Many candidates come to Nat and Pete looking to buy an existing franchise because they want immediate income and they know that there is a high small business failure rate. Franchises resales feel a little more safe. This makes sense, but often doesn't really work.
On this episode, the guys discuss the ins and outs of franchise resales, why they are good, why they are bad, and what the options are when completing an investigation.
Pete: Well, good morning, Nat.
Nat: Hey Pete, what have you been up to?
Pete: Oh man, I am pumped up; I got to tell you, Anthony Robbins, I was with Anthony Robbins. You've been to a bunch of his webinars or, excuse me, his events, right?
Nat: Yes, the good old days, where we would get together with people.
Pete: Yes, right. And so I've been to a bunch of events. But I got to tell you this last weekend; I was at one of his events.
Nat: Okay.
Pete: And it's interesting, right? We always talk about how entrepreneurs are problem solvers, right? So here's Tony Robbins, right? He gets 10,000 people into the staples center, and he spends four days changing their lives, right? And that's his brand, right? And he loves it, it's passion, you can get it, right?
And COVID-19 shuts it down worldwide; he can't do anything. So being an entrepreneur and I think he's got like 74 businesses or something. So what he does is he builds this studio, I mean it's got like 30-foot ceilings, and he puts 1500 monitors in the front of him and 1500 in the back; he designs it just to do a zoom session.
Nat: 1500 is a lot, really? It was 1500?
Pete: Yes, 1500 in the front, 1500 in the back, right? Is this huge studio. And then he's got all these cameras. And so he basically does the event on the zoom. He knows the guy that is running zoom.
Nat: Yes.
Pete: Basically sets it up so that he has instead of 10,000 people, he has 40,000 people from around the world, right? One hundred eighty countries or something like that. And he does this zoom session for four days; I'm telling you 60 hours of zoom sessions. I mean, it was crazy, right? So I start thinking about this, the guy's brilliant.
So here's the deal, right? So he takes a problem where he can't do what he's doing normally, and he builds a studio. And instead of having 10,000 people, he gets 40,000 people paying about the same amount, he's quadrupled his revenue, right? And he's also reduced its expenses because he's not renting out staples center, right? So quadruple revenue reduces expenses; now here's even better.
So now he gets 40,000 people on this thing, now he has the ability to sell them the next program. So he has four times as many people to sell his next program to, it's brilliant, right? Entrepreneurs figure out how to solve problems. And not only to solve a problem, but he quadrupled his business, I suspect.
It's absolutely amazing. So I'm pretty pumped up; it was a great experience. So I encourage anybody to do an Anthony Robbins event; the virtual session was, it was really good.
Nat: Yes. We've seen that with a lot of the franchise brands we work with, too; it's like when the going gets tough, the tough get going, right? And they really figure it out and ultimately will make them stronger long term.
Pete: Yes. He used the example in the seminar, right? Where he talks about how business owners they solve stuff, right? So we talked about two restaurants that were a mile apart from each other, right? And with COVID-19, one restaurant basically they freaked out, they just shut their doors, closed down that kind of stuff. Another restaurant says, hey, listen; we got to figure this out.
So they went and basically re-did all their seating; they basically set it up so that they one got a bunch of stuff, and they created a pavilion thing where people could sit outside and do takeout. And literally, one shut down, the other one starts thriving, literally a line down the street to do take out. So we solve problems.
Nat: That's what we do.
Pete: Yes, absolutely. So today, what I thought we would do is talk a little bit about franchise resale's, and more so this idea of investing in franchising, right? We want to talk about resales, not necessarily about buying them, but this idea we talk about it in the book higher yourself, right?
That when we invest in a franchise, we want to have the end in mind, right? We want to have our exit strategy from the standpoint. So I thought we'd talk about that a little bit today; sound good?
Nat: Definitely. Really, when I bought my first franchise, I was 29 years old, right? So I was kind of the young buck. I was at the corporate headquarters for training for comfort keepers; I bought a senior care.
And it was so interesting, because like literally within the first 30 minutes in the training, the founder was kind of starting with this, begin with the end in mind concept. And I'm like at the starting line; I was just wanting to figure out how to do the most basic things. But he was like start with the end in mind. And so that was immensely helpful because I just remember back to that, and it kind of puts everything into perspective of why you're doing it. I like that one concept too, it's like don't start your day before you finish it. And with that concept, it's like you know what you're going to get; try to accomplish for that day or that week or that month or that year before you even start it.
Pete: Yes. And I don't think when we start talking about exit in mind or planning your exit in advance; it doesn't mean that hey listen, I'm going to own it for ten years in one day, I don't think it's quite that defined.
But it's understanding kind of where you're going to take this to, and then what is your exit strategy. So as franchises, I mean there's many opportunities, right? You're building this business, you're part of a franchise system. So when you sold your franchise, how did you do that? How did you decide?
Nat: Yes. And that's the cool thing too; I think a lot of times people are like when you are starting a franchise, you're kind of like can be like oh, this is what I'm doing for the rest of my life. But actually, a franchise, there's lots of opportunities for resale’s. So when I bought my franchise, I built it up actually fairly quickly because I'm a go-getter. And the process was pretty easy.
