Most of the ultra-wealthy became so by owning businesses. One proven way to own a business is through franchising. Erik Van Horn, franchising specialist and expert in multi-unit, multi-brand ownership as both a franchisee and franchisor, shares his deep insights into the space. Having helped 1,000+ people find great opportunities that meet their lifestyle goals, Erik shares his golden nuggets on what it takes to be a good franchisee, how to finance deals, and even how to invest in franchises passively.
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Growing Your Wealth through Owning Franchises – Interview w/ Erik Van Horn
We’ve got a fun interview coming up here. This is with a guy we’ve known for a long time. His name’s Erik Van Horn. He is one of the top franchise consultants in the country. This is an interesting angle. We’ve talked about investing like a billionaire, how billionaires grow, protect and deploy their wealth. One of the key ways that a lot of billionaires and the ultra-wealthy have made their money, including Warren Buffett, has been by buying businesses and scaling those businesses.
On our continuum, we start with stocks and bonds and then we go to real estate, private equity, venture capital and hedge funds and businesses. You can earn great returns in businesses. It’s not uncommon to have a business that is producing a 20% annual cashflow and IRR and even more than that. It’s doable. Here we have the expert. He started as a successful franchisee, then became an area developer for a franchise, became involved with franchisors and then began to sell franchises. As a consultant, he runs the top masterminds and consults for franchises.
He’s had several successful exits on several of his franchise portfolios of his own. He’s the guy you want to hear from. He’s done all angles. We talk both about actively investing and passively investing in franchises, depending on where you fall on that spectrum. I hope you enjoy it.
We’re excited to have Erik on the show. We’re going to be talking about a very unique topic, which is franchising. This is a cool area. A little bit of background when I was a commercial banker and led to a lot of franchises with SBA financing, it’s something I wanted to highlight on this show because it’s a wide world with a lot of ways you can dive into it as an investor and as an operator. We’ve brought on what I consider one of the top experts in this world. Erik, thanks so much for joining us and coming to the show.
Ben and Bob, it’s my pleasure. It’s good to see you, guys.
There’s one of the things that’s super interesting here and this is why this is important. Our theme is to invest like a billionaire. One of the premier investors of our age is Warren Buffett. He built most of his wealth through investing in businesses. On our continuum, it begins with stocks and bonds, the mom-and-pop. The higher up you go in the food chain and the wealthier, the more people have invested in operating businesses.
Franchises are a great way to get into operating businesses on a smaller scale. Here is one of the premier experts in talking about, how can we make money in businesses? It’s very typical for a business to have operating earnings in the 20% range. That’s a normal effect. That’s expected. You can get businesses that operate in the 35% to 40% range. That’s equivalent to IRR. They can be better investments but they’re riskier because there are a lot of operational risks but great investments. They fit. They have a place in your portfolio. We’re going to talk about active and passive versions of this.
Erik, give us a little background of your story. How did you get into franchising? You’ve been in the space for a long time. Give us a little sense of how you got to where you are.
Start with Liberty Tax. You’re the guy that bought the Liberty Tax franchise and put on the suit. You were out on the street waving your signs and bringing people in.A lot of people get into the tax business thinking it’s a tax business. It's a marketing business. You have to go out and get customers in the door. Click To Tweet
I wore it with pride and I hate every minute of it. As we talk about franchises, the multiples on an exit on a franchisor are incredible. When I tell people what multiple franchisors get, it’s up to 20x.
If you have $1 million in earnings, you can get a $20 million exit. They’re super valuable once you figure out a franchise.
Why is that, Erik? Those are multiples you see in passive stabilized commercial real estate.
It’s SaaS or something like that. I’m around a lot of wealthy people in the SaaS world and they’re like, “Franchising? Are you serious?” One of it is because they put them into conglomerates of a portfolio of other franchises, so they have some economies scaling in it.
It’s maybe not as high growth as high tech, but it is considered high growth because you’re not capital-limited. If you’ve got a great franchise, how many units can you start? How quickly? They can ramp up massively and rapidly. They’re considered high growth businesses, even though they’re traditional.
