Best Non-Food Franchising

Transcription – WCI – 267
Intro:
This is the White Coat Investor podcast, where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 267 – Non-food franchising.

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Dr. Jim Dahle:
All right, thanks for what you do out there. Your job is not easy. You may be listening to this on the way home from work, maybe something terrible happened to you at work today. It does happen in our professions. So, if no one said thanks today, let me be the first. What you do is hard. That's why you get paid well for it. Sometimes it doesn't feel like you're getting paid well enough for what you're going through though. So, thank you so much for doing it.

Dr. Jim Dahle:
If you are interested in coming to speak at WCICON 23 in Phoenix, you can apply now to do that. We want you to apply during June. And you go to www.wcievents.com to apply as a speaker.

Dr. Jim Dahle:
Now, let me tell you how to become a speaker. Number one, it helps if your topic is something we want spoken on at the conference. And you can look at past conferences to see the types of subjects we speak on. Everybody wants to give this general physician finance talk. The sort of thing that I would give if I came out and gave a one hour talk at a residency program or something. But we can't have a conference full of 40 of those, right? They have to be a little bit niche down.

Dr. Jim Dahle:
The more topics you apply for, the more likely you are to be selected, because we might like you as a speaker, but we might already have three people that want to speak on the first topic you put in there. Plus, if you apply for more, we might be able to pick you up to give more than one talk at the conference, which obviously helps us with expenses, because we only have to fly you out one time and only have to put you up one time for the event.

Dr. Jim Dahle:
So, apply for multiple talks and you're much more likely to be picked up as a speaker. It is a competitive process though. We want the best speakers we can get and to put on a fantastic conference. It's going to be great. This last year's was awesome. And a lot of that was because of the high quality of the people that spoke at the conference. So, if you're interested in being one of those speakers, www.wcievents.com.

Dr. Jim Dahle:
All right, before we get into our interview today, we've got a great guest coming. I want to give you the quote of the day. Our quote of the day today comes from L. Tom Perry who said “A well-managed family does not pay interest. It earns it.” And there's a lot of truth to that. I've been telling my kids that for years and years and years. I ask them if they want to pay interest or earn interest. And every time they tell me they want to earn interest. So, try to get yourself into that position.

Dr. Jim Dahle:
All right, let's get our guests on the line. Our guest today on the podcast is Jon Ostenson. Jon is a very successful franchise broker. He's also an investor and author, an international speaker. He specializes in an area that he calls non-food franchising. You're probably familiar with a lot of franchises out there but they all tend to be restaurants. Well, he specializes in other franchises. So, we're going to be talking with him today about the idea of a franchise as an occupation, as a business, as a side gig, as an investment. So, Jon, welcome to the White Coat Investor podcast.

Jon Ostenson:
Jim, I appreciate you having me. I love the show and I’m looking forward to our conversation.

Dr. Jim Dahle:
Let’s start learning a little bit more about you. Tell us about your upbringing and how it affected your views on money.

Jon Ostenson:
Yeah. My father was an attorney but we lived paycheck to paycheck. He paid for all four kids to go through private school and invested in assets. I see my siblings as fellow assets. They're now hopefully paying dividends supporting them in some ways. But living paycheck to paycheck, money was always talked about in a vein that I chose not to want to talk about down the road.

Jon Ostenson:
I was fortunate to go through college, paid my way through school and worked in consulting across a variety of industries and did the whole corporate run for a number of years. Check the box on getting the MBA back in the day, I wanted it for further education.

Jon Ostenson:
I could have stayed in the corporate world forever but like so many I had that entrepreneurial itch and I wasn't sure where to scratch it. But I kind of stumbled into franchising. And like so many others, I always thought of franchising as being fast food, being synonymous and had the opportunity when I left a large public company to step in and serve as a president of the ShelfGenie franchise system. It's a large national franchise system across North America. I came in and supported all these small business owners, our franchisees day to day and really saw how franchising can be a better path to business ownership for quite a few. And it opened up my eyes to the types of industries that existed out there.

Jon Ostenson:
Fast forward, I ended up partnering with the founder of ShelfGenie. We spun off, we've become franchisees ourselves, investing in different franchises along the way. I've had other partners we've invested in franchises. So, we've had the opportunities on both sides of the franchise table, but for the most part, we have good people running our businesses and allows me to spend 90% of my time helping others get into business ownership and explore this world as well.

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

Jon Ostenson:
Yeah. A franchise by definition would be a business that is providing support to others that are running a similar operation that share the name. So, they're providing ongoing support and then they're receiving some sort of royalty stream or upward payment for that support. That's franchising by definition.

Jon Ostenson:
Franchising is regulated by the Federal Trade Commission. You have to cross your t's and dot your i's. Every franchise system has what's called an FDD or franchise disclosure document to list out everything you could ever want to know about a franchise.

Jon Ostenson:
Franchising is not right for everyone. There are some clients of mine that have to explain you are too entrepreneurial. You want to put your thumbprints all over. However, for the vast majority, it is a better path to business ownership because by stepping in on day one, you're starting on third base, not first base, in that you've got a playbook and you're not testing product market fit like you would with a startup. Instead, you're stepping into a system that's been proven out in other markets. And now it's all about executing.

Jon Ostenson:
You've got a coach on the sidelines and that franchisor that's providing ongoing support. The better you do, the better they do. So, your incentives are aligned. And it oftentimes goes overlooked, but you've got other franchisees and other markets and you're sharing best practices on an ongoing basis. And so, maybe testing new marketing vehicles or finding out where the pool of talent is to hire from. So, you're exchanging best practice as well as learnings.

