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Building Wealth through Franchising feat. Jon Ostenson

In this episode, host Ben Fraser is joined by special guest Jon Ostenson, CEO of FranBridge Consulting and best-selling author of ‘Non-Food Franchising.’ Join us as Jon delves into the world of franchising and discusses the pros and cons of franchise ownership. He shares the types of businesses that perform best in a franchise model, the possibility of owning a franchise as a semi-passive owner, and how you can invest completely passively in franchising. Tune in now on your favorite podcast platform for this insightful conversation on building wealth through franchising.

Receive a free copy of Jon’s book ‘Non-Food Franchising’ and/or sign up for a free franchise consultation at franbridgeconsulting.com

Connect with Jon Ostenson on LinkedIn https://www.linkedin.com/in/jonostenson/

Connect with Ben Fraser on LinkedIn ⁠⁠⁠⁠⁠⁠https://www.linkedin.com/in/benwfraser/⁠

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Transcription

Ben Fraser: Hello, Future Billionaires! Welcome back to the Invest Like a Billionaire podcast. You’re not gonna wanna miss today’s episode. It’s a really fascinating interview with John Austinson of FranBridge Consulting. John is the top 1% of franchise consultants in the country. He’s been in this franchising space for many years and really shares.

All the good, the bad, the ugly of what it means to be in franchising. I’ve shared a lot of this podcast about the value of being an entrepreneur, about it. Being a business owner, it’s one of the fastest ways to accelerate your wealth growth. But it’s sometimes difficult to start something from scratch, right?

So there’s a lot of proven reasons why franchising is a great method. It’s not for everybody. And we talk about that kinda what the kind of requirements and skill sets are needed. But he breaks it down. What is it like to be a franchise owner? What types of franchisees is he most interested in?

Is it really possible to do this as a semi-active or semi absentee owner? And then also to invest purely passively in franchising. He shares some new ways that the industry is shifting to allow investors to invest purely passively. So if you’re interested in a business ownership franchise, you definitely wanna check this out and really hear from the knowledge of John that he has to share.

Hope you enjoy this episode, and again, if you’re enjoying this Podcast. We always appreciate the support in leaving a review and sharing with a friend or two. I really appreciate you guys listening. Thanks so much. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.

The tools and tactics you’ll learn from this podcast will make you a better investor. And help you build legacy wealth. Join us as we dive into the world of alternative investments. Uncover strategies of the ultra wealthy, discuss economics and interview successful investors

looking for passive investments done for you. With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned.

We focus on macro driven alternative investments, so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Hello and welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host today, Ben Frazier, and today we’ve got an exciting guest, John Austinson, and really excited to have John on today talking all about franchising.

So a real quick background on John. He’s the CEO of FranBridge Consulting. He’s a top 1% franchise consultant, author of a really cool book called Non-Food Franchising, and was formerly a franchise president, a multi-brand franchisee, but he’s a frequent contributor on a lot of publications like Forbes, Inc.

Bloomberg, so he knows this stuff and is super excited to talk about this topic. So John, thanks so much for coming on, Ben. Thanks for 

Jon Ostenson: having me. I love the show and am excited about our conversation. 

Ben Fraser: This is a little bit outside of some of the normal kind of content we talk about, which is heavy on the real estate side of things.

That’s a lot of what we do. But what I love about this and secretly I’ve. A lot of excitement about this personally because I used to be a commercial lender and did a lot of SBA financing when I did that, and did a lot of m and a work for franchises and just saw under the hood of a lot of what these franchisees were able to do in purchasing these kind of established brands and a play by play for launching this business.

And a really cool thing. And so I love this topic. I think this is an amazing way to, to build wealth, to grow wealth and to have a different, diversification strategy than just real estate. So give us the real quick rundown of what it means to be. Franchisee, what is franchising and why does it make sense for some folks?

Jon Ostenson: Absolutely. And I’ll start by saying, Hey, franchising isn’t right for everyone. Some people are too entrepreneurial and wanna put their thumbprints all over a business. I’d say for the vast majority it truly is a better path to business ownership. And some of the reasons there, you’ve got the franchisor on the sidelines that’s essentially your coach.

