Have you wondered what it takes to scale a non-food franchise and exit the business successfully? Today’s guest, JT Singh, a CPA, M&A expert, and multi-unit franchise owner, joins the podcast to drop tons of nuggets from his unique experience and perspective on franchising in this episode. JT is currently the CFO for FranWorth and talks about his strategies for scaling a non-food franchise. He also shares his tips on what franchise owners should look for to identify if an emerging brand has potential. JT’s formula to success proves to be effective for businesses with certain niches. So tune in to this episode to learn more from JT Singh’s business model and scale your franchise business today.
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Strategies For Scaling A Non-Food Franchise With A M&A Expert And Multi-Unit Franchise Owner, JT Singh
After a little bit on the shelf, we’re bringing back a new episode of the Franchise Masters. We are joined by JT Singh of Franworth. He’s been a multi-unit franchisee and an investment banker. He’s done a ton of stuff in the franchise world. JT, thanks for joining us.
Dru, thanks for having me on. I appreciate you reaching out.
We’ve gotten to know each other a little bit over the past few months on that little thing called Twitter or now called X. Whatever it’s called nowadays. You put some interesting thoughts out there. You have an interesting perspective to share with a lot of folks who are tuning in. JT, I love to kick it off with you sharing your journey and story in franchising, and how you got to the CFO of Franworth, which has some interesting stuff going on that we’ll talk about. I’ll kick it over to you. Would you mind sharing a little bit about your journey?
I’ve been in franchising probably my whole life but I didn’t know I was in franchising until a few years ago. We’re immigrants. I was born in India. I came here when I was a kid. My family always worked in the type of what’s considered the lower wage positions within franchising, then eventually bought their own franchises.
We’ve been in 7-Eleven, Subways, convenience stores, and pizza. That’s the environment I grew up in. I remember being 5 or 6 years old and eating pepperonis every day out at the pizza shop. That’s how I grew up. I wasn’t a franchise guy. I went to school for business and became a CPA. I was doing financial due diligence for private equity firms. What that means is a private equity firm is writing a cheque for $25,000 or $50,000 or $100 million. They’re going to hire a team of CPAs to come in and evaluate the deal, dig into the numbers, kick the tires, and that type of thing.
I did that for a while. I looked at a few franchises there but was still not a franchise guy. I transitioned over to being an investment banker where I had focused on three industries. I was doing healthcare, franchises, and business services. Healthcare was like the home health hospice. From a franchising standpoint, I was doing franchisors and large multi-unit franchisees, so capital raise and sell-side advisory. The large multi-unit franchisees from an investment banker standpoint have to be pretty big. These are big.
How big are you thinking?
An investment banker’s fee is a minimum of $750 to $1 million minimum. When you think about what type of business can afford to pay that fee, that gives you the scope. It’s got to be at least a $50 million business for an owner to say, “You sell my business and I’ll pay you $1 million.” Typical franchises, usually at most, are million dollars. Some of them are $2 million or $3 million, but 90% of them fall under $1 million. Unless you’re at least 50 units, it probably isn’t even on the radar for investment bankers.
Did you get any deals done with multi-unit franchisees?
I can’t talk about them publicly, but I did a capital raise for one. I’ve done a lot of work on the franchisor side. A lot of capital raising. A lot of these franchisors are getting going and they’re like, “We need some money.” They’ll hire an investment banker to go raise $10 million, $15 million, or $20 million. I’d done a little bit of that. I ran a process for a few of them. That’s when I started becoming knowledgeable in franchising and seeing which franchisors are doing well, how they are growing, and what they are doing differently.
I had always been entrepreneurial as well. Investment banking was great. It’s a high-income White collar job. You sit at a desk, but I wanted to do something else. Somebody had reached out to me and introduced me to a guy who owned a home healthcare business or senior care. He was like, “JT, this guy wants to sell. Not knowing what I do. Can you help him sell?” I was like, “Sure, I’ll talk to him.” He was a small franchise guy. He is owned and operated his business for fifteen years.
I was like, “This isn’t what I do. I could give you some guidance but it’s too small for me. Why do you want to sell?” Interesting story, he had a sexual misconduct charge against him and the franchisor was almost pushing him out. The public hadn’t become aware that an owner of a senior care business has a sexual misconduct charge against him. The public hadn’t become aware so he was like, “I need to get out as soon as possible. What can you do to help me?”
I told him, “It’s not worth my time but if you want to sell, here’s probably what it’s worth. It’s going to be tough for you to do it. How about we do this? I’ll give you X amount and we can close in 30 days.” I viewed that as my out. I was like, “The business was sizable enough for me to be able to continue to pay my mortgage and all of that.” It was interesting. It was close to me, and I knew a lot about home health and hospice. I had sold one of the largest home health and hospice businesses locally. I knew this area that I’m in, Metro Detroit, well and I knew a little bit about franchising. I was like, “Let’s do it.” I convinced him to.
I didn’t think he would take my offer and he took it. Ultimately, it took us 90 to 100 days to get a deal done because of SBA financing. I bought that business, left my career as an investment banker, and I was a full-time owner-operator. The biggest learning for me in the first 30 days was I went from being a guy who was driving a Tesla Model S wearing a nicely dry-cleaned perfect shirt to going and working with a team where 80 of our employees were making less than $20 an hour, and the turnover rate was 150%. That was my real foray into franchising.
