#95 - Franchise Investing 101: Insights and Opportunities with Cliff Nonnenmacher

[00:00:00] Hey, welcome to Passive Income Pilots, everyone. Another week of financial education with your friends Tait and Ryan. Ryan, what's up, man? You're back from Detroit, dare I ask? Yeah, week of agony and disappointment. You know, we're good friends because I can laugh with you and at you and nah, I'm kidding.

[00:00:19] I know, I know. You know, the Lions, they had a good year and you can sit here and you can say, be disappointed and be down on yourself, but they were 15-3 and had it undefeated on the road and they had the best season they've ever had in franchise history. I mean, it's tough for a team not to make the playoffs or make the Super Bowl, I should say, or make the next round, but it was fun.

[00:00:44] And, you know, most importantly, I had an awesome trip with my son. He had a great time. If you notice, my voice is actually still a little bit hoarse from cheering so much. Nice. So... We had a great time and we cheered our butts off and it wasn't enough, but hey, that's okay. Commanders are going to the next round and as long as the Chief get knocked out, that's all we care about. So go Buffalo. Well, I saw a great photo of you with Rowan on the airplane out there. That looked like a blast. And I feel your pain because when I was...

[00:01:13] I was a football fan once upon a time when I was in college. I lived in San Diego and I was a big Chargers fan at that time. They were doing really well. We had LaDainian Tomlinson and Phillip Rivers and man, we had an amazing season. And they blew it in the championship round right before the Super Bowl. So I feel your pain, man. I'm sorry. But I'm cursed. I've never actually attended a Lions game in person and they've won. So got blown out in San Francisco when I went last year. Not blown out, but they got beat the Buffalo game this year.

[00:01:43] This game when I was a kid. So I think I'm just going to watch the rest of the games from my couch and spare everybody the defeat. There you go. But no, I'm excited today. You know, speaking of Michigan, you know, I grew up in the Detroit area and, you know, worked at Subway, worked at Arby's, worked at many different franchises. And I've always wondered, like, what does it take to own a franchise? How do you buy this thing? How do you find them? How do you pay for them? How do you know how to value them? You know, how can you assess what to pay?

[00:02:11] And so, you know, started doing this podcast a couple of years ago, obviously. We're almost to our 100th episode coming up soon here. And we wanted to have a franchise person come on to talk about, you know, how to even get connected with the right people to buy the franchise. So excited about today's guest. You want to share with our listeners who it is and what he's talking about? Yes. Cliff Nonenmacher, he is a franchise consulting guy for corporate executives for 20 plus years.

[00:02:38] He has a ton of experience in multi-unit franchisee, franchisor, and he's a consultant. So he is paid by franchises to consult and walk people through the process. It takes months of working with the clients that he works with. The cool thing is, if anybody from the show is interested in potentially owning a franchise, they actually don't have to pay out of pocket. The franchises that he works with pay him to walk people through the entire process.

[00:03:07] They also have a podcast on where they talk to founders who have, you know, bought franchises and are working their way through the process. So, you know, buying businesses is something we've talked about on the show before. But, you know, one of the things I love that he says is that it's very hard to build a brand. And Ryan, you know about this. I know about this. We've spent a good part of our adult lives building our respective brands. And it's a long process.

[00:03:35] So when you have the opportunity to just buy into a brand that already exists, it already has, you know, nationwide recognition or even something that's smaller. But it already has it set up and it's really the SOP is already built for you. All you got to do is just go and execute. So I was talking to somebody recently, a pilot who owns a UPS store. And it's funny, my dad almost bought a UPS store way back when I was in high school. And that seemed miserable.

[00:04:04] But there are a lot of other franchises that you can buy. And it's always an area that has fascinated me. So it was a really interesting episode. And I think at the end we talk about how they don't have to be franchises that are brick and mortar stores. You can buy a franchise that you can do from your house or from the road. You know, I just want to put the disclaimer out there. You know, I've never worked with Cliff. And, you know, the episode is amazing. But we've never personally, like, gone out and bought a franchise and done the thing with him.

[00:04:31] But the conversation is very enlightening. I think he has a world of, you know, ton of knowledge about franchise ease of franchisors, the ins and outs of it. And, you know, and we leave his contact information at the end. So if you're interested, you can reach out to Cliff and he can kind of walk you through it, you know, getting into buying one. But I think you nailed it, though. One thing that I loved about this is like, you know, when I was working for those franchises, I was like, how do I even get into this?

[00:04:58] And it's cool that we're connecting the community here with somebody who can help you actually get into franchises. So it's a super fun conversation. A couple of cuss words. We're not going to cut them out. So if you're in the car with your kids, maybe keep this one for your AirPods. But let's get to the show. Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators.

[00:05:27] We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Cliff, thanks for coming on to the show. Thanks for having me, guys. I appreciate it. You know, ever since I was, I think in high school, I've worked at a Subway, a Dunkin' Donuts, an Arby's, tons of different franchises. And I've always been fascinated by owning one. But it's always been like this big mystery to me.

[00:05:54] Like, how do you go and buy a franchise, which is what we're going to talk about and get into today. But Cliff, before we get to that, why don't you just tell us a little bit about your background and who you are and how did you get here today? Great. Thank you. Thank you both. My name is Cliff Nonnemacher. I've been a serial entrepreneur my whole life, ever since I was a kid. Skipped college, went straight to self-employment. I've done literally everything you could obviously do as a kid, right? But I've done some unique things.

[00:06:21] I happen to live near a country club, so I used to rate golf balls out of ponds and sell them at the country clubs and do things like that. And then ultimately started trading. So I started making money at a young age. I started trading, became an investment banker. I was with Solomon Smith Barney for many years. I was with a group. We managed around $250 million, which was a lot considering the year I was doing it, which was the Asia Condaysian 2000. Got involved in franchising right after that. Said to myself, I got to go back out on my own.