The better you do, the better they do. And obviously, not every franchisor is created equal, and that’s where we help our clients identify those with the track records and the leadership teams. To be able to, provide that future support. But to your point, you have a playbook on day one. There’s a path to profitability that’s been proven out elsewhere, and now it’s just time to go execute it.

You’re not questioning if there is profitability to be had in this model. You’ve got other franchisees all across North America that are running the same business day in, day out, so you’re constantly exchanging best practices and. Learning from each other. And it’s cliche to say, but you’re really in business for yourself, but you’re not all by yourself.

Yeah. And then there’s smaller benefits such as supply chain efficiencies and maybe being able to buy in bulk, whether it be goods or services. And you get a discounted price. Oftentimes you have marketing analytics, They’ve proven out in other markets, you know what marketing is optimized and you can transcend that into your market rather than having to start from scratch.

A lot of things are put into place and we’ve had a lot of clients, whether it be actively or oftentimes semi passively, step into ownership and build up portfolios and really see franchising as an asset class within their portfolio. 

Ben Fraser: Yeah I love that, and I’ve said this a lot on the podcasts, right?

Our whole goal, this podcast is investing billionaires study what the ultra wealthy are doing to, to preserve, to grow their wealth. And one of the things when I was a lender, as I was, looking under the hood of a lot of these wealthy borrowers of our business, these business owners many times gotta see their personal financial statements and look exactly what they were doing to create these net worths that were.

Impressive. And it came down to really two things. It was a common denominator that I noticed, and one of them was investing in real estate. And the other was a lot of times they’re business owners, right? And those are two very clear, well-trodden paths of building wealth. And to your point, it’s not right for everybody.

Franchising that is, but it can really help get from that kind of zero to one phase and go from one to 10, and. Being a lender and focused on a lot of small business activity, the numbers and we’ve all heard ’em right, are pretty surprising of the number of small businesses that fail every year, right?

It’s very difficult to get proof of concept. It’s very difficult to get scale to beat out competition, to have profitable businesses. So when you’re investing and you’re buying into a franchise system, A lot of times that kind of initial proof of concept and the profitability and the, all the other pieces that go into it.

Do you have the right operating expense kind of ratio and the right margins in place? And all that has already been determined for, you’re figured out for you. Now it’s a matter of can it apply to this market? Can my skill sets work in this particular business? And so I think there’s just some really cool things you were saying where it just.

It creates that kind of play by play. It eliminates a lot of the risks of starting a business from scratch with a brand new concept. And for some people it’s not right. But for a lot of people it can be. So talk a little bit about your process. Cause you said it’s not for everybody, so how do you determine if it is right for you to even get into this and then knowing a lot of our audience is, maybe they don’t wanna be, full-time business owners.

Is it really possible to do this in a semi-passive way? Yeah, 

Jon Ostenson: no, I’d start by saying your point on real estate, I think that’s a really good point. Probably 75% of our clients also invest in investment in real estate, myself included. I’ve got both components in my portfolio and, with business ownership there are tax benefits just in the same way real estate provides some, here you’ve got some active income benefits where you know, whether you’re paying your kids in the business and therefore they’re able to contribute to a Roth IRA now, or life insurance policies.

Things you couldn’t have done as a W2 employee. You’re able to, through business ownership and of course you get expense, write offs for taxes. You get the cash flow, but you also get that asset exit value down the road, which I’m happy to talk more about. But no, I’d say we often talk to clients and they say, Hey, what.

Provides the fewest headaches, fewest number of employees, largest return. That’s the common theme. And I’d say, there’s two traditional methods of ownership. One would be the owner operator, where we step in and run the day-Today, probably about a third of our clients are doing that. And then there’s the model of semi-absentee or semi-passive where, you know, two thirds of our clients are saying, Hey, let’s put a manager in place on day one.

We all know that it comes down to having a good person that you put in place where you align incentives and you trust them. The nice thing in franchising is you do have that FraNChiS on the sideline. They can serve as the technical resource to help them with their day-to-day operations. As the owner, the buck still stops with you, but you do get a lot of.

