Why Franchises Might Be the Best Kept Wealth Building Secret with Alex Smereczniak

Transcript:

Yeah, So I didn't realize this initially. It took reps and experience like I think anything else in life. And I've been around all sorts of entrepreneurs, people that inherited businesses, tech entrepreneurs, franchisees, commercial real estate entrepreneurs, you name it. And what I've realized is the majority of people that want to become entrepreneurs don't necessarily have this clear, defined path.

There was a Gallup poll that said 67% of Americans want to be an entrepreneur, but only 6% actually go on to do it. And so I've become obsessed with where's this gap and why? Because it's changed my life and I'm sure it's changed yours is it's this fulfillment that you get. And what I've realized is not everyone has this original idea or this Elon Musk idea or this Zuckerberg or Bezos idea.

But that doesn't preclude them or prevent them from being an entrepreneur. They just don't know where to start or how to do it. And to me, franchising is the single greatest path to do that. So here's something you may never hear on a personal finance show. You can build serious, life changing wealth without ever picking a single stock or Max out your 4O1K.

Now I love index font and if you've listened to this show for more than 5 minutes you know that. But there's an entirely different wealth building path that most people write off before they even understand it. And it has quietly created tons of millionaires here in America.

Now the path is franchising and my guest today has sat in every single seat in the game. Alex started a laundry business out of his college dorm room. Then he sold that business for six figures. He did the smart thing. He joined Ernst and Young. Then he walked away and Co founded To You Laundry, raised $33 million and spun out a laundromat franchise called Laundry Lab that sold more than 100 licenses in about 14 months.

Now today he runs Franzi. This is a platform that people are calling the Zillow of franchising. And now he sits on data from thousands of franchise businesses across the country. So if you've ever wondered if you can own a business that runs without you or control A6 figure operation with a fraction down or build something that you can actually hand down to your kids, well, this episode is for you.

Because Alex and I are going to dive into every aspect of franchises from looking at how much it costs to start a franchise, some of the best franchises that are out there. We're going to dive into some of the hot franchises that may not be the best overall investment. How to think about franchises is financially looking at your financials, how to get lending and financing and all the different things that come along with it.

Plus we're going to dive deeper into some of the franchises that Alex owns, some of the service based businesses and he's got some really inspiring stories of people who have built a tremendous amount of wealth from franchises, from one guy who owned 30 Burger Kings to another guy who over the course of seven years built up a portfolio that now spits off 200 to $300 million.

So I am really, really excited for you guys to hear this episode. So without further ado, let's welcome Alex to the Personal Finance podcast. So, Alex, welcome to the Personal Finance podcast. Andrew, thanks for having me. I'm excited to dig into all things business, franchising, entrepreneurship, you name it.

I'm I'm pumped for this conversation. I'm really excited to have this conversation as well. And I kind of told you even before we we started this show here, one of the things that I wrote down is there was a high school project that we were kind of having this conversation with and a teacher said, hey, what do you want to be when you grow up? And I wrote down that I wanted to be a franchise owner.

It was like one of my biggest interests when I was in high school. And I used to love finance and money even in high school. And it was one of those things I would actually go and read the franchise magazines. If you've ever seen my digital version of that now, but like I would go through those magazines and kind of read them and kind of read about each franchise, what it would cost to open one.

And back then I remember looking at them being like, wow, someone has to have $1,000,000 net worth to be able to open one of these. And I think it's just, it's a really cool thing and a really cool process that I cannot wait to talk about because it's one thing we haven't talked about here. We've talked about everything from boring businesses. We've talked about everything from real estate to, you know, just all these different ways that you can make money and increase your income, which is the biggest thing we want people to do here.

And franchising is 1 we have not touched on yet. Yeah. So I'm really excited to dive into this and and kind of talk about how this is an underrated way to build wealth. I think less people out there are are looking at this as an option than than should be out there. And I think this is going to be a really, really cool thing to kind of go through.

So, you know, most people kind of look at building wealth, the boring path. They get a job, they go and get a four O 1K and you know, that's that's kind of the route they take. But you've built and and sold a bunch of different businesses. You have franchises now and you have data on thousands of different franchises that are out there.

So can you make the case up front here? Why is franchising one of the most underrated wealth building paths that you can have in America right now? Yeah. So I didn't realize this initially. It took reps and experience like I think, you know, anything else in life. And I've been around all sorts of entrepreneurs, people that inherited businesses, tech entrepreneurs, franchisees, commercial real estate entrepreneurs, you name it.

And what I've realized is the majority of people that want to become entrepreneurs don't necessarily have this clear defined path. There was a Gallup poll that said 6067% of Americans want to be an entrepreneur, but only 6% actually go on to do it. And so I've become obsessed with where's this gap and why?

Because it's changed my life and I'm sure it's changed yours is it's this fulfilment that you get. And what I've realized is not everyone has this original idea or this Elon Musk idea or this Zuckerberg or Bezos idea. But that doesn't preclude them or prevent them from being an entrepreneur.

They just don't know where to start or how to do it. And to me, franchising is the single greatest path to do that because there's a playbook, there's a peer group that you can lie on when you, when you can rely on when you want to quit and give up on a weekend, You can call them up and say, Hey, I'm struggling with this broken machine or this employee issue.

And there's someone there that's been through the exact issue that you've been through to help pick you back up. So it's there's a playbook, you're starting on square 3 instead of square one. You've got a franchise or investing in technology relationship, supply chain, menu innovation sites like all these things.

And so it's de risked as well. So these are the reasons I've become a, a fanboy of franchising where as I used to be a skeptic because like you, I thought you need millions of dollars. It's just food and all the other brands are snake oil salesman selling you a hope and a dream. And it's not actually a good business. And that has changed drastically for me for the reasons I I just mentioned.

You know, it, It makes me think if I built a number of different businesses, there's one I recently sold in the pickleball space where we had these indoor pickleball courts. And it took us so long to kind of figure out the model. There was a lot of blood, sweat, tears and money that we had to kind of figure out, OK, how does this work? How do we make this work?

How do we operate this business in a way that can really, really help people? And it took us all that time. And that beginning stage is really the hardest part where you're sinking so much money into this and trying to figure that out where as franchises kind of flip the script, they allow you to have someone else's business model that's already in place.