[00:06:51] I just love this world. Like you said, you've always been intrigued. I've always loved just being on my own, not being part of an employment group or anything like that. Just like being on my own. I started getting involved in franchising as a master. There are layers and we can get into that. But a master franchise would be the highest level just under a franchisor. And scaled 36 printer cartridge remanufacturing businesses in New York as a master. So I own the rights to New York and Connecticut.

[00:07:20] Left, worked with PE firms, managing different businesses. Over the course of my career, I've had 12 in total. I'm invested in some businesses now. When I make investments, it's at the franchisor level. But I think franchising is one of the greatest methodologies of brand expansion ever. No one has seemed to create a better idea in terms of, can I scale with other people's money? And I think it's the fastest way to create wealth for a person who, let's say, is not entrepreneurial, not a visionary.

[00:07:48] They're not Elon Musk, right? They're not Bill Gates. They just want to create wealth. And it's like, look, let me buy your brand, your proven system. Let me execute flawlessly. And do I have a high chance of success? Absolutely you do. A huge high chance of success. Follow the model, execute flawlessly. You should be successful. That's what I love about franchising. Ordinary, average people wanting to speculate to accumulate wealth and doing it through the vehicle we call franchising. Again, which is a methodology of expansion.

[00:08:19] Sounds a lot to me like flying an airplane. You know what I mean? You get hired in an airline. You're like, push these buttons and execute flawlessly. We're going to write the SOPs for you. You don't come up with the procedure at your airline. You just follow it, right? Interesting. Cliff, can you walk us through the history of franchising? I want to know, where did this idea come from? I mean, I've seen the founder, Ray Kroc, McDonald's thing. Was that the genesis of franchises?

[00:08:48] Or what's the history behind these things? It goes way, way before him. Singer's sewing machines. People could argue Ben Franklin was really one of them. There's a lot of arguments about this answer, right? Like, where did it really come from? Singer's sewing machines, early 1900, seems to be a lock. A lot of people say that Ben Franklin, he controlled the paper. He controlled the printing presses. And he controlled the ink. He controlled the ink.

[00:09:17] If you wanted to be in that industry of publication, information, news. So it is a very old methodology of expanding. And the concept behind it is, we can grow this brand organically. Or we can grow using other people's money, other people's skin in the game.

[00:09:37] And the fact that each investor has skin in the game, they're going to take this way more seriously than had we put up the money, hired an employee who will give kind of half effort to build the brand. So when you look at these concepts today, it's like, look at Chipotle as an example. It's like they said, no, that's okay. We're going to do it organically. We'll own it. We'll drive up shareholder value. We'll go public. We're going to control every location. So there's one. Starbucks, pretty much the same concept.

[00:10:07] No, we don't need anyone. We have a ton of money. PE, venture capital, you name it. Investors going public. We'll do it. And then there's McDonald's. His attitude is like, no. I think we could scale this thing to 30,000, 40,000 units and collapse time and do it in a fraction of the time it would take to do it organically. Let's use other people's money and scale it. We'll own the dirt. They own the brick and mortar. Let them run it. So all these different ideas, Subway, same way. It was all based on franchising with another layer.

[00:10:37] Subway did something very unique, which is called master franchising, where they had development agents, 120 DAs across this country. A lot of people don't know this at all. 120 DAs, development agents of Subway, oversee 30 plus thousand locations. They're some of the wealthiest people in franchising these development agents. That's interesting. So, yeah, and I want to pull on what Tate was talking about. I mean, I started my own business.

[00:11:06] I've scaled it to over 200 employees, 750 million in assets. And let me tell you how hard it is to build your brand and build all the processes and hire everybody. And that's why it's like, you know, I love working, you know, in the airlines because I love that you can fly with any pilot and it doesn't matter their background or anything. Like you show up and everyone knows the procedures and everybody looks like, let's go. It's plug and play.

[00:11:32] One downside to franchising is you got to pay that franchisor money, right, for all that time. But I just wanted to, you know, before we talk about the downsides necessarily, kind of focus on that they're giving you a lot of value in what they're doing, right? It's setting up your brand and co-advertising.

[00:11:51] I know, like, Taco Bell spending hundreds of millions, if not more, on Super Bowl ads and, you know, primetime television, making it so you want to go order that, right? And then as a franchisee, you're going to benefit from that. So can you talk about some of the fees and sort of what, you know, kind of some of the downsides maybe to franchising? Absolutely. Yeah. I mean, I think it's important, right? It's not all kitten whiskers and lollipops and good feelings.

[00:12:18] Every deal has a little bit of hair on it and you have to weigh that and say, okay, I understand the risks. I understand the upside. And as I said, I always look for an asymmetrical deal. Is it pro me? Can I get this deal done? Can I make money? Do I have an exit, which a lot of people don't talk about? I need liquidity. I want to get out of this thing and reserve the right to change my mind. A lot of the issues that people have with franchising are really not an issue for me. Um, and I'll explain some of the issues.

[00:12:49] One is I'm going to pay you a $50,000 franchise fee to join. Yes. What am I getting for that? The mark, right? 25 years of intellectual property, right? Well, as you said, national brand fund, national advertising, a roadmap to success, a blueprint to avoid pitfalls. Like literally you're getting every answer to the test, right? But that's a one-time upfront fee. What about the ongoing fees? We're going to pay us a royalty, a royalty on what?

[00:13:18] My net? No. Nets are highly subjective, right? So we're going to pay it on gross. You're going to pay, you earn a dollar, you pay 6%. Let's just use a 6% royalty. Make a buck, pay six cents. Every dollar you bring in that register, you're going to pay six cents in royalty. A lot of people take issue with that. Then they take issue with the national ad fee, to your point, which is how you get on a Super Bowl ad or how you get on national TV or how you get on Facebook ads or how you do SEO, SEM or how you do anything in this digital world.