Anything about monthly recurring revenue, they pay royalties every month, so there’s stability in it. The buyers of it, once you get past a certain point of franchisees, it’s predictable at that point and easy ways to add value as larger private equity.
You got started with Liberty Tax.
I was in Virginia Beach, Virginia, ready to go to law school. I was a straight C student, so that would have been a disaster for me. I did what any straight C student would do. I was registered. I went to orientation. I’m like, “There’s no way I’m doing this.” I bought a lawnmower and a truck. I started planting flowers and mowing lawns. I was outside of an old lady’s house when her husband came out, gave me some water that day and said, “What are you going to do when you grow up?” I said, “I’m going to be a real estate investor because I was taking real estate classes and I had a broker who was going to help me.” She said, “We did that years ago.”
Long story short, I walked away with $100. I gave her an option contract that says, “I have the right to assume your mortgage. I will pay closing costs on this mortgage that you paid twenty years on and it’s appreciated over the last twenty years.” I left her that option contract because she said, “We don’t want to deal with the renter anymore. Our leasing agent is a real estate broker and he makes money every month versus selling it. He’s going to be so mad at us, Erik but you seem like a nice guy.” I’m like, “I’m a nice guy.”
I called up my parents and said, “Here’s the deal. Do you want in?” They’re like, “Erik, no. It sounds like it’s too good to be true.” I said, “If you don’t want in, my future broker, Gary, will happily do it.” He said, “I don’t know how you got this deal, Erik, but you did. If your parents don’t do it, I will.” I bought the house. The lady was happy. I wanted to make sure she was happy. She knew she was helping me out but I helped her out as well.
I walked away with my seed money. I sold that to my parents in about three months and made more money than I had in my entire life up to that point in three months because I put two and two together. I found the deal. I found the investor. I wasn’t greedy with anything. We split things 50/50 through it because I didn’t have credit or money to be able to pay the $5,000 closing costs. I went to a Liberty Tax discovery day or convention and I’m like, “I’m going to buy that.” There were young people involved and they were buying this franchise and it was local. I’m like, “That’s what I’m doing.”
It’s a little tax prep service. It’s a pop-up tax prep. It’s a very seasonal business. It only operates for a few months. How much did you pay for that?
It was $20,000 for the franchise fee back then and everything else was inexpensive. We were in it for less than $100,000 that first year.
Besides $20,000, what did you pay for?
You have to do rent and labor. You had to train people before and pay them on payroll before the money started coming in.
How much did you make in that first deal?
Hardly anything. We lost money that first year and we worked like crazy. We went and bought an area development in Austin, Texas, which means we bought a region.
Even though you’re losing money in the franchise, you bought a region.
The goal is to bring on new franchisees, sell them, support them, help them become profitable and coach and train them. I bought that region with my parents, 50/50. That was a few hundred thousand dollars. I got a loan on my side. They paid cash for their side. We took that region from 4 stores to 42 stores in 10 years and sold that back to the corporate office. We did well with that one. I got good at flipping these stores in the meantime. A bad owner would buy it and start it and then I’d flip it to a new owner or I would take it over and improve it.
You figured out how to make them profitable.
I figured out how to make money. I didn’t lose money for ten years.
You developed 42 stores and you became a flipper of Liberty Tax franchises. What made an owner fail? The guys who failed, why did they fail?
It’s a marketing business. A lot of people get into the tax business thinking it is a tax business. It’s not the tax business. It’s a marketing business. You had to go out and get customers in the door. If you think you’re so good at plugging some simple numbers into a computer because you’re good at taxes or bookkeeping, those guys and ladies fail because you need to get customers in the door. It’s a marketing business, not a tax prep business.
The guys who worked at a marketing business generally were successful.
Yes, but they had to hire good operational people.
You had to have two sides. You have to have a marketing focus but then you have to have good operations people. It was risky. How much money could they make in this particular example?
