different layers and you understand what role do you want to have in the business? What does the financial dynamic look like? Where are your relationships in the market? What are the market needs? All those factors come into play to say, point you in the right direction of hey, this is the right opportunity for you. So there are different types of franchises. I'd say they range from the brick and mortar style you Know, it could be a very heavy investment, capital intensive. But oftentimes we see service based businesses that may allow for working remotely and you're not having to have a physical location, at least not one that's customer facing. That's an easier way to ramp up and you know, not have as much dependent on that specific site. So from a financial standpoint, how much are these franchises? The average deal size that we see is between 125,000 and 300,000. That's where about 75% of our deals fall. We certainly have some on either side of that. What you're doing is you're purchasing oftentimes a location or maybe a territory defined by population, couple hundred thousand population. You've got a geographic boundary. So we oftentimes see clients purchasing multi packs. They might buy three territories and start out operating in one and then scale to the others over time. That's a very common approach. In the range that I provided, 125 to 300. That would be your all in investment. That includes a couple of things that would include your franchise fee, it would include your build out cost if it's a retail based business, any equipment, any inventory, and then they typically include startup costs, your first three months or so working capital. So what are those market costs, those personnel costs out of the gate, all that gets rolled into that range estimate. And what we find is a lot of clients are using different ways of funding the business. You know, probably a third of our clients pay out of pocket, but many others are choosing to go with an SBA loan. And I'd say about half of them are using SBA loan, either a 7A loan or an express loan. We also see clients tapping into their retirement where you can use a self directed program called a robs program, using a 401k or IRA that actually purchased business for you. So that's another way, or a portfolio loan using brokerage accounts. There are a lot of different ways to get into business ownership, you know, and purchase that franchise from a cash flow standpoint. The exciting stuff, every franchise system has that item 19 as I mentioned and within that shows the average of other owners in the system and it's eye opening to people oftentimes what kind of returns you can get in running a business. Even from just the cash flow standpoint, the gutter business for instance that I mentioned, you know, average investment There is between 150 and 200 and their franchise owners are averaging 1.2 million in top line revenue per location. And that's on a 31% EBITDA bottom line margin. End of the day, what are they putting in their pockets? You're talking a little north of 350,000 that that business is returning. So you can imagine as you scale that up to additional locations, it can really become meaningful. And again, it's these industries that, that people oftentimes don't have on their radars that are really getting them excited. And oftentimes they're entering a fragmented space. Some other examples of industries, I'd say the gutters. That's an example of a home and property service. Really. Since COVID nothing has been more popular than property services. $600 billion space, all sorts of niches within that, whether it be roofing or insulation or maybe it's ongoing maintenance of know pool cleaning. Let's say we, I, I'm a personally invested in the, the driveway company. It's a franchise system, great niche, no other player out there nationally. And we don't even have to market the business because we've seen such customer demand. It's very common these days. You know, as a business owner, you're always going to be playing whack a mole and you're gonna have to, you know, choose your area of focus. Right now it's definitely not on the customer demand side. Instead it is on the labor side. So we're getting creative in how we incent incentive values our employees to retain them and get the best out of them. So that's a very common thing that I hear from clients. What are those opportunities with the highest return on investment, lowest amount of employees switching gears, health and wellness coming out of COVID all the trends, the aging population. This could span from customer orthotics that use 3D printing to IV drips to businesses that are related to the aging population, such as wheelchair ramps and airlifts and helping people age in place in their homes, obviously in home senior care is another one. But we're seeing a lot of interest in areas also like B2B services, whether it be waste management, whether it be, you know, little niches along the way. You know, some businesses you can get into for as low as 75,000. We just had a engineer client up in Indianapolis purchase a business coaching franchise. We had another client in Birmingham, Alabama purchase a business that's a B2B Cost Analyst business where they go in and analyze vendor agreements and they're able to bulk buy and reduce expenses for small business owners. So really a wide variety of businesses out there. And you know, I'd say franchising has never Been hotter. The one challenge we're up against is competition. We're always trying to position our clients against other candidates for similar opportunities in the same market and they're going quickly. The process that we use to help you find that right franchise is really streamlined. So if you were to go out there and google around, around, you're going to find every brand is putting their best foot forward, they're showing you their marketing materials. Well, we've got the relationships we're able to see behind the scenes. Our process is entirely free for our clients. We get paid by the franchisors for them. It's a sales and marketing cost. None of that gets passed on to our