You have these SO PS in place and then you have to go out and kind of make sure you find the the location. They help you operate. You can ask questions. And so that is really, really valuable. Now, obviously there are different forms of ways that you pay for that, but I think this is something I think a lot of people should look into. Now, when some people, when I talk to people about franchises, a lot of times they think of, oh, OK, well, this is just like, you know, you could buy a, you know, McDonald's is a franchise or a Chick-fil-A or like there's the the fast food counters or what a lot of people I think their mind goes to upfront.

But what do people get completely wrong about franchising now? Like what have you seen as a popular misconception when it comes to franchising? Yeah. So one of them, you just said that it's all food, right. Food is 40% of franchising, but that means there's another 60% that is home services, it's health and Wellness, it's early childhood education.

It's fitness, it's hospitality. I mean, franchising is a business model that spans every industry you can imagine. Basically, it's 6% of our country's GDP. And I don't think people realize just how big it is and how much of the backbone of society, of America that it actually is.

And so that's the first one. And then two, I think people underestimate or think that it's a get rich quick or it's a mailbox money thing as well. And the reality is, is it's still a business just like do an ETA or buying an independent business. You still are the owner. You still have to run it.

It still kind of lives and dies with you. And if you are good and successful at it, then you'll be fine. And if you're deciding not to put the work in or shortcut things or expect it to be mailbox money, it's not going to go well, just like an independent business wouldn't go well either. So I think that's a common misconception too, is that it's an asset class that you just invest in and collect checks on.

I mean, you're so right. I think most people just go to the two extremes when in reality it's probably a balance between the two and it's right in the middle of, hey, you're operating this as a business. But there are ways to to grow this thing where you can put operators in place to kind of help you turn this into a true, you know, money making machine. But you got to make sure that you are working through that process first.

So you have a really cool story. I've heard your story and I think it's it's really cool, like your process through business and how you kind of worked your way up to running different businesses. And now you have Fonzie, which I think is really, really cool too as well. Can you kind of talk through your background kind of some of the businesses that you've run and how you've got to kind of got to where you are right now?

Yeah, I'll try to give the two-minute or short, you know, condensed to do on this. But I started becoming an entrepreneur when I was a freshman in college at Wake Forest. I like many people, I think thought get good grades to get into a good college, to get good grades again, to go work at a Fortune 500, do the four O 1K thing and die.

You know, it's like this what I thought my life was going to look like and I got exposed to this college laundry and dry cleaning delivery business my freshman year and fell in love with it. I was like, wait, there's another path in life and this is it can be fulfilling and fun and like almost like a video game in real life.

And so I was hooked. I learned more from that business in college than I did any class I took at Wake. Not because the professors were bad or anything, it was just that hands on experience doing something entrepreneurial that you could fail in and learn from that failure and go quick. Fully changed my perspective and view on business career, what I could do next.

So had that, that that experience sold the business when I graduated, learned about exiting a business. And then I did work at Ernst and Young for a year and a half. So I I worked for the man. I did the corporate, you know, stint and consulting and I love the people and I learned a lot there, but I hated the work.

I was like, this isn't as fast, this isn't as fulfilling, this isn't as fun. And to me, I thought if, if a career is what I'd spend a good chunk of my life doing, it better be something I'm fulfilled by and enjoy doing. And thankfully, at 22, you have the you're still naive enough to think I can go start whatever I want and take all this risk and, you know, do it.

And so I started another laundry business called To You Laundry in 2016 and over an 8 year period raised 33 million in venture capital and learned that whole world and what that level of speed and your kind of investment looks like. We then threw pivots and just learning what the market wanted and your macro dynamics changing, started building physical laundromats to support all of our delivery volume.

And so that opened me up to real estate and retail operations and a whole other part of business and entrepreneurship that I just, I loved every stage was more learning, more curiosity, more skills to, to bring with you on the journey. And that's where franchising came in.

As we thought these laundromats are working. We'd open hundreds of them. This is either going to take 40 years and we're the laundry guys forever or what if we franchise and get partners with, you know, their own capital and skin in the game and they're going to care about it just as much as we do and we can go faster. So we franchise in 2021, a separate brand called Laundry Lab to laundromat franchise.

And we'd layer the delivery piece on top of it. And that's when I get exposed to franchising at this really deep, really intimate level. And I realize this is a fantastic business model. You have to find the right fit for you. You have to sift through a lot of the noise. But if you find the right fit and you take that bet on yourself, this is a very de risked safe path to becoming a business owner entrepreneur for many Americans and people that that that don't know where to start, but want to do it and have the capital and skills to do it.

And so I thought, how do we make this more accessible? Because today it's kind of hidden behind brokers and e-mail chains. And this is like good old boys club a bit finding the right brands. I was like, why don't we do what Zillow did to, you know, real estate browsing and, you know, online kind of perusing like we do for real estate, you know, for vacation homes or for moving.

Why don't we do the same thing that Zillow did with the MLS to franchise businesses and we create this resource and tool for people to look at the thousands of brands and all the data and then give them free coaching to go do that, but in a way that's more aligned and transparent and democratized than what's happening today.

So that's the the full circle journey. I've been a marketplace entrepreneur, a retail entrepreneur and, you know, tech entrepreneur and, and an operator as well. I own franchise businesses myself and again to me it's the the, the optionality and the ability to learn as you go and hopefully impact and help others along the way.

What I think is so cool about your story too is kind of you lived every aspect of the of the path and that's kind of what it reminds me a little bit of some of the stuff that I've done as well where I kind of started off in the corporate world. And I think for a lot of entrepreneurs out there, if you start off in the corporate world and then you are born to be an entrepreneur and you become an entrepreneur, you want to do whatever you can to not have to go back to that.

I think of the things that I always think it's one of the fears that is always in the back of my head like I have to do to make sure you never have to go back to that. And I think it's one of those areas where, you know, you built into having this really cool, cool business that you scaled and then you, you turned it into a, a franchise. And I think that's just so powerful because then you realize, hey, there's a need for this.

There's a need for this product that allows us to kind of figure out and, and surf. And like I said, back in the day, I used to go through those magazines. It was really, it'd be really tough to find a franchise that you were looking for just kind of skimming through those magazines now. So I think this is really cool the way that you guys have this structured in the way that you're thinking about this.