Heavy lifting along the way where some of that daily burden falls off of you. And we just have client case study after case study where they’ve built up portfolios of investments. I was talking with the client yesterday. Every year he and I do a franchise deal together, and he buys several locations and puts a young guy from his organization in charge of running these.

He’s the largest franchisee of 2 million trucks. Moving service. Operates in 10 markets, 35 million a year in revenue, but he’s then started investing in property services businesses and just very scalable variable cost type models. And it gives him the opportunity to create jobs and new entrepreneurs and.

He’s doing very well financially. Lots of case studies similar to that with different people along the way. But I’d say the ultimate goal for most people is not to run day to day. Maybe they do it for a period of time, maybe they never do it. And one thing I mentioned to you the other day, Ben, was there is a passive model.

It’s very rare, it’s the unicorn out there, but there are three or four companies that have what’s called an investor model where they will run the business for you. I’m personally invested in one of them myself. Obviously these have been very attractive. I’ve had many clients buying into these opportunities.

Ben Fraser: And just to be clear, is this an investment at the franchisor level or at a franchisee level? At the 

Jon Ostenson: franchisee level. So I had a client yesterday buy the ride. They go all of Boston for a spray foam insulation business. There, there are a couple in the pet space. The one that I bought down in Miami.

Couple locations of a custom orthotics and footwear business where a great Fran franchisor at the helm, he’s already running some corporate locations, have staff in place and said, Hey, we might as well do this on behalf of franchisees as well. Wow. Okay. I wanna 

Ben Fraser: come back to that in a minute cuz I think that’s really interesting to dive into.

But one of the things you said earlier, I think I wanna zone in on it because it is really important to understand. The similarities between business ownership and real estate ownership, right? Because in a lot of ways they’re very similar. And, folks that listen to this podcast a lot, heavy in real estate and you go buy a piece of real estate, it generates income, and you’re buying that income on a multiple, right?

It’s usually called cap rate. We have our own terms in real estate, but it’s effectively a multiple. You’re buying off that cash flow, and then you do things, hopefully that can increase that cash flow by increasing the revenue or reducing expenses. Maybe you have a unique business plan that’s gonna bring new amenities or whatever, and you increase the value, your cash flow, number one, but you increase the value down the road because of increase in that cash flow, and it’s based on a multiple.

And Businesses are priced very similarly, right? And sometimes the multiples are lower because, potentially, the risk is higher. Whereas in real estate you may be purchasing a 20 times multiple, which would be a 5% cap rate, maybe on a business. It’s depending on the business and the size and the franchisee I would guess three to 10 x multiple, somewhere in there, right?

And gonna be a little bit lower multiple, but it also helps you from a higher cash flow standpoint generally. Then you have that enterprise value down the road. So I just wanted to pause there cause I think it’s really important to make that correlation because it is very similar in a lot of ways.

Jon Ostenson: Yeah, no, I think real estate investors are a great fit for franchising in a lot of ways cuz they wanna be a little more hands off traditionally. And with real estate, the feedback I continue to get, and I see it firsthand cause I invest in real estate myself, there are only so many good deals to be had.

Now you guys do an excellent job of finding the deals, Ben, it’s not as easy as it used to be to find out there. So I continually hear that theme and I say we have cash on the sidelines. Where can we get yield, maybe outside the public markets to, to compliment what we’re doing. So that’s one piece of it.

Also, there’s so many franchise businesses that really interest real estate investors. If there were a common theme of what we’re seeing across the landscape, it would be boring businesses, as I like to call them. It’s understandable, cash flowing, Amazon resistant type businesses. It’s things like home and property services.

Maybe that’s insulation or gutters. Or dumpsters or. Floor coatings. In some markets it may still be oil changes or niches in the health and wellness space or businesses that will do well regardless of the economy. People are always gonna spend on their pets, on their kids, on their aging parents, on their health, on their homes.

So businesses and niches that support these areas. I like the term non-sexy and I do think non-sexy is the new sexy when it comes to business ownership. But that’s where people love just the different models that play in these areas. 