[00:13:48] You need money from your national brand fund. I tell people all the time, I go, do you know why a royalty is 6%? And of course, everyone's like, why? The brand does 6% of the work. You're going to do the work. It's a 6% royalty. It's not going to kill you. That's about as much work as they're going to do. You own it. You hire. You fire. You train. You handle your online brand reputation. You handle Google reviews. And you handle scaling the business.

[00:14:16] I will gladly and have gladly, of all the brands that I've owned, pay to royalty. I have never thought twice about paying to royalty because I believe, as an entrepreneur, in collapsing time. You too are outliers. You're incredibly intelligent. You're not the average. Okay, you're not. You're the exception to the rule. If you take the average of society, right, you're not it.

[00:14:41] And an average person who is not as creative, doesn't have that entrepreneurial ability, they will gladly buy a franchise to create wealth in this country. It's the greatest country ever. It's one of the... And you know, no one said it better than Ralph Waldo Emerson. If you think becoming a millionaire in this country is difficult, you haven't tried. Period. Because it's not difficult. It's actually insanely easy, especially using tools like all the things you talk about on the show, number one.

[00:15:10] And in addition to me, I mean, let's be honest. It's like, what's the problem? I can't retire on time. How can you retire on time? You had a 60-year fucking runway. How did you not retire on time? I mean, how much longer of a runway do you need to create wealth in this country? Seriously. It's so true. So as I was in high school working at Subway, and I started dreaming like, okay, how do I buy this Subway franchise, right?

[00:15:39] And I kind of talked to the owner and he's like, oh, you got to have like experience and you got to have a lot of bunch of cash and yada, yada. So let's just talk about a freestanding franchise, right? So I've also heard of investors. I know pilots that I've flown with personally who actually don't even own the franchise. They own the land that the franchise sits on, right? So can we kind of unpack the difference between being a land owner and just getting a coupon and being completely passive?

[00:16:09] And then also then being the operator that owns the brick and mortar on top of that and kind of the interplay between the two? Super rare to buy a franchise as a startup, just entering the world and getting involved in a real estate play. Very uncommon, at least in my world. These are much higher level deals that require a lot of underwriting, a lot of debt, a lot of liquidity, right? So you're right.

[00:16:35] When you get involved in the bigger deals, you could have your franchisor own the dirt like a McDonald's. They want to own the dirt. A matter of fact, to your point, and to get away from like multi-billion, multinational brands and say, come on, bring it home a little bit. I don't want to buy a McDonald's. I have an oil change business as an example. Simple oil change business. Well, guess what? A private equity firm sat around a boardroom table saying, what is the easiest way to buy raw land and monetize it?

[00:17:05] These guys all started sharing ideas and said oil change. So if we buy the dirt for the franchisee and we build a three-bay oil change business, we're talking about brick and mortar, no trim. This is like cinder block construction. This is cheap, easy, and super fast. Well, that is exactly what this PE firm did. They went out. They aligned themselves with an oil change business that was scaling through the country, and they made this representation. We buy the dirt. You put up the building.

[00:17:34] You will pay fair market rent. And they scaled the shit out of it. It's a beautiful concept to your point, right? Where everyone's working together. It gave you and I the ability to say, wait a minute. I could scale with like class A space, commercial real estate for basically free because the PE firm owns it. And all we need to do now is put up a brick and mortar brand. By the way, the PE firm builds the brick and mortar. They build it. You're just a tenant. Yes. They're buying the dirt. They're building it. You just pay fair market rent.

[00:18:04] So love that concept. Was that Grease Monkey or who was it? Strickland Brothers. Okay. Strickland Brothers did it. Nice. Excellent unit economics. What we call an item 19 in our world. You guys like to riff revenue numbers. We're highly regulated. Just so you guys know, I know you want to get to the meat of money. And I get it. And so does your audience. Please understand we're regulated heavily by the FTC.

[00:18:32] Wall Street can make more misrepresentations about making money than I can. Think about that. No, I'm serious. Think about it. A money manager can hold up a 20-year chart. 20 years. This is my mutual funds performance. Right. But didn't you just get there last year? Yeah, don't worry about that. Don't worry about the last 19 years that was managed by another money manager. You've only been there a year. You have no right holding up a 20-year chart of an ETF or a mutual fund. Drives me crazy. But in franchising, we are highly regulated.

[00:18:59] And the only way we're allowed to talk about money is if it's in writing in a section in the FDD called item 19. This is an investor's best friend, by the way, in franchising item 19. Okay. And that's where you make a financial performance representation. Yeah. So in that oil change example, that's an example of a private equity firm basically going and saying, hey, we're going to hand you the keys to this building. You just have to go do oil changes and make sure your staff is there. And here's a playbook for how you do that.

[00:19:26] So then you pay some kind of franchise fee like you talked about. And then you pay the royalty fees and you just run an oil change business. Great. That's right. And what kind of process? Do I have to have any background in oil changes? What do I have to do to even find that opportunity? How do I even get into that? Ryan, that's a big issue in my business. People feel two things. One, I need to have direct industry experience in this, right? I'm not comfortable. Oh, the brand doesn't care if you have oil change experience.

[00:19:54] Yeah, but I care and I lack confidence and I don't have direct industry experience. Therefore, I'm out. Boy, I just hate that thinking. I really do. It is. So can you imagine? I spoke to an IT guy the other day. Anyway, this guy's over here with a visa and I'm like, so what do you do? He's like, I do cybersecurity. So I'm having a conversation with him about him being replaced by AI. And everything I brought up was a no. I go, man, like you don't like anything. He goes, well, I'm a cybersecurity guy.