From there, I moved around. I ended up at Franworth. I joined Franworth as a lead guy for M&A. I had sold my business. They had reached out to me and said, “You’ve owned a franchise. You’ve advised franchisors. You got a lot of experience in the space. We need somebody to come in here and be the head of M&A for us.” About four months in, they said, “Our CFO is retiring. Do you want to take over that role as well?” Now, I took over and I lead both functions for us.
You got a little bit of a foot in the investment banking-ish or M&A world. What was going through your head when you make the decision to leave investment banking on a successful track to probably go wherever you wanted to go in that world to jump into buying an existing senior care franchise? What was it?
Investment banking is a great career. You make a ton of money but you’re always going to be working for somebody else. That’s the reality of it. Even if you become a partner, you’re servicing clients and it’s a continuous grind. It’s not a path where you ever have an exit and you get to a point where you can manage your lifestyle.
You could be a seasoned investment banker at the top firms but you’re grinding until the end. You’re grinding for that next deal. You’re grinding to get that deal done. I wanted to do something entrepreneurial where I could control my own destiny and have a say in everything that goes on. Interesting story, everybody reaches out to me and is like, “I want to get into franchising but I want it to be 100% passive.” You hear it all the time.
I tell people, “That’s not possible.” Interesting twist in the story. I was running my business and doing great. My firm called me back and said, “We want you to come back.” I said, “I’ve got a lot of money tied up in this. I’m not walking away from this.” They’re like, “How about this? We’ll give you X amount of money.” That made it compelling. I thought about it for two weeks and turned it down. I said, “As much as I would love to, I’m not risking my business that I went all-in on to do this on the side.” They came back and said, “What would it take for you to join us? What would it take for you to come back?”
I threw a number out that was absurd. I said, “This is the only way I can make sense that even if my business takes a hit, I’ll be okay.” They said, “Let’s do it.” I said, “That’s going to be the pay. It’s going to be 100% guaranteed.” Investment bankers are paid heavy bonus-based on that deal’s closing. I said, “I’m not doing that. It’s got to be 100% guaranteed. It’s going to be 1099 on my own terms and I’m going to keep managing my business.” They said, “Let’s do it.” I was doing that and I was running my business full-time. I was sitting at my business, managing that, and closing M&A deals at that same desk.
That’s awesome. Well done. You mentioned the word grind. With investment banking, the corporate grind is different from the small business grind in a way. Did you notice any big differences in terms of the grind or the work around what it took you to operate and grow your senior care franchise compared to the type of grind that you were doing in the investment banking world? I’m asking you this because a lot of people in the corporate world are thinking about making this transition. Sometimes the type of work can be a little different than what folks may think to own and operate and then scale a small business and a franchise.
For me, from a grind standpoint, it’s less about the hours. I’ve always worked a lot of hours, but it’s more about the people that you’re managing and how you manage them. I was a director at my last firm. I had people underneath me like VPs, associates, and analysts that I’m coaching throughout the process. I was working with Harvard MBAs, Wharton MBAs, and guys that are extremely driven. It’s a grind trying to get to the same point but from a people management standpoint, it’s totally different.
You can trust and rely on people. I jumped over to a franchise business and 95% of my employees were making less than $20 an hour. That grind is different. You got to be able to coach. You got to be able to retain staff. If you could retain staff and motivate them, you can do well in a franchise, especially in a service-based business.
It’s the same as senior care. No question, the demand is out there and it keeps getting bigger. It is an interesting labor market and the reality of operating that business from the labor side of things because it’s a low-wage staffing business if you boil it down to comparison. What were some of the big things that you learned from owning and operating the franchise that has stuck with you, that you’ll never forget, and that will help you in life and business and the stuff that you go on to do?
This is a weird answer but I was living in a bubble a little bit. A lot of corporate people are, whether you’re a corporate accountant and you’re making $75,000. If you’re an executive, you’re making $500,000. You live in a little bubble where everybody around you is also doing moderately well. If you’re working at Fortune 500 or you’re working at a good firm, everybody’s making at least $75,000. They’re doing okay.
The types of people you’re around are the top 20%. When you go into franchising, you see such a diverse population, both in terms of clients and employees. I hadn’t worked with people that were making today’s minimum wage, which is $15 an hour, in probably twenty years at that point. That was a culture shock to me, big time. That’s a lot of the people in this country. That’s a big chunk of people.
Small business in general.
That’s not something people are exposed to on a day to day. To me, that was a reality check. I’ve always managed people that were ambitious and driven. This is a world where that’s not the case all the time. There certainly are people that are doing well. I don’t mean to say that but there’s a lot of people out there that don’t want to work. For me, this was post-COVID. This was the tail end of COVID.
I used to joke with buddies that own restaurants. They would always say, “Staffing is so bad, yada, yada, yada. We can’t get people.” I would tell them, “Would you rather hire somebody to come and flip a burger or would you rather want to hire somebody to come change a diaper and bathe someone?” I don’t want to hear how hard it’s to get someone to flip a burger. I could find people to do that. It’s hard to find somebody that wants to help with toileting and bathing. The people that do are angels. They are the best humans on this earth and I respect them, but there are not many people that want to do that. That was a huge challenge. Staffing was a nightmare but we managed to do it. That’s why we did well.