Ben Fraser: That should be the name of your next book, right?

Non-Sexy As the New Sexy. That’s right. I like it. I remember looking at some franchises. There was one that I funded as a bus. It was a locksmith company. So they basically, basically buy the rights to the brand and you have some equipment. You go around and you do commercial locksmithing . They are one that does pool services, right?

It’s just a service-based company and. You go to a market that has a lot of pools and everyone has a pool, needs to get a service and just things like that. Like you don’t really think about it as oh, that could be a profitable business. But these kinds of needs are not connected to the economy, right?

People have to spend on these anyway, to your point of the home and, pets even in, and other things that just people are gonna continue to spend on are, can have a lot of recession resistance even. But I wanna get into the passive seven passive in a little bit, but talk a little bit about more of your kind of thesis for these boring businesses, right?

As opposed to like the food franchising. I think a lot of people think of franchises and they think McDonald’s or they think, Jimmy John’s or these kinds of other big brands that are all food-based, retail focused. And while those are franchises a lot of times you can buy into those certain.

There are a lot of times, a lot of other factors that maybe make them less attractive than some of these more boring, service-based businesses. It’s just. Give us a little bit of compare and contrast between some of those? 

Jon Ostenson: Yeah, no, I’d start by saying we definitely need the food guys. I appreciate them.

I’m a consumer myself and admire what they do. It’s a lot of work. For about 95% of our clients, they come to us and say, Hey, we’re interested in areas outside of food. And, some of the reasons behind that would be maybe less CapEx out of the gate. There’s less of a retail build out, less equipment.

You don’t have the inventory that can go bad in a lot of cases, so you have less spoilage, therefore higher margins. Maybe you have a smaller team, with fewer operating hours, fewer hourly employees. Now if you certainly get in with Jimmy Johns and you grow that and have a sizable portfolio, it can be a really attractive investment.

However, there are so many foods, whether it be you think about froyo, frozen yogurt, that, that are hit or miss and they’re trendy. And we don’t like trendy. We don’t like sexy. We like it. Things that are gonna be around the stand. The test of time, 92% of franchises are still in business after five years. You compare that to your traditional startup, it’s pretty eye opening.

Now, not everyone’s thriving, but those that are in industries that are needs based, less discretionary are thriving in large part. 

Ben Fraser: That 92% is as a whole franchise or the non-food franchises specifically. That would 

Jon Ostenson: be what the ifa International Franchise Association shows in total for all franchises.

Ben Fraser: Okay. Interesting. So even the ones that maybe are more fatty, those are probably the outliers that are skewing those over anyway. But I remember the whole froyo fad, right? There was one popping up at every corner. And now I think there’s like one that I know of these days. It’s that you don’t want to be careful of those types.

But even still, as a whole, you’re saying that the amount of franchises that are still operating five years later is over 90%. That’s pretty, pretty impressive. Yeah, no, for sure. I would imagine too, like a service-based business is going to have a lot less startup costs than a big brand heavy retail type deal.

Talk about what are the upfront capital costs, what can you expect? I know it probably ranges a lot, but. How much money do you need to start a franchise? I know like for McDonald’s, I think you gotta, at least you plan to invest a million dollars per store or something. I’ve heard. I don’t know if that’s the right number, but I know it’s up there.

Jon Ostenson: 

Yeah, certainly if we’re doing laundromats or something along those lines, some you’re probably paying a million dollars, but. I’d say most of what our clients are getting involved in today from senior care to youth sports, to some of these home and property services businesses, when you look at the All in Investment franchise fee startup cost of working capital, all grouped together what we call the item seven, within their f D, you’re usually in the ballpark of somewhere between one 50 and 400 a.

And in some cases that may even mean two or three territories or locations. So including Working Capital are in that ballpark. Some people are using cash. We do have some that love the idea of leverage. And SBA lending is very common. As you, you alluded to. Some are using an old retirement plan through what’s called a Robs program, where they can roll that over to purchase business and some are using a heloc or they will use a portfolio loan.

So a lot of money was wasted to fund that business. 