So really, really, really awesome stuff. So when someone is buying a franchise, I want to kind of go through the basics really quick first and then we can kind of dive into some deeper stuff. But when somebody is buying a franchise or when they want to buy into a franchise, what are they actually buying? Are they just actually kind of buying, you know, just the, the Sops and the operating procedures, the name, that type of stuff or what are they actually buying when they when they get started with the franchise?

Yeah. So it's a number of things. There's the franchise fee, which is basically your ticket into the system. It's your spot in line. You're reserving the right to develop an area or a market. And with that comes all sorts of site selection, support, build out support, you know, holding GCS accountable, making sure the architectural plans are designed appropriately into brand standards, into the flow of the operation, if it's a retail business.

And then from there, you pay this ongoing royalty and that's basically to continue to maintain and have access to the brand, the menu innovation or R&D budget, whether it's food or, or a different, you know, type of, of, of franchise or category. It's to the technology, it's to national marketing, it's to training, it's to a reduction in OpEx really or, you know, ongoing operating costs because you're getting this collective purchasing power that you wouldn't get as an individual operator.

And so it's a number of things for sure. And the way I've always looked at the value between the franchise or franchise relationship is if I had this, you know, graph right now, it would be day one versus, you know, year 10. So time on the bottom, on the X axis and on the Y axis, you've got, you know, value and it's value for what you're paying.

And so the franchisor upfront is giving a ton of value. All the playbooks, all the site selection help, all the training support and you're not really paying much for you. You pay the franchise fee, but your royalties are basically meaningless to the franchisor because you're just getting off the ground. So the franchisor is give, give, give, give, give.

And you as a franchise or kind of take, take, take a little bit and then over time your revenue starts to ramp and your royalties, you know, really start to ramp, but the value from the franchise or diminishes because you're becoming a better and better operator every day, every week, every month. And so that's where things kind of flip.

And in year 6, franchisees sometimes ask the question, you know, why am I doing this? Why am I paying the royalty? What am I actually getting? And so I really challenge people to ask the question, you know, in year 6, what is the franchise or done for me lately? And if you're not getting some level of ongoing value, you probably should really consider starting this as an independent business or buying an independent business versus franchising.

But you also can't discount just a huge amount of value got those first three years that set you up to become the person you are in your six that you might not be had that not happened. And so a lot of it that I like to to to summarize your, you know, the answer to your question is they're starting you on square 3 instead of square one on this ten step journey.

And you need to decide how valuable that is to you is going faster and having some of those failures made by someone else versus you in that journey. And it was that worth to you? Absolutely. It's it's kind of like going through, you know, education or the College of business when you're starting off that, that upfront like that.

And I think you can do some, some very interesting things once you have that in place. I just always think through, you know, some of the the operating procedures and just how, like I said, how difficult that stuff is to start up and, and have that in place and franchises give you that head start. And then once you get to a certain point in time, then you have the optionality of, Hey, do I want to scale into different locations to make this royalty kind of make a lot more sense for what we're currently doing?

Do I want to sell this business and kind of move into, like you said, doing something independently? How do I want to think about that? You have those options and those that flexibility that allows you to to kind of look further into that, which I think is really, really cool. When you think about this and you know, there's there's franchise fees, there's royalties, there's marketing fees, all those different things, you obviously have to evaluate that stuff upfront.

But how much money should somebody have, You know, how much net worth should they have or how much liquid cash should they have in place before buying their first franchise? And we can talk about, you know, financing options and stuff like that. But what do you say if somebody wants to get into this or listening to us right now, they're like, yeah, I want to start at Step 3. How much money should they have on hand?

Yeah, and I hate the IT depends and type of answer, but what I've learned getting into this is this is a buffet of options. There's franchises that you can do as a side hustle that are 5 to 10K to get into. And it's like a, you know, 1 brand is carved my yard. You've probably seen them where it's like happy birthday Andrew in your yard.

Or if you just had a kid, it's like, congratulations, welcome home. You know, Susie, that's a side hustle. You can make 30 to 50 grand a year doing it, but it's only 5 to 10K to get into it. And that's a franchise. So you can start as low as, you know, 5 to 10 grand all the way up to there's some businesses that cost $5,000,000 to build out.

It's a swim school where you're building 6 pools, you know, for, you know, early childhood swimming development or one called Slick City where it's this massive indoor entertainment complex. But it's $5,000,000. And so the, the better answer is probably, you know, for most brands that are not side hustles that could replace most people's income, you need 50, you know, grand, I'd say liquid to really go after a good chunk of that.

If it's a bell curve, the average type of concept, because you can go finance the rest. And then I always advise people to have at least 6 to 10 months of working capital. In the FDD, the franchise disclosure document that every brand legally has to write, they only show three months of working capital because for whatever reason, the FTC, the regulatory body, said just show three months of working capital.

Most businesses aren't profitable within three months. You should have 6 to 10 months, I'd say, of your cash reserve, regardless of what the business is so that you can get through the hard part. Because if you're not in the game and you're two or three, it doesn't matter what the total story can be or the economics can be.

If you didn't make it through that kind of J curve that I think most businesses have where you're investing, investing, investing and you kind of eventually come out and start to make some money. I think that's the most imperative thing overall is having that cash on hand and being able to to kind of weather those storms because those storms are coming as a business owner.

We all know that. And you got to have enough cash on hand. My rule is always at a minimum to have as a business owner to have seven months cash on hand and anything above that just to kind of make sure you can really, really weather those storms. So I love that that you're saying you don't have at least, you know, somewhere around 10 months. I think it's really, really powerful when someone is looking at this, what are some of the ways that they can finance this?

So our audiences is kind of familiar with some of the financing options. There's things like an SBA can. Can you use SBA for franchises? Is that an option that people have available to them? Yes. So SBA loves franchising and I think another misnomer we talked about some earlier is one of the like unspoken or overlooked values or your pros of a franchise system.

Is there so many other units open across this brand across the country? And so lenders love it because it's not just Andrew and AL's gym. You know, it's a one off in Paducah, KY. It's a hey, it's Planet Fitness that has 600 locations open. We have all this data that's audited in the FTD that the bank can look at and use for underwriting to say, hey, this has a higher chance of being successful than Andrew and AL's gym, you know, in Birmingham or wherever it may be.