Jon Ostenson:
Then finally, you're building a business, that like a traditional business, you have the potential to exit one day. So, you're building an asset that down the road should have an increase in value that you'll be able to sell, and have a nice payday down the road.

Jon Ostenson:
For all intents and purposes, it's a small business, but it's operating within a system where there's support, where you're in business for yourself, but you're not by yourself.

Jon Ostenson:
And Jim frankly, coming out of COVID, we've seen more and more interest across the country in entrepreneurship and many are opening up their eyes to the fact that this is a better path.

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

Jon Ostenson:
Yeah. First off, you're paying a franchise fee to get access into the franchise system. And that tends to be, call it $50,000 for the first location or territory. And then typically it's $40,000 for the next, $30,000 for the next. People build these little empires through additional locations.

Jon Ostenson:
I'd say the majority of the deals that we do with our clients are between $125,000 and $300,000. That's probably where 75% of our deal flow falls. And that would be all in investment, including working capital. We'll piece that as the franchise fee.

Jon Ostenson:
So, if you were to just start a business on your own outside of franchising, you're not paying the franchise fee, but that's essentially where you're paying to get access to the brand and the systems. And essentially getting a running start on day one and then ongoing, which you're referring to is called a royalty most often. And that tends to be 5% to 7% of revenue of top line revenue. So that gets baked into the P&L, your profiting loss statement. And that's the cost of doing the business.

Jon Ostenson:
Now, the question you always want to ask is “What kind of support am I receiving for that? As a franchisor, am I going to be innovating? What are they doing for me?” In a lot of cases, they're providing services that you would've had to pay for on your own, if you didn't have that. So, it is a little bit of a trade off, but of course, that's something you always want to really investigate before you sign up, is to make sure that you're getting what you're paying for.

Dr. Jim Dahle:
All right. So, your focus is on non-food franchising. Can you compare and contrast food and non-food franchising and explain why you focus on non-food?

Jon Ostenson:
Yeah. There are roughly 4,000 franchise brands in the US today, and you have new businesses franchising all the time. Roughly half of those are in the food space, oftentimes at fast food. And my personal opinion is that they're easier ways to make money. That may be less capital intensive on the front end that may require less 24/7 type operations, maybe smaller staff. So, I just feel they may not require perishable inventories.

Jon Ostenson:
My personal view is that there are easier ways to make money. And what I found is that about 95% of my clients would agree with me. Now, 5% are passionate about food. I'd say 95% are interested in opportunities outside of the food space. And yeah, those can include areas like auto or home and property services.

Jon Ostenson:
I always say that people are willing to spend on anything related to things they care about. Kids, pets, health, health and wellness is a huge area, their homes, B2B services. There are a lot of different industry niches that have great returns off times better than food with maybe less capital upfront, less risk as well, maybe a little less trendy. So yeah, that's where I focus. Instead of trying to spread myself too thin, I really focus on all those businesses in those other categories.

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

Jon Ostenson:
Yeah. And oftentimes if it's a brand that you've heard of, then they're probably sold out in your market, just because we're seeing a lot of demand out there. But we work with a lot of development companies across the country that represent emerging brands. And so, they fit our criteria for a great leadership team, strong profit model. They operate in unique niche, competitive advantages.

Jon Ostenson:
And so, you may or may not be aware of today, that you will be pretty soon. I think like Cost of Oil or Brothers Gutters, the Gutter Space. We just had a Wall Street attorney buy into Gutter Space. No background in that, but he loved the financial model, and loved the different benefits of the business.

Jon Ostenson:
We just had a pharmacist buy into a garage remodeling business, Hello Garage. And home and property services have been probably the most popular area of any coming out of COVID in the past couple of years. Lots of interest there, tons of demand in the market from a consumer standpoint.

Jon Ostenson:
Koala Insulation would be another example there. Two years ago, they had five locations. Today they have 250 locations. It's a 52 billion market, no other national player in that space.

Jon Ostenson:
We work with businesses. We just had a PhD from the University of Arkansas buy a business called The Exercise Coach. It's a fitness business, but it caters to those 50 and above who are largely underserved in the fitness space today. And yet they have disposable income. They really care about their health.

Jon Ostenson:
Foot Solutions would be another one that we've seen some with a medical background taking interest in. And that's customer orthotics and insoles using 3D printing. They do a lot of business with Medicare, but really, it's for any foot ailment. And so, a lot of our clients like the idea of having a physical location and brick and mortar retail style presence. Others say, hey, we like the idea of not having a physical location. We'd much rather run a services business where we can operate remotely, scale up at our own pace, if you will.

Jon Ostenson:
That's just a little bit of color, but the fun thing, Jim, is that over 90% of our clients end up in an industry, in a business that oftentimes was not even on their radar. It's certainly not one they seriously considered, but once we start peeling back the onion and understanding their setup and their financial situation and how much of a role they want to play in the business, we're able to take that feedback, plus what we see resonating with others, with similar backgrounds and really played matchmaker and introduce opportunities that could be a fit that they haven't considered.

Dr. Jim Dahle:
If you're just tuning in, we're talking with Jon Ostenson, a FranBridge Consulting. He's an expert in non-food franchising. So, Jon, who are these people? Who buys franchises and why do they buy them?

Jon Ostenson:
Yeah. Well, I certainly do myself. When I refer to our clients, that's the data set we're working with. We do have purview and views into what's going on in the market as a whole.

Jon Ostenson:
But I'd say roughly half of them are what we call owner operators. They're looking to leave the corporate world or the medical field and run the business day to day, at least out of the gate.