Early on, $50,000 a store, then it continues to grow. As the franchise grew and the franchisor got better, profit margins and the support would get better and people ended up making more money per location. That’s how it is in the haircare business too. They don’t make a lot of money per location but when you have multiple locations, that’s when they start to make good money. I know some that are over the six-figure mark per location. Some people had many locations.
From there, you became the godfather of the region for Liberty Tax but then you moved into a group called FranChoice. You became a consultant. These guys represent multiple franchises and you became the expert who was advising customers which franchises to buy, doing a matching, helping people find the franchises to buy.
I’ve done everything in franchising. We’ll go through it step by step. That was next for me. I spent ten years of being an area development person, area rep owner and franchisee. During that time, I took a job at Liberty Tax corporate because I knew the founder was spending an hour every day at 3:00 with his franchise development people, which is another way to say people that sell franchises so salespeople. I knew he was spending time with them at 3:00 every day in an hour. I’m like, “I want to get trained by this guy who has sold more franchises than most of anybody.”
I took that job selling franchises and that’s when I made my first six figures. I had the inside scoop on how to grow and scale that business. I learned how to sell franchises. I sold the franchise and the area development. I had the skillset of selling franchises. I emailed Jeff over at FranChoice and said, “Can I become a broker?” He’s like, “Yes,” and then he backtracked. He said, “Sorry, we’re going into a recession. People need to buy their leads. Our program that used to work is not working anymore.”
I had a ton of respect for him to say, “No, the time is not right,” and then a year later, he said, “Timing is right.” That’s when I started to get into the franchise consulting, franchise brokering world, in which we had access to 100 brands and had knowledge of those different brands. People would come to us and say, “I’m thinking about buying a franchise. I have no clue what one to buy. I thought franchises were McDonald’s and Subway.” There’s a whole other world out there that we would expose them to and then they would end up buying one of those franchises that we would share with them. They would send us a commission check or wire.There's luck involved with business. Some of the times it's unlucky and some of it is just you're extremely lucky. Click To Tweet
There were some good opportunities. I remember you were talking to me about a locksmithing franchise. It was people making a lot of money. Wasn’t there one like water repair or damage something like that?
Yeah, the restoration ones. Water restoration businesses still do well.
If you’ve got the sales mentality and the operations, you have to have those two components and be great at those two components but then you can make a lot of money. If you suck at either of those or both of them, you’re not going to make any money and probably going to lose money.
The other thing that you need with that is to pick the right brand because most franchises never get over 100 franchisees. 5% of franchisors make it to 100 franchisees. You don’t need to be a part of a brand that has 100 franchisees but you need to pick the right brand. Some of it is luck. Sometimes it’s unlucky and sometimes you’re extremely lucky.
What’s the right brand versus the wrong brand? What do you mean by that? The one who’s growing or the one who’s supporting or the one that creates a lot of customer desire, the one that creates demand?
Let’s look at Orangetheory. There are a ton of fitness brands out there. Orangetheory had some technology that was able to track your heart and all these different types of things. They gamified the workout and had a sense of community so they had something different.
Their franchisees did better?
Their franchisees do fantastic, hundreds of thousands of dollars of location.
It’s getting something that has a unique demand profile.
You demand and then the owners need to understand franchising or have somebody advising them that understands franchising.
The owners, meaning the franchisor?
The founders of the franchisor. Let’s say Orangetheory had an amazing location in Tampa, Florida. They said, “We’re going to franchise this thing,” and they had no franchising experience. They franchised it with everything that they knew about Orangetheory. It probably would have been a flop because they didn’t understand franchising.
They have to know how to replicate their success in others, how to build systems and how to make their people successful versus milk it.
Also, how to work with franchisees because you’re not in the business of managing a manager that’s running your workout studio. You’re in the business of helping other business owners become successful business owners. It’s a completely different mindset and business model.
In some of the franchises, there’s food service, fitness, restoration and pretty much anything.