[00:20:23] I go, are you telling me that you will not reinvent yourself? You won't try new things. You're just typecasted like an actor. You're cybersecurity. PJ Patel. That's it for you? Like, this is it. This is your life. He's like, yeah, it sucks. I'm like, man, I just can't imagine. I have been involved in so many things. I have not known anything about any of them. All I care about is fundamentals. I care about scalability. I care about exit strategy, right? I care about margin.

[00:20:54] I care about weathering economic cycles. I care about proof of concept. I care about the franchisor's executive team and financial stability and their ability to support me. Like, that's what I care about. Okay. So you just laid out a bunch of things. I was going to ask you, what are the top skill sets that you think is important for a franchisee to have? And you just laid out a whole bunch of things. If somebody's listening to this and going like, I don't know anything about all the seven

[00:21:21] things that you just listed, how do you learn those things? Yeah. I think aligning yourself, well, one, that's what we do, right? That's why I'm here. I'm here to promote, let's say, my brand and to help educate folks. Don't do this alone. Like, align yourself with a trusted advisor somewhere that's been there. As they always say, don't ever take advice from people that aren't where you want to be, right? We're there. We've done what most investors are trying to do. Take advice from us.

[00:21:49] Let us guide you and guide you prudently and be a good steward for your money. But don't do this alone. Because most people are emotional, they're highly irrational, and they lack discipline when it comes to investing. And I think that's a big issue that I learned as an investment banker. Why do people make all these missteps? They lack discipline. They lack some strict adherence to due diligence, but they just get excited about things. And it's like, no. So working with a consultant can help them. I think something else that can't be understated is they lack context, right?

[00:22:18] So you get excited about a Subway store because it's maybe the one or one of two or three things that you've heard that you can do. And you might have this whole world of other things that might fit your personality better or your lifestyle better. I think it's a good opportunity since we're on the subject to just talk about what it is that you do and how you get paid. Thank you. We help investors, in your case, let's say pilots and pilot affiliate family members and whatnot.

[00:22:47] We help them identify investment opportunities that align with their investment objectives. So our whole process is centered around the listener. If the listener has little birds chirping in the nest, or is the listener an empty nester? Is the listener five years away from retirement? Does the listener not have a pension and wants to create an annuity in retirement, right? Whatever they're dealing with and for whatever reasons that they're here, it's like, okay,

[00:23:16] let's center our process around you and what you want. Like you want to be at more soccer games. You want to be in less terminals. You want to be less here. You're actually disenfranchised with flying. You don't even want to do it anymore. You want to completely reinvent yourself. We're all here for different reasons. And my job is to help folks navigate this process and determine, more importantly, are you a fit for franchising? Right? Some people are not a fit. Like I have conversations with people all the time. You know, their first reaction is, oh man, we could sell hot dogs there.

[00:23:46] No, you're not selling hot dogs. And you're not doing tattooing in the back. Like follow the model. People get a little ahead of their skis, right? We were talking a little bit before the show too. I mean, this is passive income pilots, but this is not passive income stuff, right? So, but, you know, we have a lot of spouses of pilots that listen to the show and maybe they don't have full-time work and they're looking for something to do on the side or to learn about.

[00:24:12] And, you know, this might be something for them to your point or maybe not, but this is active, right? This isn't active. This isn't like, you know, put the money in and put your feet up. This is an active business that you'd be starting, not something that is very passive. I think it's interesting, you know, we also talked a little bit too about how, you know, when I think of franchising, I think of like Wendy's, Taco Bell, Burger King, you know, Subway, Dunkin' Donuts, whatever. But there are so many other types of non-brick and mortar, maybe more at home based franchises

[00:24:43] that are trending really well, that, you know, have things that people, you know, if you think about your day-to-day and your needs, you know, and you think of what's like, what service or product do I really need? And then you can kind of be like, oh, that franchise would be really popular because it's servicing a product or a need that I need to, that is popular, right? So can you kind of talk to more about, you know, sort of the non-brick and mortar oil change, Taco Bell kind of franchise?

[00:25:12] I personally love the non-brick and mortar space. And I think you're right. If you said franchise to a hundred people, the knee-jerk reaction is going to be food. I don't think anyone is going to say super cuts. You know, I just don't see it. Or pet grooming. I think they're going to immediately go to them. And what's crazy is a lot of them are going to tell you things that aren't even franchises, which is nuts. You know, they're going to say something like Chipotle or they're going to say Starbucks. And it's like, okay, like you really don't understand the industry. So I want to go back real briefly to Tate.

[00:25:42] It's a free service. I didn't get to that. So our services are free. Our services are free to your listeners. They're free to everyone. We're compensated. We're just not paid by the buyer. We're paid by the seller. So we're paid by the franchisor and we work for your clients for free. There's no games. There's no nonsense. There's no commitment. And I tell every client the way I'm telling your audience, you are not buying anything. All you're doing is engaging and determining is franchising the investment vehicle for you. So get by out of your vernacular.

[00:26:11] There is no expectation of anyone buying anything. We just want people to do it right. Engage with a professional, go through the process, which by the way, folks, takes over three months. So when, as you could tell them, when we say we're disciplined, we mean it. This takes three months to close the loop on due diligence and get to a yes or a no. Over that three month period, it gets real. You can feel it. You're speaking to existing owners. They're telling you about their day-to-day, right? The issues that they're experiencing.

[00:26:40] So just to let you know, I think it's a very relaxed, casual, but yet disciplined process that takes three months. To your question. Yeah, we had Kristen Schiller on episode 94 and we talked about it. He's an investment banker, right? Remember what we talked about on that show? If you hadn't listened to that, go back and listen to it. What investment bankers do is they help people buy or sell businesses. And Cliff was an investment banker. We heard that in his intro. He's kind of like an investment banker for franchises, right? Is that accurate?