What did you have to change about your leadership and management style to adapt to the types of folks that you staffed your senior care business with?
We shifted the model quite a bit. When I came in, the owner had been running it for a long time. He’s in his 50s. The manager is in her 50s. The office staff were all elderly. I’m a guy in my 30s coming in and being like, “You guys are doing it all wrong.” The classic White collar guy in his 30s coming in. For me, we stopped doing any discounted work.
The previous owner would see people and he’d be like, “You’re a nice guy. I’ll give you a discount.” The demand was so great and we were so good at getting clients that I raised prices across the board. I said, “He had jobs that he was doing for $25 an hour. He didn’t raise their rate in five years.” I came in and said across the board, “$32 is the new minimum. Anybody who wants to walk away can.” Nobody walked away.
With being able to do that, I also raised everybody’s pay. You get employees that are making $13 an hour. I was like, “Now the new floor is going to be $15,” and there are people making $17, $18, and $19 that I started giving raises to. I was like, “I don’t want to deal with the worst of the worst employees. I want to deal with people who want to be here and who want raises.” I started guaranteeing people, “Every six months, you get a raise. If you’re kicking ass and doing a good job, I’ll give you raises sooner but I need people that want to stay.”
In an industry that has a 150% turnover, turnover is expensive. I would rather spend that money paying people better than having to deal with that. Our turnover still wasn’t great but we’re better than our competitors. That’s what mattered. You didn’t need to be the best. You just need to be better than everybody else. I was also struggling.
That’s interesting. You were able to apply a lot of your finance, looking at the business and the margins, and seeing the opportunity in the market to make some pretty simple adjustments. I’m sure that had a big impact on not just being able to pay your employees better and retain them longer but also I would imagine on the bottom line. That helped elevate that bottom line pretty quickly.
For perspective, when I took over, we were doing 14.5% or 15% margins. When I left, we were doing 23%, pushing 24%. Our revenue had grown quite a bit on EBITDA. It’s a lot of low-hanging fruit in my eyes. He was paying an SEO agency big dollars that were doing nothing for us. I had cut all the expenses that I thought didn’t make sense. I was like, “This is a staffing business.” At the core, it’s a simple business. You have clients that need you. They don’t want you. They need you. There are more clients that need people than there are workers. What do you do? You raise the rates until you get to the point where you could match the supply and demand, then you start making money. That was what we did and it worked well for us.
There’s a lot of wisdom in that because senior care is an emotionally appealing business to a lot of perspectives for entrepreneurs and franchise owners. You get to have an impact on the community and make a difference in people’s lives. Especially if you’ve had a parent that goes through that need and needs some daily assistance from a caregiver. You still got to run it like a business. You can’t run it off of emotion. You’ve got to run and treat it like a business.
It sounds like you came in with the business side of things, and not as may be emotionally connected to the idea of what the business provides. I’m probably not describing that the right way, but it’s interesting when you do apply business thinking to a lot of these franchise businesses and small businesses. You look at it and it’s the same principles apply to these businesses that apply to large $10 million, $20 million, $30 million, or $40 million transactions that you’re doing in your previous life. What happened with the senior care franchise? Did you sell it?
Ultimately, I sold it earlier in 2023. We had grown it. We had done. We made some acquisitions in some neighboring territories. Senior care is a territory-based business. It’s not a brick-and-mortar. We had an office because we needed an office for our managers, schedulers, recruiters, and all of that. What’s great about that business is you can essentially manage probably the entire Wayne County market. Metro Detroit was my area.
We owned West of Metro Detroit. All of our staff are coming from Detroit, literally in the middle of Detroit. They’re driving 30 minutes West. That means they can drive 30 minutes South as well. They can drive 30 minutes North as well. I’d reached out to one of my neighboring franchisees who’s like, “I have this territory. I can’t staff it.” I’m like, “I can staff that territory now.”
I was getting so many leads. One thing that I did is I optimize our website for SEO. I fired the company. I had to start doing it myself. One of the things I did was I added meta titles and landing pages for every individual city that we serviced. We started getting leads from outside of my territory. As those were coming in, I’d call the neighboring franchisee because I don’t want to get into trouble for crossing the lines. I was like, “I got this lead for you.” He is like, “Let me see if I can service it” and whatever.” I never heard about it again. Three leads in and he’s like, “I can’t even service these.”
I was like, “Let me take it then.” He’s like, “That’s my territory so give me a cut.” I’m like, “I’m not giving you a cut. If you want to sell your territory, I’ll take it.” I got three 24/7 cases on the same weekend in his territory. For senior care, a 24/7 case is a lot of hours. It was $10,700 of billings every two weeks for one case. Call it $60,000 right there that I’m handing over to somebody for a month. That’s $60,000 a month of revenue that he couldn’t service. I said, “You need to sell me your territory now.” We made an arrangement. I was going to pay it off over X amount of time. We worked it out.
