Do you have an entrepreneurial itch waiting to be scratched? If so, you’ll want to tune into this episode of The Agent of Wealth Podcast, where host Marc Bautis asks all sorts of franchising questions to Jon Ostenson, a consultant investor, author and international speaker specializing in the area of non-food franchising. While it’s risky starting any business venture, there is undeniable growth happening in the franchising industry. Let’s uncover why.
In this episode, you will learn:
- How to begin a franchise, including how to determine the correct franchise for you.
- The benefits of franchising versus building a business from the ground up.
- Various funding options for franchisees.
- Trends in franchising.
- And more!
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. For today’s show, I brought on a special guest: Jon Ostenson. Jon is a consultant investor, author and international speaker specializing in the area of non-food franchising. He draws on his experience as both the president of an Inc. 500 franchise system and as a multi-brand franchisee in serving clients across those capacities. Jon serves as the CEO of FranBridge Consulting, where he helps clients understand all aspects of non-food franchising in the process of introducing them to opportunities from over 300 high growth brands that he represents. Additionally, Jon oversees FranBridge Capital, where he and his partners own 17 territories across five property service franchises. Jon’s the author of The Franchise Path and a frequent contributor and thought leader for publications on the topic of franchising and franchise investments. Jon, welcome to the show.
Marc, thanks for having me. I love the show and I’m excited to be here with you.
Great. So I’m excited to talk about franchises. We’ve had some recent episodes about alternative investments and also some about entrepreneurship and business ownership. Franchising seems like a good fit under both of those categories. So, can you give us a high-level overview of what’s going on in the franchising world right now?
The Current State of Franchising
What we’re seeing in the market is an incredible interest in franchising and business ownership. Franchising is not right for everyone, but there’s aspects of franchising that allow it to be the better path towards business ownership. Coming out of the COVID-19 pandemic, a lot of people are looking to scratch that entrepreneurial itch — they want more sense of control in their life and feel like maybe now’s the best time to make that happen.
Year to date, our placements are up over 50% from last year. Last year it was up over 50% over the previous year. So we’re seeing great interest, and a lot of which is in sectors that you wouldn’t typically think of.
My focus is in the area of non-food franchising. When a lot of people think of franchising, they think of fast food. But I focus on the many other sectors, and that’s where we see people gravitating.
Great, thank you. I think it’s common for someone who’s planning on starting a business to consider a franchise. What are the pros and cons to starting a business from the ground up, versus investing in a franchise?
The Benefits of Being a Franchisee
Well, I have had clients who I’ve told they are just too entrepreneurial for franchising — they’d want to put their thumb prints all over the business, not within the lines. However, for a lot of people, franchising gives them a bit of a leg up. You’re starting on third base, not first base, to be cliche. And one of the reasons why is the business’ playbooks — a proven model that’s worked in other locations. Franchises put together operational playbooks, marketing playbooks, etc. So you don’t have to start from scratch and you don’t have to test everything yourself.
In addition, you’re really in business for yourself, but not by yourself. You’ve got a franchise over on the sidelines. I like to think of them as a coach. The better you do, the better they do. They can provide a great level of support, assuming it’s the right franchise system, and that’s what we help clients navigate.
Also you’ve got all these franchise owners in other locations around the country, many of which are in markets that may resemble your market. So if they’ve tested a new marketing vehicle or they figured out where to recruit the best talent, they’re able to share those best practices with you and vice versa. The better you do, the more valuable the brand becomes, which helps them as well. There’s an aligned interest.
And then finally, it’s beneficial when you think about the exit down the road. Obviously you’re building cash flow as a business owner, but you’re also working towards an exit. The business is an asset with residual value to it, hopefully more than what you put into it.
There was recently a study published by the Rinker School of Business in which they looked at over 2000 businesses that have sold over the past 10 years. They looked at similar industries for both franchise and non-franchise. What they found was that, on average, franchise businesses are trading (at the exit) at a one and a half multiple of non-franchise. I think that was really eye-opening to a lot of people. You’re not just building cash flow, but you are building an asset with exit value down the road.
How does someone pick a franchise? Is it some area that they’re passionate about, or something they have experience in? Can it be totally unrelated?
How to Determine the Correct Franchise For You
I’d say over 80% of my clients end up purchasing a business in an area that was not on their radar, much less one that they were familiar with.
First off, there’s roughly 4,000 franchise brands in the US across a number of different industries, and they’re not all created equal.
Before I work with a client, I’ve already vetted down to roughly 300 franchise opportunities that I feel strongly about. To make the list, they have to have the profit model, a leadership team in place and a niche within their industry, to name a few variables. So I’ve already done some of the homework for you.
Then, when I meet a client, I ask a lot of questions. I help educate them on the framework they should be using to view different opportunities. How do you compare and contrast A versus B versus C?