[00:27:10] It's accurate. Yeah. Yeah. Except franchises. So, you know, a buyer or a seller approaches Cliff and his company and he's sort of matchmaking with, like you said, a free consultation, a free kind of, hey, is this the right thing for you? And then gets you to the point of where you could potentially be the buyer of a franchise and kind of helps demystify all that stuff. So that's pretty cool. That's right. We help with funding. We help with every step of the way. They're never on their own for anything. Now, you can buy a franchise either firsthand or secondhand, right?

[00:27:39] You can buy it from, and I know we want to get into these non-brick and mortar things. I'm excited to talk about that as well. But real quick to touch on, I mean, you can either buy it from the franchise or you could buy it from an owner who's retiring out of the business, right? Can you speak to the difference? Yeah. I started in the business actually buying failure because I was young and had no money. So I started looking for blood in the street. It said differently.

[00:28:04] What I was looking for were people who bought an amazing franchise opportunity and chose not to follow the model. That's what I did. And I would buy them. My business partner, Justin and I would immediately turn them around and we would sell them for a nosebleed multiple within 12 months of acquiring it. Not 10 years, but literally just execute and move on, sell it and do it again. And we found ourselves in the fitness industry.

[00:28:28] And then we found ourselves in the restoration industry like ServPro and started buying failing restoration companies and turning them around. How do you know that they're just not following the rules of the road, for lack of better description? I mean... I know you guys made a comment about the pilot, right? Where it's... Yeah. Look, hey, welcome to Delta. Hey, I'm happy to be here. Yeah, just... Here's your book. Just do what we tell you to do. Yeah.

[00:28:55] I know you simplified those instructions, but now let's go take a walk into the general public. Like, they can't even stop for a stop sign. Right. Like, people cannot follow simple rules. No, I'm serious. It's like, what's jaywalking? Like, why do people get hit by cars? I mean, it's like, why are you walking in front of them? Okay. And then I got a question, though, that's probably right in front of me now, which is like, so are pilots great? Franchisees or franchisors or whatever the... You know, are they great?

[00:29:23] Because we're rule followers generally, right? We're usually type A. That's right. And that's why military and pilots make amazing franchisees, because military folks are trained to execute flawlessly off of a plan. And they're great at it. And they make excellent... Matter of fact, they're so great that they're the only ones who get discounts in franchising, for the record. No one gets a discount in franchising except DD214s. Oh, really?

[00:29:52] Yeah, that's it. Yeah, like buying the business. They get a discount on the purchase from the franchise or whatever. Okay, interesting. Of the thousands of franchises out there, there is no discount offered to anyone except usually military with obviously honorable discharge and first responders and stuff like that. They're the only ones who get a discount. It's called VetFran. Oh, it's great. And it's in the thousands. It's significant. Yeah. Yeah. So what is it to just put a bow on the used versus new?

[00:30:22] Which direction would someone go and why? Yeah. My caution to anyone looking at an affordable, low-cost resale and franchising is it's struggling for a reason. And you better figure out why. And turnaround agents are not that common. And most people can't run a successful business, let alone a turnaround situation where there's a lot of maybe bad blood in the community and the goodwill is at a low level. You got to be really careful.

[00:30:50] I tend to not do resales for that reason. And I will just tell you, Tate, to kind of close the loop on this. One of the biggest issues with brick and mortar failing franchises is not the franchisee. It's a lack of site selection due diligence, and you're never going to fix that problem. The reality is, yes, that brand is amazing. Okay? Yes, you're doing a great job following the model. Your location sucks, and you're never fixing that. And you're never selling it to me unless I take that lease over.

[00:31:18] What about a successful used sale? It's going well, but they're hitting their 70s, and they're just, man, I want to hang it up, and my kids don't want to take it, and I'm just putting it up for sale. So what are the economics? Do you find that it's cheaper to buy that business versus buying a new one directly from the franchisor? And this might be getting too into the weeds. It's a situation. I think now you're down to normal business practices, which is what industry is it? What multiple on EBITDA can it demand? Are we talking three? Are we talking a 5X?

[00:31:48] What are we talking about? Where's my room for growth? Did we hit a glass ceiling? Or did you tell me you own three more territories you haven't developed yet? Now we have future prosperity equation. There's a lot to unpack there. I think you're right. It might be another episode, but yes, it's viable. And yes, people should exhaust all opportunities when they're dealing with a brand. I like this brand. I like the executive team. I like the product. Are there any resells in the area? Yeah, I happen to have one in Houston. Great.

[00:32:17] Cliff, you said something real quick, and I just want to make sure our listeners can follow along. You said, can I pay a multiple on EBITDA of three or five times? Can you kind of, like no one's ever heard it before, explain that to the listeners? Yeah. One thing that franchise people will never tell you is how much is the franchise? $350,000. Fantastic. You buy it. You build it. You put your neon sign open. What's it worth? Nothing.

[00:32:47] It's worth nothing. Your business is actually worth, no, no, no. It's got to be worth something. I paid $350,000 for it. No, it's worth nothing. You have no customers. You have no revenue. This is where it gets real. This is your grand opening. Your business is worth zero. You have no liquidity. No one wants it. You have no customers. Now you got to make it rain. So you execute. Well, let's just say you're netting $100,000 after two years of business. What is that little brick and mortar brand worth with $100,000 EBITDA, call it earnings,

[00:33:17] net income for the audience? It could be worth $2,500. It could be worth three and a half times earnings. So I could sell that business for $250,000, $350,000. There you go. Right? Yeah. And there's some businesses that have a higher multiple earnings, which makes that business more valuable because the dollars earned are maybe more consistent or that industry is just valued higher.