I took over that territory and immediately, I was able to get clients from there and start staffing. I paid off that territory in the first six months of what it cost me. The business was doing well. I was poking around for different opportunities when I wanted to leave my investment banking career. I was talking to a broker somewhat similar to yourself. Here’s more a business broker, not a franchise broker. He was like, “I have a lot of buyers that would like your business. Would you be interested in selling?”
I’m the type of guy where anything is for sale. If you knock on my door now and you offer me twice for my house is worth, I’ll sell it to you. I was like, “I would but here’s a number that doesn’t make sense. Nobody should pay this for this business, but if somebody wants to, I’m open to it.” He’s like, “Let me see what I can do. Brokers take 10%.” I was like, “I’m not paying you 10%.”
You’re killing the brokers, JT. What are you doing? I’m just kidding.
I said, “I’m not paying you 10%. I got this thing buttoned up. I’m an investment banker. I can make a deck for you. I could sell this business myself if I wanted to.” At this point, we were cashflowing nicely every month. I was able to have a separate business so I could position this as semi absentee. We had just done so much to make the business in good shape. It is a well-oiled machine. If I’m going to sell it, it’s going to be a pretty penny.
He brought me a buyer. This is another thing that investment bankers and brokers will say never happens. I was like, “If this person is serious, I want a $25,000 non-refundable deposit,” for me to move forward with this process because I’m not going through this for you to say, “I can’t afford it or this or that, or SBA financing doesn’t come through, and the valuation doesn’t work.” They paid for it. I was like, “In this case, let’s see it.” Until the end to the last day, I thought there was no way this closes, but then the deal closed.
That’s awesome. What was the profile of the buyer? Was it an individual or a group?
It was an individual. A couple actually wanted to get into the space. They wanted a sizable enough business that they could step into that was semi-absentee, the management team is in place, and all that type of thing. I’m an investment banker. All I’d done is position businesses for sale. When I managed my own business, I positioned it for sale. This checked all the boxes and they were interested. It worked out for them. I have a good relationship with them today. The business is continuing to do very well. I’m very happy about that.
You built it to sell which increases the value of any business or any franchise if it’s transferable. It sounds like you had a good team and had done some smart things with the growth and acquisition of your neighboring franchisees and the territories, especially on the marketing side. You got creative. What you did was creative but it’s not like it was one-of-a-kind creative stuff.
Very low-hanging fruit. I tweet about this stuff all the time. You can probably apply what I did to at least 50% of the franchises out there.
Your competition wasn’t doing a lot of that stuff, I’m sure.
No. My competitors were 65-year-old ladies that are in the business because they were passionate about it. Don’t get me wrong. I was passionate about the business. I was passionate about taking care of people. One of the reasons I got into this is my wife and I were caregivers of my father-in-law with muscular dystrophy. We’ve been there. That story in and of itself also helps sell. Everything is sales in a franchise business.Everything is sales in a franchise business. Click To Tweet
We had our story on the website. People would call us and would say, “I looked at all the competitors. We read your story. We liked that. That resonated with us. We want to go with you because we know that you’re going to take care of us.” On top of that, I say, “I pay my people better than every other competitor out there now.” You mix the two and it’s a winning strategy. We had people that had gone through four agencies before coming to us and they stayed with us for over a year.
We’re able to pay them better, have a better culture, treat them right, and give them more predictable work as well. You did something very smart. You probably had a leg up because you came from the M&A world a little bit. Did you have a relationship with that business broker prior or was it an out-of-the-blue call that you got from this person that was like, “In case you’re ever interested in selling, let me know. I’ve got somebody?”
The only relationship I had with him is I had spoken with him about a business he was representing or about potentially buying a business he was representing. Beyond that, I didn’t know anything about him. I knew his name.
He called you out of the blue when he had clients that were interested in getting into the senior care space.
I kept in touch with him because I’m always looking for a business to buy. Even now I ask you every time we talk like, “What are you seeing? What’s out there?” I’m always looking at stuff. I keep a good Rolodex of brokers that I want to keep in touch with in case something does come up. Because of that, we kept in touch. To this day, I’ve never met him face-to-face.
For franchisees who are crushing it or multi-unit, even single territory operators that are building a good business, it’s profitable and cashflowing, and the books are clean. They’re updated and not running their business by their bank account thing. Do you think it’s smart for those franchise owners to always identify who some of the better business brokers are in the market, and take them out for coffee once or twice a year to develop a relationship? With the idea that maybe the same thing happens in terms of those brokers getting a buyer that wants their type of business. They can throw out some pretty aggressive terms. If they get it, great. If they don’t, don’t.
That’s my approach. You don’t have to. It’s tough. As you scale, it becomes harder to sell. If you’re making $150,000 and you run a little pizza shop, there are a lot of buyers out there for that type of thing. Almost anybody can afford that. As you move upstream, it gets harder to sell. It eventually get to a point, I wasn’t at this point, but where only sophisticated either private equity that wants to do a roll-up or somebody who’s well capitalized that wants to get into it. Those are rare and far in between. Depending on the size you are, it impacts a strategy that you should take. It always makes sense. If there are active brokers that are doing a lot of deals in your space, you should always keep in touch with them.
That’s an amazing story. Congratulations on building it up and being able to have a nice successful exit. You mentioned you get a lot of people reaching out to you about, “I want to buy a franchise but I don’t want to operate it. I’m looking for some passive income.” Why do you think people think that franchises are passive income sources?