And so lenders love it. And the SBA is perfectly designed and built for financing and buying a franchise business. But this is also true on the private equity side. When you go to sell, buyers typically are paying 1/2 a turn to 1 1/2 X of EBITDA greater than an independent business for the same reason, because they're easier to roll up.

It's easier to go buy 20 Jimmy John's from three or four different operators than it is 15 sandwich shops that are all independent. Now I'm trying to put cobble systems together and supply chain and and so private equity also pays a premium or other multi unit operators pay a premium to buy up a portfolio franchise businesses versus independent businesses for for that reason.

And so some of the ways to finance this is USBA 7A and five O 4, which is great because five O 4 I believe covers your franchise fee as well. So you're not coming out of pocket there. But then there's this really interesting program that I like called the Rob's program. It's a rollover of or is it rollover as a business startup, I think is what Rob stands for.

But you can effectively take 4 O 1K in retirement assets and invest in yourself tax free, penalty free before you're 65. Not many people realize you can do this. A lot of people think it's tied up from this last job I had. I can't touch it till I'm 65. Well, I think the government got this one right.

And they said, hey, if we're going to allow you to invest in risky businesses that aren't yours and your stocks and equities, why not let us you know, why don't we let you invest in yourself if that's what you decide to do with that retirement money? So Rob's rollovers are good for franchising, SBA, conventional lending, and then of course, raising friends and friends and family and private equity, whether that's institutional private equity or smaller private equity that wants to back a good operator.

So in reality, you know, since there is a proven business model already locations in place, it is, you know, probably easier than just, you know, a business start up. You know, I've tried to get business lending before in the past and I know how difficult they can be in terms of kind of getting some of those structures in place, especially when you're not a proven business.

But in the franchise model, it seems like it is something since there's this proven business model, the franchise is probably can help you, you know, kind of get some of that that financing as well. It can be, you know, a much easier path and process as long as you have obviously the all the credentials in place that you need in order to get approved for that financing.

So I think that's wonderful. And I think that's a a huge pro when it comes to franchising is looking at, OK, well, how easy would this be to start? If I don't have, you know, a massive amount of capital, then maybe this is something where I could finance a portion of this and have the ability to open this up, allow the business to to pay down that financing.

And I have this asset in place that is now producing, you know, cash at some point in time, if I'm operating this correctly. So I think that's wonderful and a great thing to to look into for, for a lot of folks listening as well. So let's say we, you know, someone sold, they want, they have, you know, let's say they have a few $100,000 liquid they want to get into franchising and they're, they're interested in kind of doing something like this.

But their, their bigger question is, OK, well, how involved do I have to be? And I'm sure it depends on based on the franchise again, but are there franchises that you've seen out there where it's like you mentioned, you know, the one where you put the signs in the yard and things like that? Are there franchises like that where you can be a little more hands off?

And then are there franchises where you really have to be in the nitty gritty? Absolutely. This is where we at Franzi really get into fit and it's in four buckets. It's what are you good at operationally? Are you good at sales? Are you good at managing a team of people? Are you ex military? OK, what's what's your fit there? What's your risk tolerance?

Are you wanting to work at Chick-fil-A or it's essentially you're buying a job or do you want to be at an early stage franchise or we have way more say and input on the systems they've build. Third is, you know, what is your goals and, and what are your interests and hobbies? And so does this align with those? And then the last one is what can you financially afford?

And so when you ask about are there more passive ones, First we look at fit and then two, if it is, hey, I'm going to try to keep my full time job. We typically strongly advise against that because every business for the most part, at least in the 1st 12 months is going to be work. You are an entrepreneur, a business owner at this point.

But if I had to pick a few that are more passive or more semi absentee, things like golf simulators, very popular right now. You build the, you know, it's, it's more of a real estate play and, and in many ways, but you open these 24/7 simulators, they're key fob axis, kind of like an anytime fitness.

No employees and they can produce 100 and you know, 20 to 180 K in cash flow per year per location. And that's pretty good. If you get 345 of those, especially open, not a bad gig. And same thing with some of these services based businesses where you don't have to open a, a restaurant with 30 to 50 part time employees and multiple millions of dollars into it.

You can go do garage renovations that the average unit volume in Garage Kings as a brand is over 1,000,000 in revenue. Two or three technicians and it's mostly sales. So can you do sales, you know, part of the day while you're doing your day job and then manage a crew of one or two people that are putting epoxy on garage floors and hanging custom shelving and you know you can do $1,000,000 in revenue and you're pretty high margin business.

So there are things that are more passive out there. I just can't stress enough that the 1st 6 to 12 months you really need to learn the business and follow kind of this playbook that we talked about, which is I do it. You know, you as the owner, the operator at first for a number of of months that is we do it where I'm doing it with a manager or GM and they're starting to get familiar in how I do it.

And then it's they do it. I have enough units open now that I can hire, you know, management layer to run this business for me while I'm at the beach. But I'm still printing cash. But there's an evolution. That makes sense. And I think that's where a lot of people got to figure out that's where the value with with you all come in because you know, people have to figure out how much time they have available and how much time they want to be spending on this.

And again, for the 1st 12 months, like Alex is saying, you're going to have to spend some time in here. You're going to have to spend some time in the weeds and it may be even longer than that. You may have to have a little cushion. Maybe it's 18 months, maybe it's 24 months. But if you want to be a little more hands off or you want this to be something where it's mailbox money, it's probably not that, but it is something that can produce a tremendous amount of wealth, which we'll talk about as time goes on.

If you operate this correctly and if you choose the right franchise and kind of go through this process, which is why I think this is such an important conversation. So a lot of people that I know, this is the misconception maybe that I've had for a long time is a lot of people that I know that do really well with franchises, they own multiple locations of those franchises, like when they are really making millions of dollars every single year.

The ones that I have talked to own just tons of different locations. I remember thinking back the first time I kind of, you know, came across this, I think it was Peyton Manning owned like 21 locations of Papa John's. I've seen like athletes. So like shack, I've seen owns, you know, just all these different locations of, of different things that are that are available to them.

But how important is that to own multiple locations if you really want to scale this or really want to produce a, a high amount of income? Or does it depend on the industry? Is that more so for something like a brick and mortar location where as like you're saying, if you want to own, you know, a specific area of a location that, you know, renovates garages, then maybe you can just have one or two territories and you'd be a OK there.