I run a franchise Facebook group and there are always new franchisors coming in there. Someone came in with a sports drone business that he’s getting ready to launch. Others said, “I’m getting ready to launch a pest control franchise.” I’ve got over 100 emerging or just about emerging franchisors that reach out to me in that group like, “Erik helped me with this stuff.” I get to see all the unique stuff. Some of it is a good idea and some of it is a bad idea. Some of it I might think is a bad idea that might be a good idea. Crumbl Cookies charge a ton of money for cookies and they make so much money.
What is the franchise? I haven’t heard of this one.
Go there, walk in and go to a computer screen. It’s so simple. You click all these cookies that you want and then a minute later, they have them for you and you’ve already paid with your credit card at the screen thing. You walk out with $6 cookies as much as a Subway and you’re hooked. It’s like crack cocaine. People keep coming back.
That sounds completely unappealing to me, buying looking at a screen.
It’s an efficient model. The founders of that, one of them was at Facebook, had a technology background, quick to adapt to the pandemic and had lines out the door. I know franchisees there cost $600,000 to $700,000 to open up one, which probably I can’t believe either but they’re making $500,000 a location. It’s insane. People out there reading this are like, “I want to go get a Crumbl,” good luck because you can’t buy a Crumbl. They already have franchisees everywhere. They have one in Rapid City, South Dakota.
You have to pick the right brand. Some of that is luck and some of these are venture capital gas. You have to decide whether they’re going to make it or not. You want to get them midstream where they’re not out of the gate but where there’s still an opportunity to buy franchises. The real money is not just in a single franchise in a single location but it’s in buying regions. A lot of it could be upfront money that if the franchise is poorly run or doesn’t create the demand profiles that you expect, you’re going to lose it all but you can also make a lot of money. Your multiples can be incredible.
Some people don’t think about when they’re getting ready to buy is you’re not only just paying for the franchise fee, labor and all this stuff but if you’re getting into retail, you’re on the hook for that lease. It’s called a personal guarantee that a lot of people don’t think about.
It’s very risky but the return profiles can be extremely attractive.
What’s nice about retail, both from the franchisee’s perspective and the franchisor’s perspective, the downside is the personal guarantee, the upside is once you get one, it’s rinse and repeat. You’ve got one, you do the second one, do the third one and learn along the way but it’s rinse and repeat. Customers are coming to you in retail, so you’re not always going out to go hunt for customers and whatnot. They’re always coming to you. That’s one of the nice things.
What are the pros and cons of a retail business versus a service-based business where you don’t have to generally have the lease wherever you have more of an industrial lease for equipment but your overhead is going to be a lot lower and you have to go and hunt for the customers? Are those the trade-offs between those two different models?
You’re hunting for the customer and it’s harder to scale, for example, Sola Salon Studios. My three other business partners and I own twelve of those in Orange County. We built them out in a five-year period, which is aggressive. Each one was about $1 million to open up. We were very involved in that first one. We were looking at the LOI 5 times and the lease 100 times. We overpaid for the attorney because they had to look at everything. We were so nervous because we were spending $20,000 a month on a lease guaranteed for 5 years. We were crazy over that one.
We then hired a district operational manager and paid him $120,000 a year. He came from a real estate background. We helped him through lease number 2. With lease numbers 3 through 12, we never talked to the leasing agents and the attorneys because he did all of that. That’s how much more comfortable we got 3 through 12 versus 1 through 2.
We had twelve spread out over Orange County because we could pick and choose the locations. We could see where customer demand is coming from. We could pick our 2nd, 3rd, 4th or 5th location based on that. If you’re in a service-based business, then you have to buy more trucks and you can’t scale across Orange County as quickly.
You did well with the Sola and you’re doing well with a Sola.
We had private equity buy us out on that, so it was an interesting one. We’re the only ones that up to that point that, private equity bought out.
You had a great multiple on that too.
We had a great exit on that.
Let’s talk about active investing and where you go and buy franchises. People are reading who are going to want to do that. They should be thinking about quitting their day job if they’re going to do that. Some people are ready to do that and say, “I’ve been in the corporate world for twenty years. I’m going to take my 401(k), cash-out, buy a bunch of franchises and go do this.” For certain types of people, that makes sense. Who would you advise that it would make sense to do something like that?