Jon Ostenson:
And then the second model, which most franchises allow for and lend themselves to as well, is called semi-absentee or semi passive, or we'll call it our executive model. And that's where they're putting the manager in place on day one, that's going to run the day-to-day operations. They're taking more of a mentoring and coaching role from the sidelines.

Jon Ostenson:
Now, nothing is ever exactly turnkey or entirely passive. They still have to have some role in the business, especially if they don't have the right general manager in place. You got to get the right person. But from an age bracket, demographic standpoint, we've done deals year to day with those in their 20s all the way through their 60s. Certainly, the sweet spot, I'd say, is, 30s through 50s. That's where most of the deals are happening.

Jon Ostenson:
But it's across the country. We hear all the headlines about people moving to the south. I'd say markets like Atlanta, Dallas, Florida, Charlotte, Raleigh they're as hot as anything. Brands are going very, very fast in those markets. But we're doing a lot of activity in New York and California. Some of those states that get bad press from people moving out, maybe they're not as business friendly. There's still a lot of activity from an entrepreneurial standpoint on the ground. Really, it's a large swath.

Jon Ostenson:
And again, some of our clients are current business owners and they're looking to build out that portfolio and their current businesses may be franchised or not franchised. We've got case studies of both, but they're looking to add in additional pieces to that portfolio that either serve to complement their core business or businesses or diversify from them.

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

Jon Ostenson:
Yeah. Great question. We work with a lot of businesses that are thinking about going through the franchising process. And for some it's the right move, for some it's not, but I think it's a very wise thing to at least scale and start thinking of your business as a franchise, because you start putting best practices into place when you put that headset on.

Jon Ostenson:
But no, the reasons you would choose to franchise are you can typically scale at a much faster rate because you're using other people's money. So, you're not taking on as much debt let's say or equity partners. As a business owner you always want your employees to have an owner's mentality. So, here as a franchisor you can open up in other markets where people know the local markets, they've got skin in the game, they're going to act as owners.

Jon Ostenson:
And so, those would be some of the reasons. From an exit standpoint, this oftentimes is unknown, but private equity loves franchising. If you Google private equity franchise acquisitions, acquisitions are taking place every week right now. I get PE firms reaching out all the time, wanting to know what we're seeing on the ground. There's so much money on the sidelines and they love the franchise model for the same reason a lot of others love the model. So, it does set you up for maybe a more profitable exit, higher, multiple down the road as well.

Jon Ostenson:
Those would be some of the benefits as to why someone would choose to franchise. Now I always tell them from my experience, all these are great benefits, but you will wake up one day as a franchisor and realize you've got kids all across the country that have expectations of you. And you're trying to keep the kids playing nice and happy. And it does change your day-to-day role and you do need to make sure you've got staffing in place to support those owners and really set them up for success.

Dr. Jim Dahle:
I presume you work with two different types of transactions here. People who are just starting, they're buying a building, they're paying the franchise fee, just getting going. And then there must be people who are exiting. They bought a franchise a few years ago and now they're trying to pass it on to somebody else.

Dr. Jim Dahle:
You mentioned the franchise fee to get it initially is $50,000, maybe less for repeat branches essentially. What are a lot of these franchise businesses sell for later once they've been developed a little bit, when they're turned around and selling the business to the next owner?

Jon Ostenson:
Yeah. A couple of thoughts on that. First off, people do tend to hold onto these for quite a while, but we certainly do resales. I'm invested in a driveway repair business here in Atlanta, which has just taken off and done great. And we recently bought out two other franchisees that were in our market to expand our kingdom. So, it does create kind of a natural exit to rollups or to other franchisees.

Jon Ostenson:
At times, you'll see private equity coming in and by and large swath the franchise locations. I'd say that's not common, but it does happen. It happened with Orangetheory recently. It happened with PODS. Or they'll take them corporate. They'll essentially buy the rights back from the franchisee and take them corporate. Most often times, though, you are seeing them out there on the open market and typically the franchisor is helping facilitate the process for that exit.

Jon Ostenson:
They love to find someone else that can step in and run the business well. And so, they'll support you. They probably have a lead list of those that have shown interest in that business over time in that market. So, you kind of have a natural starting point if you're looking to sell.

Jon Ostenson:
There was a study done recently that looked at franchise businesses versus non franchise businesses. It was done by the Rinker School of Business. And what they looked at was exits over a 20-year period for 2,000 businesses in light kind industries of franchise versus non-franchise.

Jon Ostenson:
What they found were the franchise businesses traded at an average multiple of one and a half times non-franchised. There is that value seen from a resale standpoint in the future buyer. And so, it depends on the industry as far as the multiple goes. It depends on if it's a recurring revenue business, the type of model, obviously.

Jon Ostenson:
A lot of times, the larger you build the business, the better multiple you get as well. But very common, I'd say from an EBITDA earning standpoint, I'd say three- or four-times earnings is very common. Sometimes you definitely see above that. At times it can be a little bit below too, but that's a good rule of thumb.

Dr. Jim Dahle:
These tend to be six figure transactions then for the most part or most of them are seven figure transactions?

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

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

Jon Ostenson:
I mean, you certainly can buy a job, if you think about it that way, but if you're an owner operator then yeah, you're shifting your efforts into running a business here. However, most people don't think it as buying a job because even if they're running the business day one, over time, they're going to pull themselves back to maybe their higher payoff activities and put a manager in place that's running more of the day to day and maybe they're more strategic or working on referral agreements going after the elephants in their town to go sell to. And so, I think over time, oftentimes I see people step in, run it full time and then start to scale back and potentially then bring in that second opportunity.