Part of it, I blame you guys, the brokers.
I knew you were going to say that. I knew it.
You’re one of the very good brokers, Dru. I send leads your way because of that. There are a lot of people out there that are telling people, “Franchising is an asset class no different than stocks. You should be investing in it.” That’s not true. It’s so false. Anybody who has ever owned a franchise can become passive. I tell people that. It could very easily become passive but you need to at least get in there and be an owner-operator for a minimum of six months.
I know guys that have done it shorter but if you’re not a sophisticated operator. If you’re a corporate marketer, a teacher, or an engineer and you’re getting into this, I would plan at least a year of running it yourself before the best-case scenario. You could step back if you want to get into multi-unit. Essentially, a multi-unit franchisee is passive.
You got to build it. You got to get it to that point.
If you own five, you’re not going into any one of them being full-time. You have to passively manage each one. Passive doesn’t mean zero to me, at least. Passive means 10 hours a week at 5 to 10 hours per location. Once you get to a certain point, you can get regional managers. There are guys on Twitter who have 30 or 40 units. You have levels of hierarchy where it becomes more passive. That takes a long time to build up to and people miss that. Don’t get into one thinking, “I want to put $100,000 to work and I want to get 30% returns.” You’re not getting that.
People come to me and I always say that it’s possible to build a franchise into “passive,” whatever passive means. Passive means something different to everybody because I always ask them, “What does passive mean to you first?” You got to operate this thing. It is a machine. It is a living and breathing thing that needs to be, especially from the ground-up perspective or even if you buy an existing one. The learning curve that you probably went through, you talked a little bit about it, getting adjusted, getting your sea legs, and getting used to operating the business. That is a very real thing.
If you don’t plan to get gritty, grind, and pay close attention to the business, it’s not going to end well. It might be a nice tax write-off if you have a lot of money, but it’s not going to be anywhere near the success that you’re looking for as an investor. I don’t even like using the word investor in franchising because you’re an operator. You got to operate this thing and maybe convert it into an investor, then you transition into more of an investor down the road.
I love people that say, “We’re looking for something that’s a manage-to-manager model.” Let’s say that there is a manage-to-manager model because technically, there are. Let’s say you own three of them. They’re doing well. The three managers are doing great. What happens when that manager quits? What happens when that manager gets sick and you’ve never been in the business?
If you’re under three units and you don’t have a regional in place, a passive business is one manager away from you becoming a full-time job. That’s what people miss. I tell everybody that. I was going into it eyes wide open with those expectations. In the best-case scenario, you have a rockstar manager that could run 100% of the business, but that’s probably not going to happen. At least not initially.
We’re getting real here. Why would anybody sign up for this? The opportunity is there to build a significant business that can be greater than whatever somebody is making in the corporate world or whatever. The opportunity to build a lot of cashflow out of a business is there with certain franchises. It’s just a different form of investing, living, and operating than real estate, stock market investing, then iBanking, or whatever it may be. It’s its own animal in a lot of ways.
Some of the stories, I’m sure you’ve seen it. People have gotten into certain franchises, and a lot of times, these are quirky-looking franchises from the outside looking in. You’re like, “These guys have built some massive businesses.” They’re low-key because they don’t need to be the face of the business. They’ve built it to where they don’t need to be the face of the business. It’s always interesting whenever you run across those super successful multi-unit franchisees. You’re like, “Damn, man. Well done.”
I talked to a lot of them. It’s impressive. What people can build through franchising is very impressive. A lot of people don’t even know about it. Early in my career, I had no idea you could make millions of dollars in franchising. If you think about it purely from an investment standpoint with the SBA loans, the SBA is the greatest gift to entrepreneurs that there could be. For using math, if you’re buying a business that makes $150 and it’s a resale for $500,000, you only need to come out of pocket $50,000 to $75,000. For $75,000 out of pocket, it’s making $150,000 after your debt service, you’re cashflow positive, you can continue to roll that up and grow if there’s white space, it’s a home run. That’s what people need to be thinking about.
It’s like smart debt. For the right business, it’s good debt to leverage to preserve liquidity, keep more of your personal liquidity in the bank, have access to more working capital than you may need, and all kinds of stuff. Even at 10% or 11% interest rates, which sucks but that’s what it is, the math still works on a lot of these businesses. What do you say to this? I get a lot of folks. I’m sure you do too, that I call the roll-up bros. These folks are like, “I want to buy an existing business just like you did. I want to buy an existing franchise, then I want to grow through acquisition. That’s my strategy.”
I’m always like, “Finding a good franchise resale is hard.” You can go on biz buy sell and it’s a cesspool. You don’t know what the heck you’re going to find on there. Half of those listings aren’t even accurate. They’re not even real listings. I always try to talk to people. I’m like, “You got to get in the game of these certain franchise systems that have shown that they are growing at a rapid rate. They have successful multi-unit franchisees but the territory in your area is gone. Maybe you go to a different market and get in the game. You can go through acquisition that way.”
That’s what I coach people to think about. What advice do you have for some of these roll-up bros? They are looking at trying to ultimately build a massive portfolio of franchises but how they start, people have different opinions and different approaches to it. What advice do you have for folks like that?