Ben Fraser: Talk about the Robs program. That was a really cool thing that was created. I think it’s a rollover for Business Startup or something. So people don’t realize you can, if you have retirement funds in a 401k or an IRA the government allows you with, within certain parameters to roll some of that into these businesses.

And actually was financed a lot of deals through the SBA that allowed the down payment to be through the ira. So actual cash that they had to come up with. Buy the business. They didn’t need much. It was actually their retirement that they saved up. So talk about that program a little bit.

Cause that’s pretty cool. Yeah. Big 

Jon Ostenson: stipulation is that it does have to be a previous employer, but then you’re able to self-direct and you usually use a third party facilitator. And there are a lot of these companies that we partner with to help our clients. But you use a third party and there are a few hurdles you have to jump through on an ongoing maintenance standpoint to make sure that you don’t have.

You don’t fall susceptible to those tax consequences. And so they, they have set it up, but there are some stipulations around it which we’re happy to more, to speak 

Ben Fraser: more to. Yeah. So just again what’s the range of investment that you’re gonna see, of cash out of pocket and, assume that you maybe use some leverage or.

You know what would be a normal range? 

Jon Ostenson: Yeah. I’d say if you’re all in for two 50s, you’re probably putting in somewhere around 50, 60,000 in cash. Call it 20, 25%, and then the rest of finance. 

Ben Fraser: Okay. Yeah, so it’s probably about the same amount of an investment into a real estate deal.

I’m sure 50, 50 K is a lot of times the minimum investment, so for a similar amount. That’s interesting. Okay so talk about. One of the things that I discovered when I was doing some of this m and a lending, this wasn’t franchising, this was buying actual, non-franchise businesses.

But there would, there’s this broker that would go and recruit these kinds of corporate executives to then come and be their own business owner. They would leave corporate America and go running. I remember one was like a rock quarry. It was this random business.

And they like, yeah, I can run a rock quarry. Turns out they couldn’t run a rock quarry and it was afterwards, the last thing they wanted to do and had no idea how to sell this. Had no idea how to really be an entrepreneur or hybrid entrepreneur. And really struggled. And I think there is an element of playing both sides of it.

What are the key skill sets? What are the things that you wanna make sure and do a self-assessment of to understand, do I have what it takes and do I have the desire to do this? And then maybe that also plays out in how you invest, whether that’s, or rock operator.

Semi passive or kind of the full passive, which I’d love to get into more. 

Jon Ostenson: Yeah, absolutely. No, I think understanding yourself, understanding kind of the why behind your, why you’re doing, do you bring a partner in? Do you have a key employee that you could hire to help you run it?

The nice thing about franchising the goal really is to. Go in as eyes wide open as possible. And so we’ve designed our process to complement the franchise orders process where they’ll take you through a series of calls and presentations and really expose you to all facets of the business.

You also get to see their F D, their franchise dis disclosure document, so big intimidating document. We always encourage our clients to go through with the franchise attorney to help point out different areas to make sure you really understand it. In there you get to see past performance of other franchisees.

It’s what’s called the item 19, so at least you’re able to plug in some reasonable assumptions into your proforma. You also get to talk to other owners. It’s what we call validation, where you talk to other owners along the way and hear about their experience and ask them questions. So is it entirely foolproof?

It’s not. You’re still taking a risk stepping out there, but you’re so much more informed than if you were just to do a back a napkin Proforma buying a traditional business. Yeah. And what, 

Ben Fraser: What’s the spectrum of success over time with franchisees? I know like network marketing’s, they only, the top 1% actually make enough money to make it work.

Okay. Is that a similar experience in franchisees or is it a little more evenly spread out where hey, 50% are gonna. Obviously there’s averages but talk a little bit about how that is, is that skewed pretty heavily to the top ones or is it usually a little more even distribution? 

Jon Ostenson: I’d say often times it is fairly more skewed.

Just like anything, you’re gonna have those that are top performers or those that are struggling and I like to think about it in quartiles, oftentimes that top quartile or middle 50% of your bottom quartile, when I was a franchsie shelf genie, I got to see. The visibility into, a hundred plus owners across Northern America are running the same business day in, day out, and we had our top floor, or we had those, we had to lean in the coach a little bit more.