[00:33:42] Like for example, I anecdotally, I don't know if this is true, but I have some friends in the franchise business. And maybe they might pay a 12 times EBITDA for a Taco Bell, but another franchise that maybe isn't doing as well. I'm going to make it up. I know a Hardee's, not as popular, not as much revenue. I don't even know if they still exist. Anyway, that might be like a five times EBITDA.

[00:34:08] So that same dollar you're making is actually worth less because of the quality of the franchise versus maybe something that's a little bit more in style, right? Because I know that Taco Bell generally is doing very well. That might be a higher multiple of EBITDA. So that brand is worth more. It trades in the market at a higher earnings potential. That I think a lot of people are looking obviously at, am I really going to buy this

[00:34:36] business and pay three and a half, four, five years in advance? It's no different from stock trading. What's the price earnings ratio? Are you really going to pay 126 times Cisco's earnings? How are you getting that back? So it's the same way in our little world, people are like, okay, I'm in corporate America. I hate it. I want to get out. This guy's already kicking off $2,250.

[00:34:59] What I also see is a bit of a correlation between what's unique about a business making $50,000 a year. Nothing. There's nothing unique about it. It's actually close to the national average of earnings to make $30,000, $40,000, $50,000 is just peanuts. So you say, all right, well, you can't really charge a premium for that. But then you have a guy that has spent 20 years developing 16 locations.

[00:35:26] Can you imagine being in corporate America and being able to sweep in and grab someone's entire 20-year legacy of building a brand and buy it in one sweeping contract? You're going to pay a premium for $1,000,000, $2,000,000, $3,000,000 in EBITDA after buying someone's life's work, right? So there's a premium for that on a multiple. In franchising as the franchisor, Ryan, just to kind of illustrate how people pay premiums

[00:35:53] and why, if you were selling a franchise concept in America that had a lot of development to go and maybe even overseas, you could get a 10 to 15x as a franchisor very easily. I know a residential cleaning company that got a 15 times on $10,000,000 in revenue. There's a hundred and something million dollar deal. So just putting that in perspective. Yeah. No, that's great perspective. And I just wanted to say too, like if you want something that's going to cash flow a little

[00:36:23] better, that lower multiple on EBITDA that you're going to value and pay the business for is what you want. If you want something that maybe is going to have a higher potential, maybe for appreciation, would you say, or pay more value, less cash flow, that higher multiple on EBITDA is what you would pay. Um, and you know, and, and if you see an emerging franchise, right, something that to your point Cliff, like this guy's continued to develop the brand, they're continually investing in the brand.

[00:36:52] The brand is getting more well known. Then you might see appreciation in your earnings on EBITDA, right? You go buy a, a, a chain of, I don't know, vending machines in a market, you know, you're probably going to pay a one times, right? There's nothing special about that. You drop a bunch of vending machines, you buy the route, you're getting dollar for dollar multiple on EBITDA. If you buy a business that is starting to get that traction, right? Maybe they come with a call center and they come with advertising and there's billboard

[00:37:20] placement and there's processes and procedures and uniforms and logo and all that. Okay. Now that earnings might go up. So anyway, I think that's just totally a fascinating, you know, thing to kind of know what you're getting into when you're getting into the franchise business. That's right. Well, and this, this relates to exit strategy, right? Cliff, you were talking about what's your exit? Like how long do you want to own this thing? Thank God. You know, is there, is there a clear path to building it and then selling it? Or is this a cashflow stream that you're going to own for 20 years and paying attention

[00:37:50] to the multiple that you can eventually sell it for is very important if you're planning on selling it. You're exactly right. This is what people do. You know, you work a job, there's no gold watch, there's no pension, there's no nothing. It's like, Hey man, thanks. 30 years later. Hey man, thanks. You get a cake, you get some candles, a couple of balloons. And that's it. We get the water gun salute in some places. The water gun salute? That's right. At the airport, you know, when the captain retires. Okay. Yeah. That's cool. Yeah.

[00:38:18] I mean, I like to, you gotta, you gotta cash in now. It's like, all right, I spent 30 years doing this. It's time to sell it or legacy. I got to tell you, a lot of people think in legacy lately, a lot of people looking at their life and looking back saying, okay, what did I do for my, how did I intervene meaningfully with my children, my grandchildren, my spouse? Maybe I should just keep this business, let the kids run it. So there's a lot of legacy thoughts and not just exit. Well, speaking of in style, you said in style a bit ago, and we were talking about getting

[00:38:47] into the non brick and mortar stuff and what's in style these days. So let's, let's unpack that. But what else can you do since, since AI now, not only did we just announce AI now we're announcing quantum computing, which if you haven't looked into it, like really, this is not a semiconductor. Like you're talking about at the atom level. You're talking about when I say collapsing time, you're talking about taking something that would take a lifetime and doing it milliseconds. It's frightening.

[00:39:16] With all this being said, there's going to be a lot of disruption. I think for the first time in our history, you're going to see technology literally destroy white collar jobs, like literally annihilate them. A desk attorney is done. I literally use chat GPT to evict a tenant in the state of Florida. So do the man. This is just getting started. I think accountants are in trouble. I think all professional white collar jobs are in trouble in the era of AI. With that being said, I tend to focus on five areas, right?

[00:39:44] And one of those areas, we went from running in a field, stake in a flag and build in a house to, I can't even install a wireless doorbell. How did that happen? I had a stepbrother call a handyman at 150 an hour to install a wireless doorbell in his house in Long Island. Frightening. But that's the reality of what we're living in. So anything involving tools, I don't care what you pick. And I refer to a squeegee as the bottom of a tool. That's a tool all the way up to HVAC. You're going to win.