Legacy franchises are tough to get into. No doubt. There are a lot of them. There are guys on Twitter who’ve done it with Midas, Wingstop, and other brands. Wingstop is a home-run business. If you get into it, great but good luck. No one is selling it. If they are selling it, those are internal sales. The only real opportunity that I see or the more tangible realistic one is emerging brands. If you can get in emerging brands, there’s going to be territory and white space. It’s going to be cheaper to get into in terms of you not paying a premium on a resale.
I always tell people, “Maybe 75% are not going to make it.” They’re not going to do well. The actual stat is like 86% will never make it to 100 units. You don’t want to get into those brands. You want to get into brands that are going to be the next Jersey Mikes. The next Crumbl Cookies. Crumbl and Orangetheory, everybody looks at those like, “That’s what I want.”
Those are unicorns. If you can get a business that’s three or three-and-a-half-year payback, it’s a high potential for growth. They’re selling a lot of units. They’re not blowing smoke. They have good corporate infrastructure to support new franchisees. The white space is there. There are a ton of opportunities. I look at these for myself all the time.
I have a full-time job but I’m a franchisee of multiple brands. I’m an investor in three IHOPs. I’m always looking for new opportunities. Emerging brands are where there’s a lot of value and potential compared to beating your head trying to find some franchisees to sell a legacy brand like Wingstop or whatever. You’re not going to find a McDonald’s franchisee that ever wants to sell.
You nailed it. They’re not going to make it to the open market. They’re going to get gobbled up by other franchisees before anybody has a chance to even get a whiff at it. You have an interesting perspective because you’re in the game as an entrepreneur. You’re also in a seat at Franworth where you are doing M&A. You’re overseeing a lot of the brands. You’re helping to select which brands you get involved with.
You could chunk it down in terms of indicators because you’re never going to know candidly. You got to size these businesses up by looking at them through certain angles and certain indicators in terms of these emerging brands. What are some of the things that you look for? Maybe it’s different personally or maybe it’s the same in terms of when you have your corporate hat on. What are some of the things that stand out to you that people should look for in terms of like, “This emerging brand has potential? This could be one worth me getting involved with and opening multiple locations with.”
It’s a little different. I’ll start with that. From Franworth standpoint, I talked to probably 3 to 5 early-stage franchise brands or businesses that want a franchise. I had calls with two of them. This is the baseline introductory call. Does this make sense to dig into? One, the unit-level economics have to make sense. If your financials aren’t good, stay away from them. Personally, I have a rule that if you’re an emerging brand and you’re not disclosing Item 19, even if supposedly amazing as they say, it’s not worth my time. On the framework side, I’m not a prospective franchisee. They disclose their financials to us fully.
I get a little behind-the-scenes look at a lot of different brands. Unit economics is the number one thing. Two, we need a good founder and leadership team involved with the business. If you have a business that you’re not that involved with, it does okay, and you’re like, “Can you franchise this for me because that’s my only way to grow this thing,” we’re not interested.
The third we look at is the white space. What’s the potential? What’s the end market looking like? If you have good unit economics, multi-location ideally, a good leadership team, and the end markets are strong, that’s a brand we want to get in with. I’ve personally been looking for a framework in the Pet Space. I love the Pet Space.
I’ve talked about it on social media. Home services is a home run too. The demand is there. It’s a lower investment and you can do well. I’ve done a lot in the health and wellness space as well. There are a few other industries that we poke around, but those are the three that we look for now in the franchisor. The framework is pretty deep in the beauty and wellness space. We do that as well. For me, it’s who the leadership team is. Do I like them or not?
I was this close to signing a franchise agreement with an emerging brand that I liked a lot, but I could not get over my interaction with the CEO. I thought he was a prick. I was like, “I don’t want to be affiliated with this guy.” I walked away from that one. A good leadership team, good unit-level economics, and good potential for growth. How many units are they selling? That’s what gauges my interest. Do I like the product? I don’t pursue business as a passion. I pursue them to make money. I’m less about the passion, but if it is there, it’s great.
You’re agnostic to a certain degree.
I don’t come to work because I love to work. I come to work to make money. The same thing with business. To me, it’s dollars and cents or 90% of it.
It’s interesting. You said the unit economics, the founder of the leadership team, and the white space in terms of the niche that they’re in and what the competition is. How do you assess white space? What are some of the things you look for when you’re sizing up a certain niche of a company that’s come across your desk?
I’ll give you examples of brands we’ve turned down. One had 30 locations. They checked that multi-location spot and they’re all performing pretty well. The founders are great. It’s a tanning salon business. Think about that. The end markets for tanning in the industry are not a business you want to be in.
More stuff that’s coming out about the health effects, etc. That’s not interesting at all. I turned that down.
That was ten years ago. That might’ve been an interesting business to get into.
Fifty years ago or maybe twenty years ago, that would’ve been good. For the last ten years, it’s been going down. We tried to convince the founders. I try to convince them. I tell people, “You shouldn’t franchise. Don’t do it. It’s expensive. It’s a lot of headaches. It’s not going to be worth your time.” I don’t know if they listen to me or not but whatever. A brand I like a lot is Pet Space, with seven locations and all crushing it with a great leadership team. The stat was there are nine million more dogs in the US now than there were pre-COVID.