Then we had a, and for some of them, some of ’em just don’t think big enough and they are comfortable with making 150,000 a year and they’re happy and that replaced their corporate job. Others say, Hey, I want to really go big, replace myself and go get the next thing and do a good bit more in income.

In those cases, I’d say, this sounds cliche, but our top performers, for those that came in, were humble enough to follow the system and not try to be the smartest guy in the room. They didn’t bring all that baggage from their past marketing agency into play. And so I’d say that’s one thing, follow the system, and number two would be how you deal with people.

Be someone that people wanna work for. Be someone that you know they wanna continue working for. Attract talent, retain talent, make tough calls when needed. It sounds so basic, but it’s true just like in any business. Yeah. 

Ben Fraser: What would be some other kind of top skills that you would say are necessary?

Obviously people, as most businesses are people businesses, right? And being able to work well with people is very important. But what else? You gotta have some drive, obviously, if you wanna go be your own business owner. But are there any other things that are key and that are more general that can apply to a lot of different businesses?

Jon Ostenson: 

I think if there’s some degree of sales in your background or, and it’s not that you’re gonna be a tip of the spear on this new venture, but you know how, what to look for in salespeople and how to incentivize and coach them. I’d say that’s a nice skillset. If you have any bandwidth at all to get involved in the community, and that could be sponsoring the Little League baseball team down the road, or it could be getting involved in Chamber of Commerce, some of that organic piece to compliment the let’s say the paid marketing.

That’s always a nice addition where maybe you’re able to reduce your cost per cus customer acquisition, let’s say. But I think just, again, being teachable and going in and, it comes down to partnering with a good franchisor. Not all f franchisors are created equal, just like in any industry, and that’s where we help our clients find the right ones.

But going in and saying, Hey, we’re gonna follow the system and call us out if we need coaching and then bring on good people. So much of it comes down to good people. 

Ben Fraser: Absolutely. That’s probably honestly part of the challenge with the retail or food service based businesses is labor right now.

And the staffing is such a big challenge, would you go more service based and just lower overhead, lower staff requirements? That is a helpful thing. Very cool. So talk a little bit more just about the kind of semi-passive and this kind of passive investor approach.

Both of those sound a little too good to be true. So I’m skeptical, but, convince me otherwise. Yeah, semi-passive, 

Jon Ostenson: The buck still stops with you. It’s always been common in franchising. You put someone in place to run that day-to-day operation again, they can lean on the franchise or for support at the end of the day, then buck still stops with you.

If that person walks out the door, they decide if they’re, if they need to be replaced, they’re not doing a good job. That’s where, as a business owner, it can create some headaches and you have to lean in until you find someone to replace them. So I’d say that’s probably people’s number one concern in their mind is who is that key person?

We do have a recruiter on our team that can help clients find that general manager but still, you send ’em off to training and get trained up by the franchisor. So I’d say that’s probably the biggest piece with that, the passive side. Again, there’s only a couple of companies that are doing this.

I’m hoping more companies jump on board over time. There’s some strategic reasons why it can make sense for certain companies that are staffed up to be able to support this. But essentially the franchisor, they help recruit the general manager in a passive opportunity and then they manage the manager and you as the owner.

There’ll be a few steps in the beginning where you’re maybe signing a lease or maybe you’re signing. Some other documents, but then you’re getting on a call once or twice a month, checking in with the team, making decisions, letting the team report back on performance to you. So I personally just signed the lease in Delray down in South Florida this past week for my first location within one of these models.

So I’m excited about that. It’s retail, but it’s retail white, I would call it. Okay. 

Ben Fraser: So in this structure, the franchisor is the one managing the manager of the franchisee. Correct. So that’s really, so that actually to me feels like it creates a good alignment of interest because the franchises are paying the franchise fees to the franchisor, which is how they make their money.

But now the franchisor is taking the risk that. The franchisees that they’re managing are gonna be able to be successful to pay them. I am thinking about that right? Or it seems like there’s a good alignment of interest in that model? 