[00:40:13] You have a 10, 20-year runway, in my opinion, before you're disrupted by AI. We humanize pets and animals in this country, right? You could do boarding, grooming, training, non-brick and mortar, vehicle-based, highly scalable, asymmetrical, high margin, everything you want in a business, right? Very few employees is what you want in the worst labor market that this country has ever seen. Then you have the aging of America, which is one of the reasons why our labor market sucks,

[00:40:42] is we don't repopulate anymore. We just buy another dog, right? So since we're not repopulating, so I mean, think about what I'm saying, right? So you couldn't, the first comment was you couldn't have kids anyway, right? Because you have issues. Now you don't even want them because you live in a high inflationary environment and you're still paying off $200,000 gender sciences study at college, right? Which you can't seem to monetize, shockingly. So you look at all these trends happening in this country and it's like, okay, how do I

[00:41:11] capitalize off of the graying of America? Mobility? Selling, renting, repairing scooters, wheelchairs? Installing stair lifts and chair lifts and ramps and grab bars and anti-slip flooring? There's a ton of money to be made in the aging of America. Elon says in the next decade, we will be selling more adult diapers in this country than baby diapers and that should scare the shit out of everybody listening. Seriously, you must repopulate a nation.

[00:41:38] You need strong people to care for your aging population. Otherwise you end up like Japan. They're a disaster, right? Now you have the humanization of pets and animals since you can't have kids. Now you have the dogs. And then you go into, well, now they're all aging. Well, I want anti-aging now. Now I want to look beautiful. Now I want to feel sexy again. Now I want Botox and I want a med spa and I want anti-aging. I want peptides and NACs and I want to be in a testosterone therapy clinic.

[00:42:06] So all these areas, and then you close it out with the public school system has failed us miserably across this country. An abysmal failure with our children. They've eliminated the very things that make you intelligent, reasoning skills, visionary, right? Just coping like art, like bridging both hemispheres of your brain and just, and the sciences and the stems of the world and all this stuff. Instead, they, I don't know what they teach there anymore.

[00:42:37] Franchises have backfilled and introduced music. They've introduced art. They introduced science, technology, engineering, math. They introduced robotics. They introduced all this stuff. So when you look at, well, what's out there, what's trending, what shouldn't I do? I don't talk about food because I think food is really one of the worst investments because I just don't see any money in it. I see it on your best day, five to 8% net. It's a, it's a big investment, right?

[00:43:05] I mean, the people that I know doing it successfully have hundreds of stores and thousands of employees, right? Like you're, you're talking about an exit from the airlines to do that in a long time and probably multi-generational building of a, some of an empire like that. Right. This is, this is not that. This is, this is much different. And I really appreciate the trends, especially the one in education. Um, cause the schools are cutting music and art where, you know, the PTAs are having to backfill,

[00:43:34] uh, those, those positions. And, you know, I admittedly, I, you know, my kids are in public schools and it's, you know, very convenient, but, you know, I want to supplement their education with afterschool activities. And guess what? I do those through franchises. And, uh, so that's very relatable to me. Same, same here. I'm a dad. I did the same exact thing, Ron. I, what are you doing at two 30 in the afternoon? We're working. So you put your kid in an aftercare program.

[00:44:02] It's either going to be sports or it's going to be, you know, cerebral and you're going to get this kid cooking and saying, wow, I really like coding. Look what I made. And it's like, man, what are you thinking? Engineering, this is taking you down a new path that I'm glad I did this. Yeah, totally. So how much does something like that cost and how much does it make? I mean, I know that's a very job. That's exactly what I was going to ask. Is the juice worth the squeeze for someone who's listening to this? Yeah.

[00:44:30] Time commitment, you know, give us a little bit of a flavor of this is for us or not. Okay. So let me start with that. So anyone listening, I would not venture into franchising if I didn't have 15 to 20 hours of bandwidth during business hours. Everyone always tells me I could do it after work. No, we're not doing 3 a.m. You know, stuff on a spreadsheet. You need to be available during normal working hours, 15 to 20 hours a week. If you don't have it, the investor, you need to find your rock star manager who's going

[00:44:59] to manage the business in your absence. And there's nothing wrong with that. Managing the manager is key. I don't want to invest in anything that requires my day-to-day involvement. That's called a job. I already have a job. In many cases, these guys are already flying, right? They're pilots. So I want to buy something that doesn't require my day-to-day involvement. Investment. I'm going to give you some general statements on investment so everyone can kind of level set what we're dealing with here. If you just took all 4,000 brands and put them into two buckets, brick and mortar, non-brick and mortar.

[00:45:28] What am I looking at? Let's start with brick and mortar. Your starting investment. I don't care what it is. Great clip. Super cuts. UPS store. Everyone knows those things. You're looking at 3,350 as a starting conversation, depending on where you are in America relative to the cost of doing these things. Are you in California or Kansas? Next. Oh, by the way, what does that actually mean? 3,350. Here's the good math for the audience. Everyone always wants to know, well, what do I have to put up? What's my cash injection requirement?

[00:45:58] Can I borrow for that? Yes, you can. But you would be required to put up 30% of the size of the deal. So if you're looking at a $400,000 deal, you're putting up $1.20, right? You're looking at a half a million dollar deal. You get the math. You just keep multiplying it by 30%. That would be the SBA's underwriting requirement that you put skin in the game and then they'll bridge that loan. Personally, I keep my clients away from debt because the U.S. dollar has absolutely no value but is insanely expensive to borrow.

[00:46:27] So, right? Those two stories can't be true. They are very expensive. SBA rates now are reaching 12% and the repayment period is 7 to 10 years. It's not 30. So it's a big payment. Yeah, and SBA takes forever too. I mean, you go through an SBA process, it is very time consuming. It could take some time. When you're working with our people, you'll get an SBA pre-approval in two weeks. Funded will probably take 90 days. And that's the Small Business Administration. That's right. That's right.