How important is that to scale and have multiple locations? Yeah, if you're an empire builder, you have to do it through multiple locations and honestly multiple brands as well, whether it's the same category or not. A lot of the most successful from a financial perspective, people that I know wealthiest, it's because they're Mumbos multi unit, multi brand operators and they own 70 units.

But you do the math on this, that's 2 to $300 million a year in revenue that that portfolio does. Where else can you go and do that in a seven-year period? One of the guys that I know very well, there's a number of stories just like his started franchising or getting into franchising as a franchise 7 years ago.

He was an investment banker prior. So he's good, good at putting deals together and he's good at raising capital. And he used that skill to go buy up to orange theories to start, did really well. Then he bought a few more than he got into food. And now he's up to about 90 to 110 units across Dave's Hot Chicken, Papa Bagels, Marco's Pizza Restore Hyper Wellness.

So not just food. And his portfolio, you know, 3 to $400 million a year in revenue in A7 year period. And so if that's your goal, franchising provides this. I don't want to say easy, but again, kind of straightforward de risk path again of can I go raise capital, allocate it to the right brands and then it's really putting an operating layer in place.

I mean he has 3000 employees at that scale and that's what he's good at. He's good at operating and so for him, yeah, he had to do multiple. But then you have the folks that are, I'm not fulfilled working for the man. I'm not motivated in, you know, what I do in my day-to-day. And I just, I want to just replace my income.

And that might be half $1,000,000 a year. That might be 300 KA year, that might be 100 KA year. And there's answers and franchising to every single one of those. You know, to get to 500 K, it could be one really good concept. Papa Bagels, 25% margins on a $3,000,000 average unit volume store, you're already there.

Same with a McDonald's, same with a Chick-fil-A. You could do it with one location. Those are higher investments. And so if it was a services business, you need two or three territories to your point. And then if it's the 100K, you know, income that you're trying to replace, there's tons of tons of businesses that kick off 100 to 200 K in cash a year that at least it's yours now.

And yeah, you might be working more especially in the first year or two, but it's yours and it's your family's and it's an asset versus a job that you're you're renting cash flow from essentially. And I just can't put money on, at least for me. I know everyone's a little bit different, but you've tasted it and you felt it and you live it.

It's just doing something for yourself that's yours with your work behind it. The success and the failure time back to you is just one of the most rewarding to feel fulfilling feelings that I've. Never felt there's nothing better than that. And I think that's why this is such a powerful methodology for people because if you if you have no, you know, background in doing something like this, then you can look into, you know, franchise and this gives you that opportunity.

It gives you the opportunity to be able to be a business owner with a system behind you so that you can do this. Now what I love about your example of the of the guy who kind of scaled this up with multiple brands over the last seven years is this is just like an investment portfolio. A lot of our listeners understand an investment portfolio, but you're kind of diversifying those assets and you have the ability like, Hey, if one, you know, industry is struggling, let's say, for example, there's a recession and people just start to spend less at Orangetheory or they just start to cut back on, on some of those things that they maybe are not pure necessities, but you own something else, like, I don't know, a grocery store chain or something else that is, you know, it makes a lot of sense in terms of, you know, it's a, it's a recession proof business.

Well, then all of a sudden you've got this, you know, diversified portfolio. That's not going to sink you based on, on some of that stuff as well. So there's some cool stuff that I think even a lot of folks out there when you diversify helps you when it comes to to some of these industries. So I think that's awesome. And where does real estate come in?

Like where does real estate come into play when it comes to, you know, how you find these locations? You know, how do the leases work? And then if, if you do like, I know some, some locations, for example, like I know McDonald's is famous for owning the real estate for a lot of their locations that they, they are in currently. And they're like, I think one of the largest real estate owners in the entire world.

Now, how does that come into play when it comes to, you know, finding these locations? And do they help you when it comes to getting those leases? Do you put personal guarantees on those leases? How does that stuff work? Yep. So I think similar to whether it was an independent business or a franchise, if you have enough capital or you can raise it, you know, from investors that like real estate, many franchises are phenomenal tenants, right, because of all the reasons we mentioned, they're de risk.

It's not like it's Andrew and Alex's taking a first crack at a coffee shop. It's like, no, it's Dunkin' Donuts. So it's they're probably not going anywhere. They have a brand Starbucks, same thing. And so if you can own the real estate while being the tenant yourself and you're getting to kind of double dip, it is a fantastic strategy to scale your wealth, diversify your wealth.

And I know a number of franchisees who when they were in their younger years, they love the operating and managing employees and scaling an empire building. But then they got to a stage in life where they're like, I just want to collect checks and not deal with any labor at all really. And so they sold the operating, you know, the franchise rights that they had in the franchise businesses that they owned.

The example I have is this guy who owned 30 Burger Kings. He's as of last year and he's in his 60s, late 60s now he's done with all the operating businesses, but he owned like 30 or 40 of the underlying pieces of, of land in the building. And so now he just, I mean, he, he makes a ton of money just collecting checks from the old operating businesses that he used to own.

And that's the strategy I see a number of people do or early on, they're making money both ways. The value of the real estate's appreciating and the business is healthy and the brand that they picked was right. And then they sell, you know, that portfolio, make some money there and then continue to make cash flow on it on a monthly basis in the form of rent. And so that's one of your many strategies.

I see other people, you know, they'll pay higher than normal rent. Some of this you have to be careful on because the franchise or is maybe not thrilled about this because they have financials that they have to disclose publicly in in that FDD again, But they could pay themselves higher than normal rent so that when they go to the bank, they can say, look at this tenant that pays this amazing rent and then they can borrow more money against that asset to go buy more buildings.

And I've seen some people do that where they're the, you know, the tenant and the the landlord franchising. There's a little bit more, you know, oversight and rules there than if you were doing that independently as just a, you know, solo operator, independent business owner. Now you're firing me up with the guy with the Burger Kings because thinking, OK, you have this business and this this real estate portfolio and all of a sudden you could sell that underlying business and then still collect off the real estate portfolio.

Just sounds like an amazing move, an amazing career over that time frame. So I love these examples. These are so fun. And I think this is showing what the opportunity is when it comes to to franchising is figuring out a plan and kind of, you know, coming up with what's going to work best for you, which is what you guys help with as well, which I think is cool. And, and this is something that I think is, is a powerful thing that people should be at least considering or thinking about when they are looking into, you know, starting a business or getting into entrepreneurship.