Jon Ostenson:
Very, very common we do a lot of repeat deals with clients where they are building out that portfolio. One thing to think about, even as an owner operator though you're building cash flow as you would with the W2 income, let's say. But as a business owner, you're also able to write off expenses. As a W2, you can't do that.

Jon Ostenson:
So, there are a lot of travel expenses or other expenses that you can tag to the business that you benefit from, being able to write off. Then of course, you're also building an asset that's going to have to exit down the road. As a W2, you can't really sell yourself down the road. There are a couple of dimensions beyond just that cash flow equivalent.

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

Jon Ostenson:
Yeah. It would be the seller. Our clients never pay us a nickel. Going through their process, we never get compensated by them. But it is a commission on the back end. And that's very much like an executive recruiter type model. We've got agreements in place with literally 500 – 600 franchisors across the country. And they're pretty even across the boards. We're not swayed one way or another. That never comes into our thinking.

Jon Ostenson:
With the franchise brands, none of that ever gets passed onto our clients in any way. For them, the franchise fee is the franchise fee. It doesn't change. If you were to go directly to a franchisor versus working through us, you're paying the exact same thing. For them, it's just a sales and marketing cut. So, it varies. I won't get into the exact amounts, but, yeah, we do well, but we also bring incredible clients to them that become new owners.

Jon Ostenson:
We've been very fortunate that we do more deals than about 99% of others in the market in the US. And so, we've got those relationships with the franchisors that I would say are more important now than ever, because in a market like Salt Lake City, let's say, you're going to have multiple people wanting the same opportunity at the same time. And so, what we're able to do is work our relationships time and time again with the franchisors to best position our clients ahead of other candidates in the market.

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

Jon Ostenson:
Yeah. It's a meaningful model but we love helping people. I mean, that's a big piece. I've had clients reaching out. I was on the phone with a client this morning that I purchased a little while back and just seeing their success. That's what gets me going.

Jon Ostenson:
And I've only had one client where it hasn't worked out for them in our time of doing this. In most cases, they're coming back, buying additional locations. And in that one instance where it didn't work out, he lived three hours outside the market. He could have kept running with the business, but it was one of those businesses that it really helped be in the market, that ground game, grassroots out the gate I think would've helped him gotten off to a faster start. So, a few months in, he chose to throw in the towel. But again, that's very rare based on what we've seen.

Dr. Jim Dahle:
Let's talk about leverage for a minute. How leveraged are most of these purchases and where are people getting financing for them?

Jon Ostenson:
About a third of our clients use debt. So, SBA loans are most common within that. About a third of our clients are paying out of pocket because right now there are record levels of cash sitting on the sidelines. People are nervous about the stock market, only so many good real estate deals be had. So, we do see some people paying out of pocket.

Jon Ostenson:
About a third of our clients are using what's called the ROBS program or portfolio loan ROBS program is where they can tap into their 401(k) or IRA. They set up the business as a C Corp and they actually self-direct their retirement plan to purchase the business. And so, it's a unique model. We've got a partner FranFund that helps clients with this process. Portfolio loan would be where you borrow against your brokerage account, your non retirement brokerage account, which can be really compelling.

Jon Ostenson:
I do that personally. I'm paying like 1.5% interest and it's variable. It'll go up over time, obviously, but right now, I'm paying 1.5% percent. And then I either invest in franchises or I invest in some private lending deals that I do at 12% to 14% return. So, it's a total arbitrage play if you think about it that way. That's a circular way to get back to the SBA loans that you're asking about.

Jon Ostenson:
In most cases, people are putting down somewhere between 20% – 25% of the purchase. I'd say the average loan that we're doing is probably $200,000. Again, we've got partners that help our clients through the process A to Z. But if you were taking out a $200,000 loan and putting in, say $50,000, and then the nice thing is with SBA, you are personally guaranteeing it. There are some caveats to it, but you are able to pay it back early. So once your business is up and cash flowing, you can pay that down.

Jon Ostenson:
The rates I've been seeing are probably in the 6% ballpark. I would guess that's going to go up, obviously, from what we are seeing in the market today. It’s not going to be as low as your home mortgage, however from a historical business landing standpoint, they are still relatively low.

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

Jon Ostenson:
Yeah. One that comes to mind, we've had three of these deals go through in the past two months. I mentioned the gutter business. I think that'd be a good example. A 47-year-old Wall Street attorney outside of Boston just purchased it. We had two brothers in South Carolina purchase, that had a background in the insurance space. We just had a corporate executive in the sales and marketing space in New Jersey purchase.

Jon Ostenson:
So, it's kind of a good representation there for the white-collar background. None of them had a background in home services or property services. They said, “Wait a minute, we really like the niche these guys operate in. It's a 6 billion market. We like the leadership, the model they've proven out. We like the culture. And then we like the financials.”

Jon Ostenson:
All in investment on this one, if you were to do two locations, which is average. Location being defined as the territory of, call it 250,000 to 300,000 in population. The franchisor works with you to define that territory. So, you purchase two, you’re all in investment, you're between $160,000 and $200,000 all in. Really the biggest variable is, “Do you finance your track or do you purchase it outright or do you lease it? That would be your biggest variable cost.

Jon Ostenson:
So, let's just say $200,000 all in on the high side. What they're showing is average revenue as of last year, for inception to date, and they've got over a hundred locations. Average across their franchise owners was $1.2 million. This year, their new FDD just came out, franchisors come out with a new FDD typically every spring. Their average is now $1.7 million. The business is thriving.

Jon Ostenson:
So, that's your average revenue. They're doing 31% on the bottom line if you're running it as an owner operator. So, 31%, we'll just round down, call it $550,000. Now, if you're paying a general manager to run the business, including incentives, you're aligning your interest, you're probably paying them, let's call it $100,000. So, you're still dropping $450,000 to the bottom line.