[00:46:57] And now non-brick and mortar. This is why I like the asymmetrical investing of non-brick and mortar. Think of all the risks we just described. You have personal guarantee risk with the landlord. You have contract risk, right? You have minimum wage risk. You have 5,000 to 8,000 a month in rent risk. You got a lot of risks on the brick and mortar side. Non-brick and mortar, your total investment will be between 100 and 150,000. So you're halving it, more than halving it. And your burn rate per month is peanuts.

[00:47:26] You have a very, very low burn rate. You could operate out of your home. You could operate out of a vehicle. You could operate out of an office. Office space is cheap because nobody's occupying them anymore. And you could operate out of a mixed multi-use industrial park. Again, very inexpensive real estate requiring no construction. And when you scale those businesses, this is the biggest misnomer on brick and mortar versus non-brick and mortar. Well, you probably can't make any money with non-brick and mortar brands. Not true at all.

[00:47:56] I have non-brick and mortar brands. I'll ask you guys just a quick quick. Just play along. What do you think the average revenue is of closets by design? Just one of these closet organization brands. Just guess it like average revenue per year. Per year on how many employees? Yeah. Well, I don't know what the average number of employees will be. But just think of an average franchisee with closets by design. Say less than 15 people on payroll. 750. 750,000. Right.

[00:48:26] That's fair. Tate, just play along. What do you think? You know closets by design. You know California closets. A million in revenue. A million. Guys, nine million. Nine in writing. Yes. That's what I'm talking about. This is the disconnect that we experience with non-brick and mortar brands or, oh, I see those trucks all the time. How much money could possibly be in a custom closet? Like give me a break. You know, putting little sprinkles on the floor in the garage. How much money can you really make doing epoxy flooring? Amazing. Tree trimming. Seven million.

[00:48:56] You just keep going. Some of these businesses are really impressive. So don't think that there's some inverse relationship, right? Or a direct correlation between you got to spend money to make money. It's just not true in my world. You could scale some really. Look at ServPro. ServPro is 150 grand to buy. They're averaging over 2 million a year. I mean, look at some. And they're based on disaster. Random acts of disaster.

[00:49:25] So let me just connect the math dots. So I buy a ServPro. I pay $150,000. So what is that EBITDA multiple that I'm paying for that? Yeah. On a ServPro, you should be doing at least 20% net to the bottom line at minimum. I used to own a Puraclean. I was doing millions of dollars a year in revenue out of Annapolis, Maryland. That's where we had our location. It was a failing location. We turned it around. I mean, we would do a north of 30% net on a business like that.

[00:49:55] But what income would a ServPro that I pay $150,000 for, what net income would that net me? Would I expect that to net me in a year? Yeah, that's a tough one to answer in a year. Yeah, that's a tough one to answer. But if you used just their earnings claim of an average revenue of 2 million, I mean, you should be making $400,000 a year. So I put up $150,000. And I'm not going to hold you to any numbers. And by the way, this show is not giving any tax legal or investment advice. Do your own diligence.

[00:50:25] We're just having a friendly conversation here with Cliff and Tate about franchises. So we're not saying this is what you're going to make or what you're going to get. So you were saying you could put in potentially like $150,000 and make $400,000 on something like that. Well, the $150,000 or the $200,000, whatever the startup cost is of a territory. Like let's get off the word ServPro and maybe just say the restoration industry. Forget ServPro so we don't confuse everyone. If you wanted to get involved in the water, fire, mold, and biohazard business,

[00:50:55] you're looking at around $150,000 investment. It's going to be dehumidification, air movers, desiccant machines, right? It's going to be hydroxyl and ozone. Okay, basic stuff. And then what? A van. Great. Now I got a van. I got a tech. And then you're scaling it. You got to add a van. You got to add techs. You got to keep going. But to start it, the point was is how do I get in the game, right? There's a lot of barriers to entry to businesses where it's like you're never getting in that game. You know what I mean?

[00:51:22] This is a business with an amazing amount of upside. And there's a lot of catastrophes. California is burning as we speak. It's the 21st of January, 25, right? There's a lot going on everywhere, whether it's mudslides or floods or fires. That's what the catastrophe restoration business does, right? They're mediators and they mitigate risk for the homeowner and the insurance company. It's a ton of money to be made. If you're looking to make six figures in a business like that, it's very realistic. Follow the model.

[00:51:51] And again, always look. I want to echo everything Ryan said about earnings claims and representations. Always get the FDD, the franchise disclosure document of the brand, and look at the item 19 earnings claim that they provided in writing. Okay. Yeah, that's important. Yeah. Well, I could keep going for another half hour, but we want to be respectful of your time, Cliff. You guys are awesome, man. This is good stuff. Yeah, you guys are really good.

[00:52:17] I know that there's going to be a lot of listeners that are intrigued and want to continue this conversation. Can they reach out to you and keep poking on this and see if it's something that they want to pursue? Yeah. There's no commitment. Have them give us a call. I mean, they can reach me at cliffn, C-L-I-F-F-N, at frenocity.com, F-R-A-N-O-C-I-T-Y. And our website is frenocity.com, F-R-A-N-O-C-I-T-Y.com.

[00:52:46] They can check us out on LinkedIn. We have a ton of content. We also host the podcast. It doesn't compete at all with you guys. It's called Pursuit of Profit. And if people are looking for, we only interview founders, so they're high level. We're interviewing the founder of a franchise concept, and we're trying to get as granular as you were today. And I have a ton of respect for what you guys do. This is a great value add to your audience. And I love it. I really enjoyed my time with you too. Thanks, Cliff. Yeah. Thanks, Cliff.

[00:53:13] Yeah, definitely check out the podcast because that'd be a great way to sort of hear some stories and see if it's really for you ahead of a call. Thanks, guys. Well, thanks for the great show, Cliff. Listeners, thanks for tuning in, and we'll catch you on the next episode. Bye. Bye.