If they want to work in the business or they don’t want to be completely passive, especially if that nest egg is significant to you that you’re putting into it, you should plan to be active in that business. When I think about passive ownership in a franchise for a first-time business owner, then you should probably at least put in twenty hours a week, have the flexibility and be agile. That would be considered semi-absentee or semi-passive to me. Other than that, go in 40 hours a week, work the business and then start hiring management underneath you. If you’ve never owned a business before, going semi-absentee is risky.
If you’ve never owned a business before, even active is risky. I’ve mentored a lot of entrepreneurs. Being in a corporate world is not good training for being an entrepreneur. To be an entrepreneur, you have to be a jack of all trades. You don’t need to be great at anything but you need to be good at almost everything. If there’s anything you need to be great at, it would be sales. You’ve got to be able to sell and market, recruit and manage.
If your coworkers and employees don’t like working for you in your corporate job, you should probably not do this. If you’ve got that caustic personality and you don’t have the gift to manage people and manage processes, it’s a mistake. If you can do this, you can make a lot of money doing this, picking the right franchise multiple times with local brands.
I’ve had 6 or 7 different brands and most of them have been successful. Not all of them have been successful but most of them have. That’s why I’m clear on how there’s luck involved in some of this stuff. Even at Sola, the first location that we opened up was average. We’d already signed our second lease.
Explain what Sola is for those that may not have heard of that.
Sola Salon Studios, we would go in and take 7,000 square feet of retail space. We would divide it into 40 individual suites for about 100 square feet for salon professionals like aestheticians, hairstylists and massage therapists. They would rent from us. They pay us weekly and they were under 1 to 2-year contracts doing that. That was the real estate business. We weren’t in the salon business.
What we did is we opened up our first one in Mission Viejo. We already had our second location lease signed. Everybody at the corporate office thought Huntington Beach was going to crush it. We thought that was going to be the best one. We were already locked and loaded. We were building that out. We signed our lease on our third location in Irvine. We’re dealing with Irvine company, which you’re paying a lot more for rent. That was going to be our most expensive location.
We got 3 leases signed, 1 open, 1 under construction and the 3rd lease signed. The first one was average. We’re like, “We’re average. This is fine. This is what we predicted.” The second one was a dot. We lost money on day one. For two years, we lost money. The 3rd one opened up a few months after our 2nd one did. We were making money the day we opened and couldn’t help but make a lot of money out of that one, same ownership group and same management team, different location and different results.
The lesson there is location matters.
All of us had a ton of business experience and real estate experience. The franchisor said, “This one’s going to be the best one.” It was the worst one. Sometimes you get unlucky. I’m so thankful that we had the least signed on the third one.
Diversification is the key there. You want to make sure you diversify in case you stick the fork in the wrong place. You want to make sure that isn’t everything. Let’s talk about the financing. Few people understand that you can leverage even a startup out of the gate. Ben is a banker and you’re one of the top SBA lenders in our area. Talk about leveraging the deals that you can get.
I want to bring you on because I saw so many of these investors going by these franchises and the leverage terms were very generous. If you’re not familiar with SBA, it’s Small Business Administration.
These are government-backed loans. Banks do government-backed.
It reduces the risk to the bank. Wherever there’s a franchise involved, banks love that because the idea and the concept is, “There’s going to be a lower risk of failing because there’s already a roadmap and a playbook for these operators to go in and operate the deal.” A lot of times, if you structure a deal right with some seller carry back financing and some bank financing, you can buy a business with as little as 10% down.
What kind of interest rates?
They’re going to be higher than a general commercial loan, probably mid-single digits, in the 6% to 7% range.
What kind of payment terms?
The great thing is they’re usually ten-year loans.Location matters. There could be the same ownership group or management team but different location and different results. Click To Tweet
10% down in ten years so $1 million Sola Salon, you can get for $100,000 and you pay it in its principal and interest payments over 10 years so it’s 10-year payback. That’s great. This is for a business that’s a startup that doesn’t have any history, no track record?