Then I present them six or seven opportunities, going into more detail. I give them an overview of the business.
Next, we narrow the list down to roughly three for them to engage with. We’ll set up a call for them to talk to the franchise and hear about their experience.
Then I spend time with the client as they make a final decision.
This process is free, and clients get very educated throughout it. They learn how to analyze the business and how to compare and contrast. I hold their hand through the entire process.
Our success rate is incredibly high because we’re matching people — not necessarily based on their passion or their background — but based on what they want their day-to-day to look like.
We ask them, for example:
- What are you looking to invest?
- What are you looking to achieve off of that investment?
- Do you like small teams or large teams?
- Do you like being involved in the community?
All of those little things add up, helping us decipher the right opportunity.
Trends in the Franchising Industry
What are some of the specific industries or types of franchises that are hot right now?
Even prior to the COVID-19 pandemic, the property and home services space. Everything from pool cleaning to roofing the kitchen remodeling. That’s a sector that’s got a lot of interest. In a lot of cases, it’s seen as an essential service. So we’ve done a lot of placements there.
Also anything related to the senior population — not just in-home senior care — whether it be retrofitting a bathroom, wheelchair ramps, stair lifts, or even fitness concepts that cater to that population.
Anything health and wellness related is also popular. Boosting immunity, whether it be IB drips or regenerative medicine. There’s a lot of concepts that are playing towards that.
Non-sexy is the new sexy, people don’t want the latest fad. They want something with staying power that’s understandable.
I just did a 10 location oil change deal a couple of weeks ago. That’s a business that people may doubt, thinking, ‘Well, what about electric vehicles?’ We did the research, and electric vehicles only represented 2% of auto sales last year. When you look at the runway for the next 15-20 years, electric vehicles are going to be a very small percentage of cars on the road.
Do you see any virtual franchises out there? Do those types of franchises exist?
Great question, Marc. In fact, over the past year, we’ve done more placements in remote franchises than those that have a physical location.
Now, in some cases they may have a physical location, but it’s not customer-facing so it’s not an extensive build-out cost. It could even be, in some instances, a self-storage unit or a shared office space. But we’ve done a lot of placements in remote work.
I know a lot of people are looking to invest, but not necessarily take on another job. Can any of these franchises be passively run? I know nothing is really passive, but what about a limited type of active involvement?
Franchises and Passive Income
You hit the nail on the head, Marc. Nothing is truly passive. However, there are semi-absentee or semi-passive opportunities. I’d say that more than half of the brands that we represent provide that semi-absentee model. More than half of the placements I do are with clients that have a full-time job, whether it be in the corporate world, or they’re already a business owner. That’s very common on the semi-absentee front.
I give a talk to investors called “Franchising as an Asset Class.” Right now, I think a lot of people are wising up to the fact that stock market’s at an all-time high and interest rates are fairly low, so only so many good real estate deals are to be had. You can invest in Bitcoin and baseball cards, but what alternative investment makes the most sense? Business ownership can make sense — business ownership through franchising.
There’s probably a lot of misinformation about franchising out there. One of the things I hear a lot is that you need 10… 20 franchises to make money. You can’t do it with just one or two. Is that true, or can you generate some income with even just one franchise?
It depends on the franchise. When you go through the process with us, your eyes are as wide open as possible.
Every franchise system has an FDD, a franchise disclosure document, which has 23 items in it. One of them is item seven, which is your all-in investment costs. Another is item 19, which is the financial representation that the franchisor is making. And franchising is regulated by the Federal Trade Commission, so they have to cross their T’s dot their I’s on what’s in the FDD.
So you’re able to see how other franchise owners are operating in similar type markets around the country, or in some cases around the world. In addition, you’re able to do what we call validation, where you can talk to other franchise owners prior to you joining. They are an open book. Not only do they disclose the money they make, but they can also tell you what kind of support they get from the franchise and what their ramp up was like.
These data inputs give you a ton of education.
That’s kind of a long way to get back to your original question, which is, “Do you have to have 10 to be successful?” You’ll know the financial profile of the franchise before you make any commitment.
For the people that do purchase multiple franchises, do you see them buying the same franchise or buying different ones?
Yeah, absolutely. Those clients who recently purchased the oil change franchise also own a flooring business and a property management business. For them, the oil change franchise was a diversification play. This is common.
So let’s talk a little about the cost of buying a franchise. I’m sure it ranges, but what are some of those ranges in terms of all-in cost?
What Does A Franchise Cost?
So that’s what we call the franchise fee, it’s a piece of the total investment. If it’s someone’s first location, the fee is typically $49,000 across the board. That money goes directly to the franchisor.