clients. So we've been very fortunate. We have selected over 500 brands to represent across a wide array of industries. And what we do is we take take our clients through these vetted opportunities. We get to know our clients and introduce them to seven or eight opportunities on average in their market that we feel could be a good fit based on what they've shared with us. You know, some of those criteria that I mentioned earlier, as well as what do we see resonating with others in the market in other spaces. And so we bring all that in, we narrow it down with them to two or three to actually take a deep dive with where we make the introduction to the franchisor. The franchisor will then take them through a process of unit economic FDD review, really getting into the financials, understanding the behind the scenes of the business. They'll put them through validation where they get to talk to other owners. They'll ultimately meet with the CEO and their team typically for a day and a half. We call that a discovery day on site with the franchisors team. And all through this process, we're holding our clients hands. We're getting on weekly calls or bi weekly calls and serving as a sounding board will help them think through whether they should drop one of these opportunities that they're looking at, maybe bring back another one. So it can be an iterative. It's also very educational. They're learning how to develop a lens through which to compare different types of businesses and pros and cons of each. So it's a lot of fun for us again because over 90% of our clients end up in an industry that was not on their radar. So we helped them kind of turn that light bulb on it, if you will. So would love to connect more and discuss all of this. I am passionate about franchising. I've seen it work for so many of my clients and love just changing lives through it. If you'd love to learn more, come out to franbridgeconsulting.com that's frambridge consulting.com and schedule an intro call and we will chat and share Share some resources if nothing else. Let's get you on the on the monthly newsletter list where we share some great content. We look forward to connecting. Thank you.

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Code sxm what a fantastic lesson by John Austensen. If you want to learn more about this topic, go to Franbridge Consulting. Com I know several entrepreneurs that only buy franchise businesses and when I ask them why it's pretty simple, they say it's a proven model and they see it more as an investment, like they're putting in money that has a predictable return on investment. The other thing that attracts them to franchises is that it's got a system that works, that you can just plug in players to make it work. This means it really can be an investment, meaning that you can be hands off. You can be vacationing, doing your hobby projects, writing a book while your team is running your franchise business. Because they have a handbook to know exactly what they have to do, how to do it, and how to achieve the goals that you need to achieve to have a successful business. So it's just a matter of hiring the right people to do it for you. There's plenty of support and training included in a lot of these franchises that you can buy. The other thing they say is that it's like a partnership, it's in the franchise's best interest for you to succeed. They're going to try to refine that process and make sure your store, your business, your branch has what it needs, has all the tools, the resources to be successful. And lastly, what they share with me is that they became an entrepreneur for simple reasons like they want to be their own boss, they want to have their own hours, they want flexibility, they want to have financial freedom. All of this can be achieved with a franchise business or businesses. And they don't have to deal with any of the headaches of trying to figure out if the actual public wants what they're offering. Create something out of thin air. They're not really the inventor type. They just really want the financial benefits and the time and flexibility benefits of business. They're okay with having a non sexy business and I can totally resonate with that. Like sometimes you just want a business that does well, that earns you cash, that allows you to help people in a significant way without having to jump through fire hoops, right? To figure out all, all these different problems that no one has figured out before with a franchise. They've been through it a million times. They've optimized for success. They know exactly what you should and shouldn't do, where to advertise, how to get customers, how to lower your costs and expenses and all that kind of stuff. So this is kind of resonating with you. You should really look into becoming a franchise owner. That wraps up today's lesson. Thank you so much for listening. Don't forget to hit, subscribe or follow on your favorite podcast and app. What are you listening to this podcast on right now? Spotify, Apple Podcast, Stitcher, Radio, Overcast, Whatever it is, make sure you're subscribing, make sure you're following so that way you get the next episode automatically. It's also the best way to show whatever platform you're on that you love this podcast and give us a bump in the algorithm. Before I go, I want to leave you with this. For many new entrepreneurs, a franchise is actually a really good business to start with, to learn how to manage your P and L, a budget, to hire, to fire, to work in the confines or the rules of a franchise. Sort of like playing bowling with the bumpers on the side of the bowling alley or the of the lane. It's ensuring that you're going in the right direction. It's a good way to just earn some wealth and then you could take that wealth and turn it into another business if you like, whether it's a franchise or not a franchise. But it's a good place to kind of earn your chops to learn as your first business. Thanks so much for listening and I'll check you in tomorrow's episode. I'll see you then. Take care. Of.

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