Jon Ostenson:
I always tell my clients “Let's go conservative. Even if that’s their average across a large swath of owners, let's go conservative in our assumptions.” Some businesses you have faster break evens, you can get out of the gate faster. Some are slower. These guys, back in 2020 I remember a couple of case studies where one guy did $800,000 in the first year. One did $1.2 million. One actually hit $2 million in their very first year. So, you can get up and running fairly quickly. That's a 31% bottom line. I'd say typically in that space, home and property services, you see somewhere on average around 20% to 25%. So that one would be a little bit higher than average.

Jon Ostenson:
I mentioned the fitness concept earlier. Let's just look at that case study really fast. All in investment, you're probably $200,000, including the build out, including your working capital. It’s not a huge footprint, but you've got some high-end tech machines in there. So, $200,000. They're averaging lower revenue. It's about $260,000 per location and they're dropping about 40% to the bottom line.

Jon Ostenson:
So healthy margin, recurring revenue type operation. But you're probably going to want to open up a couple of those to get to where you want to be from a number standpoint. And you don't have to open up all of them at day one. You can open them up maybe every six months, every nine months. Oftentimes you have a phased approach to scale. So, those would be two examples.

Jon Ostenson:
And I'll just mention one more, Jim, that may be helpful. Just switching to another industry. There's an oil change business. We think about electric vehicles. Electric vehicles get all the headlines, still when you look at 15 years down the road given the average age of cars is 12 years on the road. Still less than 10% of cars on the road are projected to be electric. It’s still a long runway for the oil change industry.

Jon Ostenson:
And there's a model right now that we've been doing a lot of placements with it. It’s truly a semi passive executive model. The guys buying into it don't have any background in the auto space. But it uses prefabricated buildings. They're backed by an investor group that operates out of unused parking spaces in a retailer shopping center. So, you get great road frontage and convenience. People get to stay in their car. It's a 10-minute oil change in and out.

Jon Ostenson:
All in investment on this because you're leasing the building, you're leasing the space, even though it's technically brick and mortar, you're able to get in for $140,000 – $150,000 per location. And they're kicking off $335,000 in top line revenue with about $130,000 dropping off the bottom line. Again, a strategy here would be, let's open up three of these, put a manager over all three of them and run it from an executive model standpoint.

Dr. Jim Dahle:
Right. But you're talking about getting your money back within a year in a lot of these. Six months to two years. That's a fantastic investment return.

Jon Ostenson:
Well, with the oil change, that's their average. Some of these have been open several years, so it's not necessarily year one, but you are able to get it back. And then again, you're building an asset that you're going to be able to sell down the road.

Jon Ostenson:
So, Jim, I found it's really eye-opening to people once they extrapolate, “Hey, here are the types of returns that you can get.” And it's not just pie in the sky. It's not just back in the napkin. The data has to be audited, t's crossed, i's dotted because you're regulated by the Federal Trade Commission. You're looking at a large swath. It's not a guarantee of success. It doesn't totally de-risk it, but you're able to go in with a very eyes wide open view into what to expect from a return standpoint.

Dr. Jim Dahle:
Okay. How do you make this as passive as possible? If you have any management role whatsoever here, you can only scale so big. The more passive you go, the more you can scale this. So, what's the secret to making these completely passive?

Jon Ostenson:
We do have two or three concepts that can be completely passive where the franchisor will actually run the business as a corporate model, corporate location. That's definitely a rare case, but we do have a few of those. By and large it's semi passive and I stress that it's semi passive. You have to expect to have some level of involvement in the business.

Jon Ostenson:
I don't want to misguide people, but a couple of things that we're doing to help our clients because we have that request coming a lot of, “Hey, I'd love to get into franchising, but I really don't have any time.” Having that general manager, we're partnering with a recruiter. This is out of the gate. This is new news, but we're partnering with a recruiter that's going to help our clients find general manager candidates for them to then interview. So, it's going to kind of take some of the work out of that process.

Jon Ostenson:
A former client of mine, a guy named Nathan Bocock, great guy, right around 40 years old. He built up Two Men and a Truck Franchise. He bought in and acquired additional locations. That's a moving service and it's a franchise. But he has about 10 locations doing over $30 million a year in total.

Jon Ostenson:
He and I have done a couple of deals together in the past few years where he's like, “Hey, I want to expand and diversify my portfolio.” I've introduced him to opportunities that he's bought into. And in every case, he puts a young general manager in place. They don't have to be young. It's just kind of how it's happened.

Jon Ostenson:
But he actually gives them some equities. He says, “Hey, I want you to actually be an owner. Not just think like an owner.” He sources these guys through church, oftentimes. He just kind of gets to know these guys and says, “Hey, I trust you. Go make us proud.” And sometimes even in other cities, he'll position them. And in every deal, we've done, he's come back and bought additional locations. He just had a lot of success.

Jon Ostenson:
Anyway, that's a long way of saying he is now working with us to coach our clients. When we have a client sign a franchise agreement, we bring Nathan in for a couple of coaching calls that we fund and Nathan will share his learnings, best practices and how you align interest with the general manager, what's worked, what hasn't. Again, just trying to help the clients get out of the gate strong, and be able to be as semi-passive as possible.

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

Jon Ostenson:
I certainly do have clients that are moving from California to Texas and to Nashville. We see that happening. Obviously, business friendly states are easier to get up and running and do business in and maybe a few less regulations.

Jon Ostenson:
We look heavily at the demographics of the area and this is something that the franchisor really has expertise on. They know, “Hey, can we operate in small markets? Are we better in small markets? Maybe where there's less competition. Or are we better off in big cities?”