When you talk about potential, I don’t know about you but in my market, you go to any dog boarding or dog daycare and you ask them, “Are you guys busy?” They’re like, “We’re at capacity.” It’s across the country. That’s a business you want to be in. I know for a fact that I can open one of these. I could probably open 30 of these in every state and crush it. That’s the end market that I try to look for. What’s the competitive landscape?
Are there 20 other competitors that are crushing it out there and you’re going to be the 21st? That’s probably not a space you want to be in. Are there 1 or 2 that are leading but they have fatal flaws in the business? There’s an opportunity for a new player to come into the space. That’s what we think there. Does that help?
That’s very insightful. That’s why having an open mind is so important like you do naturally. For a lot of first-time entrepreneurs, franchise owners, whatever it may be, to get to that mindset of having an open mind around businesses that operate in certain niches that you might not have any direct industry experience with. You’re going to have some assumptions about it based on probably life and personal interactions with that type of business. To flip your mindset, to look at it as an entrepreneur, it’s like, “Now that I’m thinking about it as an entrepreneur, I could start to see some of these angles.” What systems and what’s the business model that the franchise companies put together?
You’re going to see a lot of franchises in the space like the 86% of the emerging brands that you mentioned, that never get to 100 units because they don’t have a very sophisticated business model. It might be straight up owner operator like, “Owner, you’re going to be in the shop grooming dogs. That’s our business model.” That’s not necessarily the model you want to get involved with.
You want these companies that have put together the right infrastructure, systems, and playbook for not just a single unit to where you can get that thing going to the point where probably you have a manager in place and whatnot, then replicate it. The first one is always the hardest. The first one, you learn a lot, but once you get the first one open, then you have some resources that you could leverage for another location.
That second one, you’re going to be wiser and smarter. It’s not going to be as hard. It’s still going to be a lot of work but not as difficult. You rinse and repeat it from there. It’s interesting as we talk about all this stuff theoretically. There’s always the decision too. When you made the big transition in your career from leaving the iBanking to getting into the senior care space, did you have any massive sleepless nights where you were like, “What the hell am I doing? Is this the right thing for me and the family?”
We lost 25% of the revenue a week before closing. They had two large facility contracts. They were providing staffing for two facilities in my market. Those ended literally 9 or 10 days before. The seller told me 3 days before. He could’ve closed and lied to me and I would’ve sued him. He’s like, “I know this was going to happen. I have to be transparent.” He’s a nice guy. Thankfully, I still keep in touch with him.
To me, that makes you realize that there are a lot of different clients. You look at the roster and this and that. You’re like, “There’s no customer concentration,” but there is constant concentration in that sense. They’re all within the one community and that community walks away. I was at a point where I was like, “I need to do something.” I hate the term retrade. In investment banking, it’s a sin to say that word like to retrade a deal, but we had to retrade the deal and we still got it done.
It means you had to renegotiate the terms, right?
Yes. He still got paid. We structured it where he got paid a little later depending on a few things. The first month was tough, for sure. Probably in the first three months, I was like, “Did I make a good decision?” I had zero risk. I was making good money. My son was six months old at the time. I had a newborn at home and my wife trusts me with this. I was like, “I hope I made the right decision.” It was probably months 4 or 5 when things started taking off. I was like, “This is getting good.” By months 6 through 8, we started making a lot of money. I was like, “Now I’m good.” It takes six months to get to that point.
No doubt. It’s important to go into that with that mindset. It’s delayed gratification. You got to find gratification from the small stuff and from the small wins. Finding a good employee that you think is going to stick around or figuring out a new marketing strategy that’s starting to generate some activity. The small wins are where you get the gratification from when you’re in the build phase of this thing. It’s not the money. The money comes with franchising.
With franchising, from a sales standpoint, there’s a lot of value to being an owner-operator. People want to see an owner involved. If you go to a restaurant and the owner is walking around and checking in on you, how good does that make you feel? My favorite restaurant in town here, I know the owner. I go back there. The owner is not there every time, but when he is there, it makes you feel like, “I know the guy.” It’s a local place and that type of thing.
In franchising, you’re a small business in a local community. Being out there, having your name out there, and all of that adds so much value. In that sense, it’s another reason why passive doesn’t work out great for most people. It depends. If you’re a QSR and you’re at McDonald’s or a big brand, it’s less relevant. If you’re an emerging brand that’s getting off the ground and trying to make it. Having your face and your name associated with the business as the owner is very valuable.If you're an emerging brand, getting off the ground, and trying to make it, having your face and your name associated with the business as the owner is valuable. Click To Tweet
Not just from the customer’s perspective but you’re showing it to your employees too. You’re there present and involved. You’re in the game and not just sitting in the back or not even there. From a cultural standpoint, it has a big impact on them.
The little things are what people care about. They want to see that somebody cares about them. It’s not this mysterious. You’re working for the man. The man is a guy you like, you know, and you trust. He takes care of you and buys you lunch. If your car breaks down, he is there for you. In the senior care space, a lot of our employees ran car issues. I would send somebody to go pick them up. I’d send them an Uber. I wouldn’t charge them for it.