And what categories are you most excited about right now? You mentioned, you know, one thing that you just mentioned recently was, you know, talking through, you know, the indoor golf simulators, for example, I know we've talked about indoor golf simulators. We do this this series on on the show called side hustles that can turn into full time businesses.

And it's one of those things that we're trying to say, Hey, if you're going to start a side hustle, we want you to start something that can turn into a full time business. Well, we mentioned, you know, starting something similar to that where it was a indoor golf simulator and I've never gotten more emails in my entire life about a business than that one specifically. I think it's a lot of people were were pretty interested in that.

But what are some of the franchises or I guess the categories that you think are are high opportunities right now? Not that I'm looking for trends, but I'm looking for macro things that are going to exist for at least a 5 to 10 year period. So when you sign a franchise agreement, you're signing up for a 10 year commitment. And so I'm always like, all right, a lot of things are cyclical in life.

Things that were not popular 10 years ago became, you know, popular now, but they were popular 30 years ago and they go through these these cycles. And so 1 for me right now is the aging, you know, baby boomer population. There are 10,000 people a day turning 65, you know, or older.

And so there's just such a huge supply of people wanting in home care or better quality assisted living care and there's just not enough, there's not enough supply for there's demand coming online every day and there's just not enough supply for we've done a few kind of field cases where we call acting as you know, a child of an aging parent saying that, hey, we need, you know, we're looking for XY and Z and all of them have wait list beyond 10/11/12 months.

And so there's clearly demand, there's not enough supply and there's tons of home care franchise opportunities to get into. One of them is first day home care. It's 143 to 250 K to get started. And the top franchise there is doing $12 million a year in revenue.

And so it's very low cost to start. You're not, you know, a staffing agency essentially is underlying business model because you're training, you know, care providers. But I wouldn't have necessarily thought of getting into that and you know, you know, serving that demographic. And then same with some of these other kind of unsexy things like auto, you know, repair and transmission.

There's one called Mr. Transmission. It's like a yeah, a Meineke or Mako. It's less than 3401K to get into, but the average locations doing just under a million in revenue with with pretty high margins, about 47%. And so again, these kind of unsexy things that you might not think of ever.

I would never think about owning an auto Body Shop. But again, I don't need to be the one in there changing oil and rotating tires. I'm need to be the business mind behind it, putting the deal together, building a management layer, staffing it and then acquiring customers. But the day-to-day itself is and in any of these businesses, you know is up to the team that you build, not you as necessarily the business owner or the operator.

I can tell you what I my first, when I worked in the corporate, I worked for the largest in home healthcare company in the country or one of them, and I can tell you how profitable those are. That is a great, I didn't know they had franchises for those. I think that's absolutely fantastic is having the ability to kind of look at some of that stuff like you're talking about here and seeing, hey, even some of these these businesses that are out there that are, you know, just serving people and they're going to be recession proof.

People always need healthcare. They are always going to need their car fixed. They're always going to need these things that are in place. I think it's a really, really important metric to look at long term. And one big thing I know a lot of people talk about now is home services. And that's a big thing that, you know, it's, it's trendy for people to talk about like it, you know, starting up a home services business.

But things like HVAC or plumbing or roofing, you know, garage doors, anything like that. I think is, is some of those boring based businesses. Are there a lot of those out there when you get when it comes to franchising that you can look into? Because I know we get those questions all the time on on those types of businesses. There are tons and this is what shocked me against like Benjamin Franklin Plumbing is a well known, you know, plumbing brand.

It's franchise, same with roto-rooter and Mr. Sparky and a lot of these brands that we actually might have used or have seen regionally or nationally. You think, oh, that's like a local regional business or that's a, you know, mom and pop. And the reality is, is it is a mom and pop, but they're a franchise of a larger system and brand.

And when we talk about in purchasing power, imagine how much these franchisors and these larger chains, the advantage they get at buying all the parts and materials that nationwide bulk versus again, you and I buying, you know, pipes and, and different things that are up to you.

So like doing this alone, you can get beat up on price by some of these, but you're still as a franchise, even though you're paying a royalty, you're you should be more than making up for that royalty in the form of cost savings everywhere else that makes you more profitable in the long run. That's a great metric to look at too. I didn't even think of that was is looking at, you know, you know, how much can you save on, on some of the supplies that you have to, to utilize?

I think that's a really, really good metric to look at. When you start to think about that, how important is recession resistance? You know, I kind of mentioned, you know, that would be one of my big worries as a franchise if I'm looking into something like a. You know, a location, for example, like a giant location that's like my kids go to trampoline parks all the time.

So if I'm looking at a trampoline park, my worry would be, hey, there's a recession and people are, you know, like a 2008, 2009 and people are cutting back on some of the the excess that they have in place. You know, would that be something they would cut out? And or, you know, I'm just trying to think of other things that that could be, you know, something that that could cause you to be cut out during recession proof.

Is that something that you look into when you are evaluating franchises? Yeah, absolutely. And whether again, franchise or independent, you're doing it, you're listening to this episode, you're doing, you know, ETA or entrepreneurship through acquisition, you've got to look at macro trends. Again, franchising is just a business model that serves many, many industries and many, many different types of businesses.

And so I challenge people as you're thinking about the next 5 to 10 years, is this going away? What happens if there's a recession? What happens if oil and you, some of the, the, the friction in the Middle East continues like what, what kind of downstream impacts are going to happen to you? Because those are things that you can control in the decision making and diligence process as you're thinking through.

But once you're in it, you're not changing the price of oil, you're not changing some of these macro things. And so you need to be thoughtful upfront because that part you can't control. If you decide to invest in this or build this business or buy this business or franchise this business or not, you really need to be thinking 5 to 10 years out and in your models, if you're building, you know, sensitivity or your different scenario analysis, what happens if there's a recession?

Are bagels going to stay around and your people are going to buy them? Are they going to make them at home or not eat them anymore? They're going to go to trampoline parks or not, You know, what are these things that stay versus not? And if you're going to bet on something that's a little bit riskier, you better be sure the good years are really good so that you can weather the storm through the bad, you know, one or two years.