Jon Ostenson:
They'll define their locations and territories by population or a number of addressable households with an income of at least this or a number of addressable businesses that meet these criteria. They have access to all that information in their systems. And so, they're able to work to help define those locations with franchisees, but they know based on trial and error, what to look for in new locations.

Jon Ostenson:
So, it varies. I'd say more often times than not you are looking more towards big cities or areas that you anticipate growth people moving in, not moving out. But again, we're doing a lot of business in states like upstate New York or Western Massachusetts or areas that you don't think of as hotbeds for attracting new relocations.

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

Jon Ostenson:
You can certainly go out there and Google around and get some information. The challenge is going to be, every brand is putting forward their best foot online and you're going to see their marketing messages. And you may see in the case of the insulation, “Oh, they've got five locations. That's a little too small. I need something more proven.” Well, they may have a ton of momentum and have a hundred locations opening up in the next six months, but you don't have insight into that or the background of the CEO necessarily.

Jon Ostenson:
Again, we love engaging with clients. And what we've done is we've taken out the food and the lodging franchises. We don't deal with hotels. That's just a different game as well. But then we've taken those and applied different screens to them. Again, we work with all these different development groups that work with the franchise brands. When I say development groups, they'll come in and represent on the sales side these different emerging brands, allowing the franchisor to then focus on their new franchisees and setting them up for success rather than having always sell new franchises.

Jon Ostenson:
Anyway, there's partners that we have in the market that have already done some of the screening as a first step, and we do a lot of business with them. And then personally I draw on my experience as a franchisor and franchisee. I network, I go to events, I get to know these franchisors, understand what their growth projections are, what's their competitive advantage in the market. What types of franchisees are they attracting? Are they attracting many franchisees? What would be relevant to a market?

Jon Ostenson:
All of that goes through into the selection that we have. Like I said, we work with over 500 brands. At any given time, there's probably 30 to 40 that I'm really excited about introducing my clients to, but it has to meet some of my client’s criteria.

Jon Ostenson:
We get to know our clients through a series of a couple of calls, get to know their background, their skill set. They may be coming from a totally different industry, but they're open to this industry. All those different things, do they like a large team, small team, brick and mortar, or non-physical location? Where are they looking to invest financially? Are they looking to build a portfolio? What's their timeline for being in business? All those come into play.

Jon Ostenson:
And then we also bash that against what we see taking place in the market. I'd be hesitant to buy into a franchise system that hasn't sold a franchise in six months. However, I would love to take a hard look at one that sold 50 locations in the past three months. There's something that's resonating with others oftentimes with similar backgrounds.

Jon Ostenson:
So, all those data points come into place. And what we'll do is take clients through typically 8, 9, 10 opportunities that match the criteria we've discussed with them that are available in their market. The client works to narrow those down to two or three, maybe four opportunities. We then make the introductions and then they start the process of having a few calls with the franchisors, hearing all about different dynamics of the business, the financials, the ins and outs, the branding, the FDD review.

Jon Ostenson:
They get to do what's called validation where they talk to other owners in the franchise system and hear about their experience. What was your ramp up? What kind of support are you getting from the franchisor? Anything you'd do differently? Really with the goal of an eyes wide open approach, ultimately culminating in what's called a discovery day where they meet with the franchisor's team at the home office, get to meet all of them. They need to make sure it's a match both ways. And then they get the offer to join the franchise system.

Jon Ostenson:
We're serving as a sounding board, holding our clients' hands through the entire process. If they get off the call and say, “Hey, I don't think that's the right fit for me.” No harm. We let the brand know. But what will happen is they're going to say “There's something that I heard on that call that I really like. Hey Jon, can we look at some other opportunities to fit these criteria?”

Jon Ostenson:
Because our clients' thinking evolves as they go through this. You create a framework and lenses through which to analyze option A versus option B. It's this muscle that you haven't necessarily used in the past – “How do you analyze businesses?” And so, that's what the process looks like and kind of how we help them narrow down so they're not overwhelmed at this universe of noise out there.

Dr. Jim Dahle:
Now, what role does passion play here? A lot of people choose their career. A lot of our listeners are doctors, they feel passionately about medicine. They feel it as a calling for instance. What role does that play when choosing a franchise, if any?

Jon Ostenson:
I do have clients that say, “Hey, I'm passionate about pets. I've got five dogs. I want to do something pet related.” Well, there's a lot of businesses that cater to the pet industry and probably some they hadn't thought about. So, we introduce that world of pets. If they know that's where they want to be, we don't try to talk them into something else.

Jon Ostenson:
But the vast majority, they come in and say, “Hey, I'm open-minded, here's what I want. Here's my long-term vision.” I just hear this day in day out through would be entrepreneurs across North America. Some that have never owned a business before, some that have, and they say, “Hey, here's what it looks like from 30,000 feet. Help me break it down to what tangibly could fit that mold.” And in some cases, I say, there's nothing that will fit that mold. But in a lot of cases, it's, “Hey, here's what we've seen be successful for others that you may not have considered. Let's at least consider it, maybe have a conversation with them.”

Jon Ostenson:
And inevitably Jim, even once we review opportunities with the client, what was ranked number three in their mind, after they talk with them, they say, “Hey, that's now my number one.”

Jon Ostenson:
And so, I just encourage people to come in with an open mind. From a passion standpoint, there are times the passion comes into play. I'd say the majority of my clients say, “Hey, I'm passionate about a lifestyle for my family, the work life balance. And I may have to work hard initially, but longer term, I see what this can lead to.” So, that's more of where the passion lies versus, “Hey, I'm passionate about this industry.”