I’d picked up employees myself. If this was a KPI we tracked, employees I’ve picked up myself stayed with us probably three times as long as employees I’ve never picked up. You build a relationship with them in that twenty-minute car ride. There are not many times besides the interview, Christmas party, or whatever that they get 20 minutes or 30 minutes sitting down with the owner one-on-one. In a car ride, you do. Those moments add value over time. That employee goes and tells other employees how great you are and that type of thing. That’s how you drive a culture.
That’s one of the soups. I’ve worked with a lot of folks over the years who’ve gotten into all different types of franchises. If I had to boil it down to the folks that I’ve seen that have gone on to have the most success with franchises, they just do the people piece. It’s amazing. It’s a superpower. It’s not a superpower you’re born with. You can learn it but they have this ability to connect with their employees and make their employees feel like they’re a part of something.
There’s a bigger purpose to what they’re doing. It’s not just a paycheck. They do the little things that employees might not expect like going and pick them up, taking a late-night phone call if they’re going through something personal and listening to them, and that kind of stuff. It’s the people piece of a small business and a franchise. If you can do that piece well, it’s an integral part of scaling, but that’s where the magic can start to happen because people want to work for you. People will go out of their way to do stuff that maybe is not in their job description or whatever it may be. They want to make you happy and impress you. They want the company to succeed and all that stuff. The people skills are something that I’ve seen folks do well with that have had the most success.
If you’re exceptional at that, that makes up for a lot of flaws. You can be exceptional at that and be horrible at everything else, and you’ll probably still do okay. You don’t need to know finance and accounting and all that type of stuff. You can hire great people and they like you. They stay with you and all of that. You can hire people to do the things that you need them to do. Everything else boards itself out. That and probably sales are the two most important things. Everything else, you can figure out.
I agree with you 100%. As first-time owners, if you have those scales, it’s great. Those people will be successful no matter what franchise they get into, but your life becomes a lot easier if you get into a quality one versus that 86% that isn’t going to go anywhere.
Let me ask your opinion on this. How much of it is a franchise? How much of it is the owner?
It’s a third, a third, and a third. A third of it is the business model. The business model has to have been proven and it can replicate to other markets. That thing. There’s the business model. A third of it is the franchise company in terms of the support, culture, training, and whatnot that they provide to their franchisees. The last third is the franchise owner themselves. I keep it simple like a third, a third, and a third to keep it simple in my head. That’s how I look at it. How do you look at it?
Probably similar. I always view it as 50/50, but you group two of them together. It’s like 67/33. For me, if you’re a good operator and you have a B-quality franchise, you’ll be fine. If you’re a C quality operator and you have a quality franchise, you’ll be fine. What you don’t want to be is a C quality operator and a C quality franchise. That’s where it’s challenging. I view it as 50/50. There are guys out there that I know that you could plug and play into almost any franchise system and they’ll crush it.
They’ll figure it out.
From a framework standpoint, we’re looking at brands. To us, you don’t want to be the franchisor of a brand that requires that an A-plus guy do well. We want a franchise brand that B-minus or C-plus caliber franchisee that’s still going to crush it. You and I have talked about other brands that are like, “They’re doing so well with the good franchise owners but what about everybody else who’s not quite as sophisticated?” The business model is so complex. That’s not something you want to get into. Where if it’s that complex, that’s a tough business to run. A franchise in my eyes is supposed to be a business in a box that’s simple enough for somebody who has an average IQ and a hardworking person to do well in. That’s a good franchise system.If you want to get into something, a franchise should be a business in a box that's simple enough for somebody with an average IQ and a hardworking person to do well. That's a good franchise system. Click To Tweet
I agree with you. The simpler, the better. The more complicated some of these businesses get, especially in the medical space and stuff like that, I get a little nervous. There are so many angles to look at. It does start with looking in the mirror at yourself if you’re thinking about getting into franchising in terms of like why? What is it that’s driving you to get into a franchise? Are you willing to make changes in your life and work differently? Do you have something greater that you’re trying to achieve that you can’t do following the corporate world or whatever it may be?
I kept it upside. That’s what gets people going.
No doubt. Also, the exit. There’s a massive opportunity to create wealth as a franchisee. It’s not just in the short term from the cashflow of business but also long term if you ever go to cash out and sell it. There’s a very real market for folks like the roll-up bros that want to buy existing franchisees and scale from there. We’ll wrap it up. Any other thoughts that have been going through your head that you think would be good to leave the audience with?
Nothing off the top of my head. If you’re a prospective franchisee, make sure that you do your diligence. You use guys like Dru to make the introductions but don’t rely on guys like Dru to pick the right brands for you. Hire the right advisors. Hire a CPA if you’re not good at it. Definitely hire an attorney to review the FDD. You and I could probably go into an FDD episode on things to watch out for and the risks there. Go into it eyes wide open, work hard, and things will work out.If you're a prospective franchisee, make sure that you do your diligence. Go into it with your eyes wide open, work hard, and things will work out. Click To Tweet
I love it. JT, thanks for the time. I enjoy the conversation.
Likewise, Dru. Thanks for having me.
About JT Singh
Currently leading M&A and finance for Franworth and its portfolio of companies. Previously an investment banker focused in the healthcare, franchise and business services industries. CPA. Owner/investor in franchise brands.