Yeah. For a startup, you’re not probably going to be able to get it for 10% down there and want more skin in the game. If you buy an existing franchise or existing business, you can usually get less but even still, those are leverage terms that you normally see.
How do I get an SBA loan? It’s a little bit tricky because certain banks love SBA and certain banks hate SBA. It’s not just the bank. It could be a certain lender loves them. He moves from bank to bank and he takes this SBA with them. Is that true? If somebody is wanting to do this, how do they find an SBA lender?
I’m putting that question to you because I’ve been in it for a while. From my experience, there are certain banks and national lenders, even non-bank lenders that love franchise lending. That’s all that they do and they will get aggressive, especially on big-name franchises. That’s probably part of the whole package that you did when you’re a consultant for people.
You could go to the local bank or you could go to a broker that will help you get an SBA like FranFund or Benetrends. Let’s say you’re looking at a franchise and you say, “I want to buy this particular franchise.” They say they have done 10 or 20 loans of that particular franchise. What I like about working with a brokerage group like Benetrends or FranFund is they know the franchisor and they know the things that like that franchisor.
When we can find a lender that has lent to that franchisee of that franchisor, that’s a good thing. On the flip side, I’ve done loans with local banks that are small banks that you’ve never heard of before. Sometimes those can be the best things and sometimes they can be the worst places to get a loan because they might like or hate franchises. They may like or hate that industry. You never know.
They may like and hate SBA.
How much of the lender’s personal preferences go into that? I’m not talking about you but other ones out there.
I do want to say for people that are looking for financing, a lot of times they’ll go talk to a banker, get the stiff arm, give up and not realize that a lot of it is not you, it’s the bankers. You need to go talk to a dozen bankers. It’s a lot of work. They’ll all say, “We love SBA.” It’s BS. It’s not true. You have to find out what their real appetite is. I’m not being unfair to them.
It’s appetite-based and it is driven a lot by the credit culture and committee that they have where they’ve been burned before. A lot of times, if a bank has been burned to a particular area, they won’t lend there anymore. It’s a lot of based on that. One of the cool things back when I was doing it was the ROBS program. It’s the rollover for business startups program, which is a way for a borrower to roll 401(k) qualified monies. It’s for their equity contribution and not to have to pay the early pre-payment penalties.
I had dinner in Vegas with a couple of the executives at Benetrends Financial. Their founder invented ROBS. Here’s another point, I’m off of trashing lenders. I’m moving on from that, Ben so you get a break. It’s true, that’s important to talk about. There are challenges with different lenders. I hate dealing with lenders sometimes because I always have this expectation that they’re always going to tell me no at the last minute for whatever reason.
The lesson that I’ve learned dealing with lenders, try to understand them, ask them a ton of questions and try to understand their process, their bank and everything that’s in their head because the more knowledgeable you are, the better off you’ll be dealing and trying to get a loan. Back to Sola, let’s say we got a 20% SBA loan.
What does a 20% down SBA loan mean?
80% SBA loan, 20% down, you can tell I’m not a lender. What we did is we had tenant improvement dollars from the landlord. Let’s say we would get $200,000 back from the landlord for signing the lease because they reimbursed us some of the expenses. We were able to roll that back into our pockets as franchisees versus paying off the loan, so cash out of pocket was less. Even though we got an 80% SBA loan, falsely said it was 20% but we were able to recoup some of our out-of-cash expenses with that. There are a lot of different ways.
Erik, before we go on to the passive side of this, I want to hear from you who’s going to be successful as an active operator? We’ve shared a few ideas but from your experience, I’m sure you’ve seen both sides as a consultant when you had people come and want to get into this business, some were successful and some weren’t. There’s a lot of luck involved. What’s it going to take to be a successful active operator franchise?