And that over the 10 year period, it kind of averages out to where you wanted to be on that investment in that use of your time and and capital. I love that and I think that's, that's where a lot of people just need to make sure that they're, you know, evaluating that and evaluating that long term. Like you're saying, you know, the next 5 to 10 years, where is this going to be and what is this going to look like in all different market cycles?

How would that, how would this kind of weather those storms if you had, let's say, for example, let's play a game, let's say you had $250,000 ready to go and you had $250,000 liquid. Maybe you, you grab some financing. If you wanted to, what franchises would you be the most bullish on? What would be the ones that you would kind of look at or start to target currently because you have all these this data that you look at all these different franchises out there, Are there any that you absolutely love?

Yeah, so there's a few categories and and you know, even brands within those categories. So I, and again, some of this is bias because I'm actually doing these, but like the golf simulators I really like because the investment was, you know, it's 300K to 450K to build 1. But I can, I know I can go get financing so I can get a couple of these open, but they're very hands off compared to other options.

And I running a startup and you know, tech tech startup cannot be in the day-to-day as much as I would need to be in a different type of business. But they kick off 100 to 160 K in cash. And so we have the rights to five of those in, in, in Minnesota, in the Midwest area. And I have a partner there as well.

So that helps. I couldn't do this alone. I need an operating partner and so on. That can be more hands on. So I love golf simulators. I love there's a brand right now called Pop up Bagels. It is a very hot brand. They have very high average unit volumes and revenue and very high margins as well.

Whereas most food you're spending 23 million to get open and they have 10 to 15% margins. Whereas this one, the build outs 400K to 650K, same type of revenue as a large format QSR, but a fraction of the fixed costs and margins that are two to three times higher than you know your typical QSR.

So I really like that brand. And then some of the home services brands that I mentioned, they're way less to get into. You can service a huge territory. So the garage renovation business I looked at personally, garage Kings over 1,000,000 in revenue, high margin, near 45 to 55% margin, but a couple 100K all in to get started because it's a little bit of equipment and a little bit of materials.

But the rest is up to you. And I like businesses that I'm in control of and it's not a build a retail location. And I hope that I picked the right site. I like businesses I can be very flexible and mobile on and a lot of these home services brands give you that kind of lateral movement and leeway to do so.

I like that your thought process on that because even like it was some of the the biggest brands out there that you think would never fail. For example, there is a Chick-fil-A that just opened right next to to where I live. And I was talking to the owner the other day. I was in there kind of just having a conversation with him and he said, you know it, it had the smallest line I've ever seen in a Chick-fil-A.

Like usually when you drive by a Chick-fil-A, you can see the line, you know, going out the door and onto the, the road even sometimes. But this one like never had anybody in the drive thru. And I, I was talking to him. I was like, how you guys doing? He goes, I don't know if we're going to make it. I think we just chose the wrong location and we're in the, we're in the wrong spot right now. And he seriously was like concerned about not making it out of Chick-fil-A, which I just could blows my mind.

I never thought that would ever happen. But it was one of those things where like, Hey, it reminded me, OK, well, if you have a site or a location, you got to make sure that you are careful about that. And so I love that that you mention that because, you know, some of these service based businesses, you don't have to worry about that as much, but you've got to worry more about the equipment and they managing the employees and the staff and all that kind of stuff.

So really, really important to have that in place and then having a sales process that helps you kind of get there to win. So I think that's a that's a really important thing just to note. So are there any trendy franchises out there right now that you think are over hyped or any industries that you feel as though or just, you know, over hyped for a lot of people out there?

Or can you kind of do well with any of these businesses? Yeah, I think nothing can do well with any of these businesses, but I think the right person in the right franchise is a great outcome. I think you could take the wrong person, but the right, the absolute right franchise, the trendy thing, the hot thing, the thing that's working, it has staying power and it's still be the wrong franchise because it was the wrong person in that business.

And so all that aside, if I'm just looking at trends like the, the, you know, the flavored drink trend right now, like Swig and some of these words, you know, the sugary drinks and you know, it's the margins are great on these products because it's just syrup and water, right? And so like very profitable businesses, but it feels like crumble cookies, you know, a little bit more crumbles.

Did it had this meteoric rise and, you know, great economics. People are making a ton of money, but they're kind of falling off of a Cliff now because people are getting healthier and they don't want to eat a cookie that has 1200 calories in one cookie. And I think the same is going to be true for these like kind of energy drinks, sweet drinks, 7 brew coffee, same thing.

I've talked to, you know, some of their team and they only let people in as franchisees now if they're willing to develop 60 locations or more. And so they're just at this scale where I'm like, do you need thousands of these built everywhere? And I know, you know, we have a big coffee, coffee culture and I just, I don't know that this, the sweet drinks I, I question is like another trend.

And I don't know how long it can be here to stay. I think you're spot on that there's been two swigs that have been open close to me within like I would say they're like 5 miles apart. And it's just interesting how fast that brand is growing. So yeah, the same thing with the crumble. People are getting healthier and I think that's a, that's a great thing to, to, to think through as well, because some, some of those seem like they're great at the time, but then you got to think again, 10 years out, what it, what does that look like, you know, in the next 10 years?

That's really important. If someone's looking to, to start in franchising and they want to build generational wealth. And maybe it's, this is, you know, a lot of our listeners are, are planning long term, They're long term investors. And so they're interested in things like that and kind of thinking through what is my long term plan when it comes to this? If you were to, to look at this or, or think about this to build out a, a franchise portfolio over the next 10, maybe 20 years, how would you do that?

Let's say, you know, you, you start with one location in one industry. How would you kind of build that over the, oh, the course the next 10 to 20 years? Would it be kind of hey, let's start to operate, you know, some of these franchises in the first couple of years in in one industry and expand to other ones or how would you think about that? Yeah, so similar to the story I mentioned, the guy who went from zero to, you know, 90 in in seven years, He started as an independent owner of a butcher shop and then it was a, you know, Orangetheory, it was a fitness concept and then it was food.

And now he has restore Hyper Wellness as well. And then he has it's AVR kind of gaming concept for the kids, birthday parties and stuff like that. So very different businesses, right? The core of what he does is food, but the the the theme there and what I want to draw on is he just got in the game.