Jon Ostenson: You absolutely are. And in theory, franchising is aligned that way, that the better the franchisee does, the better the franchisor does.

So the franchisor is incentives to lean in and support and coach, and in this case actually manage, personnel for them. Again, just like any industry, you’re gonna have great franchisors. With the track record they’ve supported successful franchisees. Then you’re gonna have some that maybe don’t have as much franchise experience, but they have a lot of industry experience.

And Ben, the older I get, the more I say it is so important to invest in the leadership team behind the company. That’s why I look at it every time I invest. And I always see franchisors to have a combination of industry experience and franchise experience. Cause that’s your business partner. That’s a huge value add of why you buy into a franchise.

It’s not just the playbook, it’s not just the system, it’s not the brand. It’s that leadership team that’s your business partner. 

Ben Fraser: Talk about that a little bit cuz you’ve talked a lot about the franchisees and the skill sets required, but what makes a good franchisor and what separates the top brands from the mediocre brands and what are some kind of maybe yellow flags that would give you pause for concern of.

Hey, my buddy started this franchise and they wanted me to jump in with them. Should I do that right? That’s, yeah. Talk about what separates the good from the great. 

Jon Ostenson: Yeah. The easiest screen there is, how well capitalized are they, obviously they’ve gotta have a lot of money in the bank cuz when you start a franchise, there’s a lot of expenses, pre-revenue that you’re generating on the franchisor side.

One of the things I like to see also is that many franchisors that are emerging, newer brands that are in expansion mode, expanding across the us. Which is very common these days. I like to see that they’ve partnered with a great franchise organization that may be an organization that helps them more on the sales side of the business so that they can then spend their time supporting new franchisees and getting them up to speed.

So that would be one piece which I dig into more, but so much of it comes down to their experience and their track record. It’s not just the promise of tomorrow, but it’s what you have done in the past. And I’d say the industry experience usually is a. Natural check the box. They wouldn’t be in their position if they didn’t have that industry experience and have created a successful model.

But if they don’t have franchise experience in their background, I wanna see that they’ve complimented that with franchise veterans. They brought in, just because supporting franchisees is a different animal, and you’ve gotta have franchisees to understand when they need to be tough and hold their ground, but also when to really lean in.

I think franchising is a great path for a lot of companies from an expansion standpoint. On paper, you’re able to typically expand pretty rapidly using other people’s funding who have skin in the game that know their local markets. And private equity absolutely loves franchising when you look at all their acquisitions.

The flip side is you’ve gotta go in and be staffed up and ready to support your owners or else you’re gonna have a lot of headaches on your hands. You’re gonna wake up one day with kids all across the country with expectations of you that you, maybe you didn’t properly set in the beginning.

It’s a unique dance. It’s a unique dynamic that can really be done well, but I’ve also seen instances where it hasn’t been done as well. 

Ben Fraser: So what’s the incentive for a franchisor to do this fully passive model? Because, ultimately all of their, they’re benefiting from is the capital of the investors.

So it’s just, it’s basically a more efficient way for them to allocate their own capital. Or what was, what’s the incentive for them to do all the work and have investors? Make the returns. 

Jon Ostenson: Yeah, no, you’re essentially opening up a bunch of corporate locations, but you’re using the franchisee funding to do it.

So rather than having to take on debt rather than having to take on private equity, if you had private equity come in, they would oftentimes be dictating some of the moves that you make. Yeah, absolutely. You get them off your back, you really get to do what’s right for the business.

And when you think about that long term game, all of a sudden you’ve got owners or you’ve got, Locations across North America that are running the playbook because your team’s running them. It’s not at the whim of the franchisee. And so you’re able to streamline a lot more of the communication and the support and the efficiencies in the operations of running the business.

And but I’d say, I was talking with one of them yesterday and he said it is so nice not having private equity involved and yet we’ve been able to scale rapidly, which you find interesting. You wouldn’t be able to do without that private equity. 

Ben Fraser: Yeah, cause private equity, they can write big checks, but they want a lot for it.