If you’re looking at any franchise and let’s say most service-based businesses are active owner businesses so if you’re going to be an active owner in a service-based business, there’s one tip, talk to all the franchisees or many of the franchisees. If you come from an accounting background and you realize everybody else used to sell timeshares, Cutco knives and strollers, you should probably think twice about doing that. You want to find people that are cut from the same cloth as you or have the same background. If you can do that, they’ve had success, you understand why they’ve had success and you think you can duplicate that because you have the same skillset that they have. That’s probably the best setup for success that you have.
Before we move on to passive, talk about some of the best brokers. What’s the best way to approach this? If I’m reading this thinking, “I’ve got to do this,” who should I reach out to? What are the brokers that make sense? How do you find a good broker?
I don’t broker so you can be assured that this is honest.
You used to be one.
I used to be 1 of the top 3 in the country for years, so I know what good looks like. Here’s the deal. They’re like real estate agents. Sometimes you get a new one and they’re just going to feed you brands. They’ve only been in it for a couple of years. If they don’t have a franchising background, they don’t understand franchising. They are a salesperson just putting brands in front of you. They’re regurgitating what they heard and what the franchise salesperson of the brand told them. That’s probably not the best. If you want brands introduced to you, that’s one way to do it.
What’s the right way to do it?
They have content that you can listen to online. They have a book, a podcast and a following on social. They’re always giving good sound advice or they’re on a podcast as a guest and you’re like, “This person knows what they’re talking about. I learned a thing or 2 or 10 from them.” That’s probably a good thing. You can go to a call with Erik or go to FranchiseSecrets.com and I can make some introductions to some of the top consultants out there.
Who are the big brokers out there?
The big broker networks, the one that I used to be with, FranChoice, have been around for a long time. Look online and see what they are. On the other side of the spectrum, you’ve got a lot of newer brokers. Some older existing brokers are IFPG. There’s another one called Franchise Consulting Company. That’s a newer one. I know all of these guys, all these broker networks. There’s another one called FranNet. There are four of them. They’re probably the four of the bigger ones out there.
How are they different from the two lending hubs you were mentioning?
They lend. They go in and shop your loan to banks. The banks are used to dealing in the salon suite industry. They love it and it’s easier to get a loan that way. There’s another one out there called Guidant. I know the principles of the founders of all of these and all three are great.
You’re FranchiseSecrets.com. Tell us what that is and what do you do there.
That’s a podcast that I have, Franchise Secrets Podcast. I give a lot of free actionable advice to people that are looking at buying a franchise. Franchisees that are wanting to make more money and franchisors who want to learn things about a franchise that they didn’t know before and then people that want to get into franchising and want to turn their brand into a franchise. All four of those listeners love the Franchise Secrets Podcast.
Out of that, they come into a Facebook group. You can find the Facebook group by going to FranchiseSecrets.com/Facebook. I’ve got over 2,000 people in this Facebook group and they’re the same type of person. They’re all interested or might be interested in franchising at many different levels. I have masterminds out of that. I have franchisees that want to grow and scale more than they are. They come into my mastermind.
The mastermind for franchisors is getting ready to launch. Franchisors are the ones who want to get leads and be better franchisors, I’ll have instructors in there helping them in all areas that they need help with. I have a passive investing mastermind as well. Once you’re a franchisee, you make a ton of money and you want to do it the passive way, join my passive investing mastermind.
If someone’s reading this and they automatically say, “I’m not going to quit my job. I’m not looking for another gig but how do I play?”
This is the 99% of the people probably reading. I started a mastermind with my good friend, Justin Donald. He wrote a book called Lifestyle Investor. We started this mastermind called Tribe of Investors. We present deals to the mastermind and usually their off-market, cashflow, wholesale type deals, so not retail. It’s not a lot of real estate.
Debt or equity?
Debt and equity kickers, we like debt with an equity kicker, so you can get in and get the best of both worlds. Consistent, recurring payments monthly or quarterly is typically what we like. An example of one is we’re getting 13% interest in a company that’s in the software business and a backend hub of a lot of big brands out there. It’s 13% interest. We’ve got some equity kickers with that and it’s a three-year note paid monthly.