If it’s a brick and mortar location, you’re then going to have the build-out costs beyond that. If it’s not brick and mortar, you may be paying for an automobile, equipment or startup marketing costs. Typically, the franchisor, on that item seven, will give you a breakdown. It’s going to be a range, maybe between $80,000-140,000. But you have to look at the different variables.
And there’s usually some working capital involved as well — between three to six months.
How to Finance a Franchise
We are seeing a lot of people use cash these days, but loans are also very common, both the SBA 7(a) loan and the Express loan. The government, believe it or not, does support small business ownership.
A lot of people will use their retirement funds in what we call the ROBS program. We’ve got some great partners that take clients through this process. With the ROBS program, you’re able to set your business up as a C corp and then tap into your retirement without distributions being impacted by taxes. There’s some favorable, non-penalized ways to go about it.
Then, finally, a portfolio loan. I’m sure you do some of these yourself, Marc. Someone can borrow against their portfolio. Instead of having to liquidate any positions, they’re able to use their portfolio as collateral and borrow up to 70% of the value.
Where do you see things go wrong? Do you ever talk to someone and say, “I don’t think franchising is right for you.” Why would that be the case?
I do. It depends on what they’re looking for, what role they’re looking to have in the business and what their degree of entrepreneurship is. Most franchise owners will allow franchisees to do some testing, as long as they stay within those wide guard rails.
I’m a member of The Entrepreneurs Organization, and within that group there are a lot of current business owners that built their success from the ground up. Some of them love the idea of franchising because they don’t want to reinvent the wheel — they’ve done that already. Now, they’d prefer having a system to step into. But some of them say, “Hey, why are they doing it this way? I’d do it this way.” And I have to tell them that franchising might not be the best option for them, since they can’t shake that mindset.
While the vast majority of my clients who have bought into the franchise system are successful, there are some instances where the business doesn’t work out. I had a client open a franchise in the mosquito business outside of Nashville. He’s a smart guy — he’s actually a CPA full-time. Well, he lives three hours outside of the market. What we realized is in that particular business, it helps to have grassroots in the area. He really needed friends and family to help him build a clientele. He thought he could run it from three hours outside Nashville, but it’s been tough getting it off the ground.
I know you mentioned that a franchise business is an asset that you can sell down the road. Is there an exit on the other side? If it doesn’t work out, will the franchise buy it back?
When Franchising Fails
The franchisor doesn’t usually buy the franchise back from you. Not necessarily. However, they will help you sell the business and find a buyer. After all, it’s to their benefit as the franchisor, to find a good buyer.
Now, if you go out and find one on your own, they technically do have to approve that new buyer. But candidly, very rarely do they not approve of a new buyer.
On the flip side, when is a business ready to franchise? Is there a certain point — whether it’s revenue or brand awareness — that can help a business owner determine it’s time?
How to Know If Your Business Is Ready to Franchise
I’ve worked with quite a few companies that believe franchising is a scaling possibility. But once people understand that many industries participate in franchising (outside of food), they may ask, “is my business franchisable?.”
One of the benefits to franchising is you’re using other people’s money. As a business owner, you always want your employees to think and act like an owner. Well, once franchised, you now actually get people’s skin in the game. They really are thinking like an owner.
Private equity loves franchising. I get calls almost every day from private equity firms asking me for my pulse on the ground. “What are you seeing out there? What emerging brand should we look at?” They ask me. In most cases, they’ll invest at a franchisor level, but in some cases they’ll invest at the franchisee level. Private equity is a great exit path for a business once it’s decided to franchise, because they just love the model.
The businesses that I see going through the franchising process, should have a couple of key things.
- An established model.
- A niche and/or success amongst the competition.
We’re seeing more and more businesses considering franchising, because they do see the benefits.
And, while there are a lot of benefits to franchising your business, there is an element that not every business owner can handle: All of a sudden, you have kids around the country that have expectations. They bought into your franchise system, and you’ve got to be ready for that.
You have to have the team and the systems in place. Some of that you’ll be able to innovate along the way, but you want to make sure your bases are covered.
I don’t personally take companies through the process, but I do have these conversations several times a week with businesses that are thinking about franchising. For any of your listeners, I’d be happy to have that conversation.
Awesome. Back up to the franchisee. How do they get started? When they come to you and say, “I’m interested.” What’s the first step?
Great, that sounds really helpful. We’re just about out of time, Jon. Thank you for being on the show today, you gave us some great information. How best can someone reach out to you if they want to learn more about franchising?
I would love to engage with anyone that would like to have this conversation. You can go to franbridgeconsulting.com or email me at [email protected]. Also, feel free to connect with me on LinkedIn as well. If you go to our website, sign up for the newsletter and ping me. We can set up an intro call. I would love to get to know you!
Perfect. We’ll link to that in the show notes. And thank you, everyone, for tuning in to today’s episode.