They want you to hit certain benchmarks. They usually have short timeframes, right? They want a three to five year kind of max, growth and then sell. And so sometimes the interests aren’t aligned with the business plan of the franchisor. And so they want to have more patient capital. They wanna have capital that’s not gonna have this.

Burn it all in your pocket and gotta get the money back, return to their investors. 

Jon Ostenson: And I will say in defense of private equity within the franchising realm, I’m not thinking of Princeton Equity Group or some others that call me every couple weeks and say, Hey John, what are you seeing out there?

A lot of them have cash on the sidelines. They’ve got a billion dollar mandate. They need to go spend franchises to have that estimate for a few of them. They love that predictable revenue model that franchising provides. They like the scalability or they like all the dynamics around why it’s an attractive model on the franchisee side as well.

So private equity loves franchising typically on the franchisor side, but you think about like an orange theory or a pod, sometimes they will roll out franchisees as well. But I’d say a lot of what I see right now is more patient capital on the PE side in franchising. It’s more strategic and they’re building out these portfolios of brands than maybe they’re bringing in centralized, sales call centers or marketing.

They’re able to do things more, not just from an expansion of one franchise system, but multiple franchise systems pulled together. There’s some synergies around that. So you’re, that’s very common these days. 

Ben Fraser: Okay. Interesting. What, can you give us any kind of detail or even a case study or. What could an investor expect in that kind of position as a passive investor in one of these, one of these deals?

Is it, you get a cash flow, is it just a pure counter of total return and wait for the capital event down the road? Is, what’s obviously it’s different for every deal, but just gimme some context for what that looks like as an investor. Yeah. 

Jon Ostenson: The one that I just bought into, I’d say this is a more conservative one from a financial standpoint.

Then I’ll give you one that’s a little more. Aggressive from the number standpoint, all in investment. I’m probably 1 60, 1 70 per location. I’m doing a handful of locations. And with this one, franchisors are running the business for me. They’ve got some locations that do as much as eight or 900,000 in revenue, but what I’ve modeled out is 600,000 in revenue per location now, trickling down to around 15 to 20% ebitda.

Call it, somewhere between 80,001 20, we’ll call it a hundred thousand. It’s not a bad, that’s not a huge number, but it’s not a bad return and you consider what I paid and 

Ben Fraser: Then your cash on cash is gonna be very high. Yeah. And 

Jon Ostenson: The exit down the road, when I look at.

There’s a company that we did nine placements with last year. It’s in the gutter industry. $6 billion industry. Highly fragmented without a large national player. But this is a company that came in with a better, and this is one that most people run, semi pass it, not pass it, but all in investment, right around 200,000.

With this one, their franchisees and their item 19 are averaging 1.7 million in revenue. Now, not every franchise system’s created like this, but it shows you what can be done 1.7. They were at 1.2 the prior year. So you’re seeing really good system wide growth year over year. And they’re doing that at a 27% bottom line margin EBITDA margin.

So that translates to 500,000. Let’s go conservative and assume it’s less than that in our proforma, even though that’s their historic average. When you look at that 200,000 initial investment would be pretty attractive. So again, not everyone’s created that. Not everyone’s created a life share. Sure. But there are some that 

Ben Fraser: Yeah, absolutely.

Very cool. Ja, this is always fun to chat with you and hear about this space. What’s the best way for folks to reach out and learn more about what you’re doing and about this whole world of franchise investing? Yeah. 

Jon Ostenson: First off it’s entirely free to work with us, very much like an executive search or real estate type model.

We get paid by the franchisors when placements happen. No cost at all on that piece, nice and clean, but I’d say come out to our website, fran bridge consulting.com. That’s f r a n like franchise fran bridge consulting.com. You’ll have a popup out there, multiple places where you can sign up for a free copy of our book, and when you do, I’ll have my assistant reach out and also offer a link to my calendar in case you’d ever like to take the next step and have a conversation.

Ben Fraser: Awesome. We’ll put that in the show notes so folks can click on the link and learn more. And John, thanks so much for coming on. I really appreciate it. Enjoy it, Ben. 

Jon Ostenson: Thanks for having me.

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