All my alarm bells are going off. Why would it make sense for a software company to pay 13%-plus equity for a little bit of money?
They want strategic people. People that are in our group have already introduced them to new partners. One of the reasons is they want to take money. They want some sharks and a personal relationship with the brand. Justin has a personal relationship. He has been working on this for a while.
Why would they want to spend that much money? That’s a lot of money.
It’s not non-diluted if it’s debt. If they want to keep more of the equity, they have to pay more for it but you cannot dilute your ownership.
They can keep coming back. The first was a $10 million raise and they came back with a second $10 million raise. People are happy. They can come back and not have to go through all the banking stuff. This company is either cashflow positive or about cashflow positive. It’s not pre-revenue or anything like that. This is a company that’s doing well. We’ve got deals like that. Some of them are more land entitlement and some cash coming in on rental properties that they have.
That one is 8% a promissory note. You get paid that every quarter and do some profit sharing. Over the last few years, the profit-sharing was another 8%. We got some other unique things with that. One little perk of that one is if you want to pull out some of your cash, you can do that with a 30-day notice. Put in $100,000 and let’s say you want $50,000 out, 30-day notice and you got $50,000 out of it.
In your community, you have these deals that are popping up here and there. There are opportunities to invest in a franchisor, which is someone who wants to scale their business through selling franchises. You’ve been involved in that so there are other ways to get involved by investing in a franchisor.
We are going to be presenting a deal in the first quarter of 2022 on a franchisor that I’m involved with. We’re going to be bringing on some investors into that one and that’s equity.
There is a venture capital play here as well. That’s super interesting. The early stage is super risky because you never know if it’s going to catch. You find someone that has amazing traction. Guys who have amazing traction are super expensive to scale. Guys that have amazing levels of traction are going to need capital. Doing some VC investing there would be very nice.
We want sharks in that one too. We want people who are going to be able to spread the word about that brand. That’s why we don’t want to go to the bank. We want to bring equity investors in.
What’s a good shark there? How to introduce the brand and to who?
Anybody in the service-based world that might want to own a franchise or talk about the franchise, that’s great or anybody that’s in franchising already. They don’t just own a franchise. They own part of the franchisor and that’s hard to do. It’s unique. I’m excited to have people that are in the franchising world successful franchisees be a part of a franchisor and hopefully participate in a nice exit.
Erik, this is awesome and so eye-opening. I love your background and experience sharing with people because you’ve seen it all and done it all. Thanks for sharing with us on the show. Readers, if this is interesting to you, check out his website, FranchiseSecrets.com and get connected with Erik. He’s awesome. Erik, thanks so much. Maybe we’ll have you back another time and talk more about some of the stuff you’ve got going on.
Bob and Ben, thank you. I have immense respect for both of you. I love the impact that you’ve had on my life. I cannot thank you enough.
It’s so good to have you. Good to see you.
- Erik Van Horn
- Liberty Tax
- Crumbl Cookies
- Sola Salon Studios
- Small Business Administration
- Franchise Consulting Company
- Lifestyle Investor
- Tribe of Investors
About Erik Van Horn
Erik Van Horn is a franchising specialist and expert in multi-unit, multi-brand ownership as a franchisee and franchisor.
From franchisee to franchisor, regional developer, investor, consultant and podcast host, Erik has worn many hats over the last two decades. His diverse experience has provided him with unique insight into the challenging aspects of the industry.
Erik has owned 6 brands in 8 states. But more than growing his businesses, Erik has a passion for helping people. That’s why he has helped 1,000 people (and counting) find great opportunities that meet their lifestyle goals so they can find the same freedom through franchising that he enjoys.
In the wake of the Covid-19 pandemic, Erik founded the Franchise Tribe Mastermind–a group dedicated to helping franchisees learn how to shortcut the path to success without sacrificing their lifestyle. With over 80 members and counting, the Franchise Tribe Mastermind has quickly become one of the most valuable resources for franchisees.