Jon Ostenson:
I will say though it is fairly common for people to come and say, “Hey, I know I don't want a physical location. I want to do it remotely.” Others say, “Hey, I really want something that has a physical location.” So, there are some criteria that we can apply that take out large swaths of opportunities but by and large, it's more what they're passionate about versus the business itself.

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

Jon Ostenson:
It’s certainly a two-way partnership. The clients that we were working with are sharp folks. We've gotten accolades from the franchise world on the types of clients that we bring to them.

Jon Ostenson:
And so, we haven't run into that too often where they say, “Hey, you're absolutely not a good fit.” I'd say if it's a sales-oriented business where the business lives and dies based on sales orientation. If you have no sales in your background, you don't want to hire someone to be a sales person and manage a sales person. I'd say sometimes those are easy disqualifiers. When we say, “Hey, it's just not going to be the right fit.”

Jon Ostenson:
But in a lot of cases, there are transferable skills. Again, I think about the medical profession and the doctors, many of whom are listening. You've learned how to work with others. You've learned how to work with clients, if you will, how to negotiate on the back end of reimbursements or what have you. There's a lot of things that you've done that will be applicable though may look a little bit different but these are skill sets that you've honed over time.

Jon Ostenson:
I always say that if you care about people, I mean that's the biggest thing. At ShelfGenie we'd have candidates go through the process and they'd say, “Wait a minute, you're marketing, making our phones ring. You're answering the phones, you're setting appointments. You're supporting us on the technology side and product development. What do we do day in, day out?”

Jon Ostenson:
And my answer inevitably was get involved in your local market, get some grassroots. Whether it be supporting the little league baseball team or getting involved in the chamber of commerce. But then really your most important thing is going to be around people, finding and hiring the right talent, incentivizing them, supporting them and then making tough calls when needed. I'd say that the biggest thing is just your ability to work with other people.

Jon Ostenson:
And it sounds commonplace, but for some people it's tougher than others. So, I'd say with the franchisor, the biggest challenge we're running into right now is again, where you have multiple candidates wanting the same opportunity at the same time in the same market. They're not going to let you open up in a market that doesn't make sense. If it's a mosquito business, you're probably not going to go sell it in. Do you have mosquitoes in Salt Lake?

Dr. Jim Dahle:
Not a lot. It's probably not going to work great here.

Jon Ostenson:
Right, right. So, it's a little bit of a more regional business. They're going to want you to be successful. Again, your numbers get rolled into their item 19 of their FDD. If you're going to be too difficult to work with, if through the process you haven't been able to follow the development process to lead to that point of agreement, they're going to say you're not the right fit from a culture standpoint. We don't see you abiding by the system. So that does happen, but it's definitely more rare from our experience.

Dr. Jim Dahle:
Most of the time, you can get what you want.

Jon Ostenson:
Most of the time.

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

Jon Ostenson:
Yeah. Again, the one example that I have from our clients where literally it didn't work out was the example where he lived three hours outside the town and just didn't have any connections in that area. And it was a business that lent itself to that.

Jon Ostenson:
I'll give you an example from my personal experience. I had two partners, and I always say the partnerships are great until they are not. My partnerships I'm involved in now, I couldn't be more thrilled. If you're going to partner up, make sure it's the right person.

Jon Ostenson:
And one of these two partners was one that I've done a lot of business in the past. I really trusted him, he trusted me. But we brought in an operating partner on an equal field with us. We were each one third owners of the business.

Jon Ostenson:
And long story short, the operating partner ended up not being who we thought he was. It was a situation where he wasn't running the business well, but he was reporting back to us essentially that things were going better than they were. And once we really dug, it was our fault for not being more hands on, probably early on, but once we dug in, we realized, “Oh gosh, he's really put us in a hole. We're going to have to put in some additional capital, which is not ideal.”

Jon Ostenson:
And so, that created a little bit of tension as well, that he'd kind of run the business poorly and then couldn't put in additional capital. And that really created some riffs, especially between him and my other partner.

Jon Ostenson:
But it ended up that we needed to remove him and really get him out of the equation. So, to incentivize my other partner, who wasn't planning on being an operating partner, I ended up selling my equity to him in the business at a fairly low rate. So, I took a loss on that deal and tried to set him up to be motivated to run the business, which he hadn’t planned on doing. So, yeah, that was the horror story, I guess. And it doesn't sound as bad now, but when you're living in the moment, there's some drama and I don't like drama.

Dr. Jim Dahle:
How about if I want to get involved in some of these famous brands? I want to be a Chick-fil-A location owner. Can you help me to accomplish that?

Jon Ostenson:
Well, Chick-fil-A. Actually, Andrew Cathy is a good friend here in Atlanta. So, I might be able to pull some strings over there. But Andrew, of course, took over for his dad this past year for Dan Cathy.

Jon Ostenson:
Chick-fil-A is probably the hardest one to get into. It's just such a unique operator model that they have with that business and culture wise and everything, but great, great business. Here in Atlanta, we have a lot of folks over there.

Jon Ostenson:
The food industry is a different animal. Again, what I'm focused on here is the non-food. And if you were to get into Wendy's, and one acquires 78 Wendy’s, it's just a different level. You're dealing with a lot more private equity buyers that are owning hundreds of locations. I've got a friend that runs Atticus Franchise Group. They've got over a hundred Sonics, got over a hundred Massage Envies.

Jon Ostenson:
And so, it is a little bit of a different realm and that's not where we focus. A lot of the brands that we work with are ones that you've heard of. They're household names, but typically they're either resales or you're buying into smaller markets they haven't developed yet.