And So what I really encourage people to do is the first one, it's really about, is it something that you're going to be good at fit wise so that you don't quit too early? Because once you're out of the game, it's over, right? Like you're not, you're not getting back in. Or I mean, you could, but like you're out, you've given up. You need to stay in it.

And I think you have a higher chance of staying if it's something that you're aligned with, that you're good at, that you're starting to make some money at. But it doesn't need to be the 10 out of 10 perfect thing. Just get in because once you're in and this is the unlock, you start seeing deals from other franchisees. Hey, what if we bought this together?

You start meeting people and you become partners with them. And maybe you don't own 100% of the second or the third one, but you have a partner now and you're starting to own sixty 5040% of 10 locations, 12 locations. And those are kicking off cash. And now you're buying more on your own again and you're starting to diversify your portfolio.

But the main thing I've noticed is it's kind of a good old boys club or good old, you know, Girls Club and free franchisees share deals and tips and tricks and things with each other. And you just, you need to be in the game, I think to start building that, you know, generational wealth portfolio. And so my advice is don't wait, don't overthink, find the right fit.

You know, it's 80% of the way there. Get in, operate for a few years, learn the hard way and now start adding more from all those lessons you've learned. You might learn different segments are better for you, different brands, different type of financing structures are better for you. You find partners, you find operating partners, and that's all a result of you being in the arena.

It's not going to happen behind a computer or sitting on the sideline or talking to your friend at the bar about maybe doing it someday. Like you have to get out and take action even if it's not perfect action. When people structure this way with operating partners when it comes to franchises, does the operating partner, is that one of those things where, hey, you got to go through this process as both of you are going through that process And how do they kind of structure those deals?

Does the operating partner have a certain percentage while the the person who's put up maybe the capital has another percentage or how do you think about those a lot of times? Yeah. So depending on the caliber of experience, if it's a person who's you've been AGM at a couple restaurants and they've never had equity, it's ideal to keep that person under 10% for a number of reasons.

That's the threshold where lenders start to ask for a lot more from that other person, the franchise or ask for a lot more from that person. It just overcomplicates things administratively and, and otherwise you could do phantom equity or something else if you really want that person to have upside beyond the 10%. But in many cases, 10% of the system is wildly valuable, especially if they're getting a salary on top of it.

It's valuable to use the capital partner because now you aren't in the day-to-day weeds as much. And that's kind of a shortcut to that step of I do it, we do it, they do it, you're getting we do it out of the gate versus I do it because you have capital that allows you to shortcut the I do it stage a little bit. But I, my advice is you should still learn kind of the core day-to-day of this business.

In the event that operating partner doesn't work out, in the event you need to know which questions to ask and how to work with and coach and you know, in some, some ways manage that that partner a bit. And so I tried to shortcut the, I do it too much because you really got to know the business from the ground up. I think, especially if you're in a scale portfolio of, you know, similar locations.

But my advice is keep it under 10%. There's tons of amazing operators out there that would love the opportunity to have some equity because they've never had it before and it doesn't. The grand scheme of things, I don't think it costs you all that much. And for that Peace of Mind and you have freedom of time and choice again, I I can't put a price on it.

That Peace of Mind is definitely worth 10%. I mean, that's just that for sure. I think that's a that's a big, big thing. So I think that's that's wonderful to to know. And then for people out there who want to build these up and they want to build out these businesses and maybe a portfolio, but they want to also have the ability to have the option to hand it down to their kids.

If their kids want to operate this or run this, how does that work? And do you know, are, are some of the franchises weary of having, you know, kids kind of take over or is this something where you can kind of do what you want once you've been operating for a certain period of time? So this is where the things are a little ironic.

So if you think about a franchise or, and how they make money, you know, franchise fees upfront, one time ongoing royalties, as long as that business is producing revenue every month and they're getting a royalty off of that revenue that's being produced. And ideally it's growing and not shrinking. Not that they don't care who the operator is, but they kind of don't care who the operator is.

So, so actually whenever there's a transfer or someone going to sell, it's a bit of a headache because they're like, OK, Andrew's selling to Alex. I hope Alex is a good operator. What's his background? We have to kind of re vet Alex, but they're not getting anything net new different. They're going to keep getting the royalties on the business that I'm buying from Andrew.

And now they have to train me. And so that they'll charge like a transfer fee. It's much less than the initial franchise fee. Let's say the initial franchise fee is 50 grand. They might have a 20K transfer fee that they basically break even on to train me and get me up to speed. And so it's kind of a headache sometimes. But now if Andrew's kids who have kind of been involved in running the business before, they've been around, you know, the the scene and they've they've made managed shifts before as a franchise or like, OK, great.

It's staying in the same family. That probably means Andrew is going to be a little bit involved in the background still. So we kind of get this like earn out for free a little bit where Andrew staying involved because he wants his kids to be successful and his kids have been around it already. They're still probably to charge you technically the transfer fee. They might waive it in that case. But the thing about people's incentives is what I usually challenge people on and the franchise or in a perfect world, Andrew just ran it, you know, for 50 years because they don't hear from you ever.

And that you other other than the royalty that you're paying every month and makes their business more operationally is simple. That makes sense. And I think that's probably where, you know, you just plan for that. You kind of have that thought process there where it's going to be, you know, potentially have the fee, but it's not it's, it's partially just a break even on, on their end and it's just having that available.

So I, I love that. I think that's, that's great. And so this has been wonderful. I think this is this fires me up every time. You know, I start to think about this again, and I think this is one of those things where I think a lot of people are going to get some great Nuggets out of this, Alex. So if people want to find out more about you or they want to find out more about Franzy or anything else that you're doing, where can they go and find out more about?

You on all socials. I'm Alex from Franzi. So Instagram, Tiktok X, you know, threads, you name it. We have a podcast called the exit plan where we interview folks that have left corporate to go start businesses, franchise or not, as well as folks that have scaled large franchise systems and then exited and sold, whether it was to private equity or or other operators and how they did it.

So the exit plan is that then on LinkedIn, just my name, Alex Smersnack, we do a lot of content around educating people on business ownership, buying, how you finance it and how you scale it. Awesome. Well we will link all of those down below in the show notes for you guys to check out.

Alex, thank you so much again. This has been wonderful. Thanks for having me. It's truly an amazing experience and appreciate the opportunity to come on and share all things franchising.