Jon Ostenson:
The benefits of buying into a brand that you've heard of is that they've probably been around for a while. There can be some brand awareness in the market, but you may go in and be franchisee number 741. You're not going to get quite the same hands-on attention. You're not going to get a seat at the table. You'll probably have to work around some other prime locations of existing franchisees.

Jon Ostenson:
With an emerging brand, the opportunity is you get to go in and get choice territory. You get more hands-on treatment. The challenge is maybe they haven't seen every situation or encountered everything in the past that you may encounter. This is where we do our investing, prefer that emerging brand opportunity, given they've got the leadership, the financial model of competitive advantages, all those things in place. But we'd rather get in early on, get the right market, really get a seat at the table in a lot of cases as well.

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

Jon Ostenson:
Yeah. I think just from a high level, we're having conversations across North America with all sorts of backgrounds. Many in the medical field, many coming from the corporate world or in the legal field. In some cases, existing business owners.

Jon Ostenson:
So, there's a desire I believe in everyone to be a business owner to say, “Hey, do I have what it takes?” And they want that idea of financial freedom and independence that you so often talk about on your show, Jim. They just don’t know where to start. And so, we've just seen success story after success story. And again, not everyone moves all the way forward. They'll go through the process and decide it's not right for them. That happens all the time.

Jon Ostenson:
But I think it's a really good idea for people to at least give it a consideration because there are a lot of unknowns in franchising. And once you really start realizing the benefits that can be had, you can quickly determine if that is a possible fit. And if so, let's at least dip a toe in the water, check it out and see if it could be a good path.

Jon Ostenson:
We see families going into business together, oftentimes couples. We'll purchase a franchise together. Or we just had two brothers, as I mentioned, or a brother-in-law. That sounds a little scary, maybe not a brother-in-law. But in a lot of times, it is, “Hey, it’s a good friend of mine, we want to partner up and he's got relationships with all the commercial real estate agents in town.”

Jon Ostenson:
And start thinking about in your market, where are the needs? Where are people being underserved today? And maybe the service just isn't that great. And you say, “Wait a minute, we can do that better.” Oftentimes it's a fragmented industry that you step into with a brand, with a white-collar approach, the technology, and just really differentiate. So, start having those thoughts as well as think about connections in the market and what would help you get out of the gate fast?

Dr. Jim Dahle:
All right, Jon. If someone wants to hire you as a consultant or a broker, what's the best way for them to get in touch with you?

Jon Ostenson:
Yeah. As a first step, I'd come out to our website, franbridgeconsulting.com. I'd say as a first step, sign up for our newsletter. We deliver great content every month. We've got a book coming out in the third quarter. And so, Jim, I'd extend the offer to all of your listeners that if you'd like to get a copy of our book, it's called The Book on Nonfood Franchising. It’ll be releasing in the next few months. We'll make sure to get copied to everyone that signs up.

Jon Ostenson:
But yeah, if this is an area that you want to take a next step in and actually have a conversation, I'd be happy to get on 10- or 15-minute call and hear a little bit more about your background and kind of what you're looking to do and help you think about does it make sense to jump into the process and take next steps.

Dr. Jim Dahle:
All right. We've been talking with Jon Ostenson, a non-food franchise broker. Thanks so much for coming on the show, Jon.

Jon Ostenson:
Thanks for having Jim.

Dr. Jim Dahle:
All right. I hope you enjoyed that interview. Obviously, bringing on a guest like that, he wants you to hire him. That's why he comes on a podcast like this. We get pitched a podcast interview like this about five times a week. And we take almost none of them. I think we can count them on one hand or less all the people the whole time we've been doing this podcast that reached out to us, that we brought onto the podcast. Most of the time we're reaching out to them.

Dr. Jim Dahle:
But this one I thought was interesting. I've been a big fan of ownership, whether it's owning your practice, whether it's owning your home, whether it's owning a small business on the side. You are far more likely to become wealthy when you own stuff, whether that's in your portfolio, stocks, real estate, bonds, etc, or in the ways you generate money. It's just a much more likely path to building real wealth and certainly to building any sort of passive income.

Dr. Jim Dahle:
I don't know how many people in our audience would be interested in franchising. But I know I've gotten questions about it over the years, and I was interested in learning a little bit more myself about it. And so, that's why we brought him on.

Dr. Jim Dahle:
All right. What else do I need to tell you about? We got a scholarship, right? We give away money. We're giving away tens of thousands of dollars to medical and dental students and other pre-professional students. All you have to do is apply. We get, I don't know, 700 or 800 applications a year. You can apply at whitecoatinvestor.com/scholarship.

Dr. Jim Dahle:
If you are interested in being a judge for the scholarship, you can't be a student, you can't be a resident. You have to be a high-income professional of some type. You can be retired, that's okay. But if you would like to be a judge, apply at [email protected], put the word “Judge” in the subject line and we'll let you help choose the winners of this scholarship.

Dr. Jim Dahle:
Nobody at the White Coat Investor chooses the winners of this scholarship. We're completely divorced from it. We just help fund it. But it is our audience, our volunteer judges that decide who wins the scholarships each year. So please, if you're interested in winning that, you got to be a full-time student in good standing, go ahead and apply. If you're interested in judging it, please also shoot us an email. We would love to have you help us to judge this contest.

Dr. Jim Dahle:
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Dr. Jim Dahle:
Thank you, Alpheus06 for that great review. For the rest of you, keep your head up, keep your shoulders back. You've got this and we can help. You can be financially successful. All it takes is a little bit of effort, a little bit of knowledge and a little bit of discipline. See you next time on the podcast.

Disclaimer:
The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.