I actually just hired a local business broker because I didn't know really any; it was my first rodeo with a resale. So I hired a business broker, and then he kind of helped me with you get all the papers and the financials, and the kind of the presentation book, right? And it was interesting as we went through that process.
We kind of, what's important to people that are looking to buy a franchise resale, is basically what kind of systems, processes, operations manuals, people like your team. It was kind of; it was eye-opening to work with a business broker as we were kind of going through that process.
Pete: In resale's of franchises are more attractive to people, right? Because as you sell your franchise, you're handing it over to the new person, right? You've got that transition. But that the person that's buying the business also has all the support and the training from the franchise. So I mean to me, there's a lot more appeal to that because you're not going it alone as you take over that business.
Nat: Yes. I think usually when you buy a business like there's always kind of like that one blank that you fill in, and it's like how much training or support is the seller offering. And usually, it's like two weeks; sometimes it's 30 days.
But what's nice is with a franchise resale, that you actually, you can put that, the seller's going to help you for two weeks or 30 days, but the franchise it's basically unlimited, and it's forever, right? So it's like you go to training, and you have all the resources of the regional developer, the parent company, the other owners throughout the U.S.
Pete: Yes. Now you obviously used a broker, right? But we see a lot of resale's, were I'll call it kind of a hand raiser, right? So I own my franchise; I've been doing it for ten years. I decide I want to get out of Illinois. I want to get out of the high taxes and certainly the cold weather, and I'm going to move to Florida; I'm thinking about retiring.
I can go back to the franchisor and say, hey, listen, if anybody's interested in this area, I might be interested in selling. We see some of that out there; I mean, that's pretty common in terms of people selling their franchises, is that right?
Nat: Yes. I think that's an important function of the franchisor, it's the ability to help them, help the system basically sell the franchise resale's in the system. I think if I remember, at one point like maybe one to two percent of franchise system is either for sale or maybe they're thinking about selling or retiring or what have you.
I kind of think of it like Toyota and their used car market, right? Where because they have a strong used car market, they've done a good job with the residual values and all that, then it makes their new car sales really strong too. So I think it's an important function for the franchisor. Or should we use the ford example?
Pete: No, you're killing me. I like my ford, absolutely. So all right, so resale's they can go to a broker, they can go back to the franchisor and hand raiser. But when we start talking about resale's, it's really hard to find a good one, isn't it? I mean it's tough to find a good one.
Nat: Yes. I would say it's like a needle in a haystack, because well, you and I did that one podcast; what was that guys I'm trying to, what was his name? He had the molly made. But I think he's in his 70s, and he just loves what he's doing. And it's kind of like a semi-absentee business for him, right? So the good resale's are pretty hard to find, to be honest.
Pete: Yes. No, I think so, that's right. And when we sell our franchise, or we're looking to buy a franchise, the franchisors have rules, right? They say, hey, listen, if you're going to sell your franchise to this person, one we have to approve them, right?
So one they have to approve them and then generally yes I think you have to pay a transfer fee, is that right? So you have to pay a transfer fee to transfer the rights from you to the new person, so certainly there's a little bit to it.
Nat: Yes. I always think like I think it's always smart if you're looking at a franchise resale's actually to talk to the parent company pretty early on because it goes back to the same thing as when you're looking to invest in a franchise. It's basically is it a good fit. At you as the buyer, would you be doing things that you enjoy or play to your strengths, right? All those types of things.
And you want to learn about the culture of the franchise and all that. I don't really encourage you guys to make these decisions just based on a spreadsheet; I think there's so much more that goes into joining a franchise system or a network of franchise owners.
Pete: Certainly, it's a partnership, right? It's a long-term partnership, and it's beyond numbers from that standpoint. So like for that standpoint, it makes sense. When we talk about a franchise, we look at it, and it's a resale. A lot of times, people say I just want to walk into that immediate cash flow, right?
But they're going to pay a multiple for that. So one of the things that I like to talk to people about is can you beat the clock, right? So if you buy that franchise and you're going to pay a multiple three, can you buy the rights to a territory that you like?
So it's your backyard, you get the geographic area, and you go out there, and you work really hard, and you're a go-getter like you. And you can beat the clock, build it faster than if you were to buy it at an existing level.
Nat: Yes. I think it's kind of that six of one-half dozen of another, right? It's like there's always just the different trade-offs. You can pay a little bit of a premium, get something up and running, but there might be some things you need to fix or might not be your ideal location or geography, or territory.
Starting from scratch, you get that perfect territory, build your own team, but you're going to have to ramp up probably over a three-year period.
Pete: Yes. Well or faster, it just depends, right? You try to beat the clock. So as you look at it, I know you've bought and sold businesses from that standpoint. And from evaluating franchises in terms of resale's, any thoughts you give people? I know one you said, hey, it's not about spreadsheets; what else would advise if you're looking at a resale would you give people?
Nat: I think to me, the biggest variable is whether or not you're, you have to really understand what the existing franchise owner is doing day-to-day and see if you're basically as a buyer if you're buying a glorified job. Or if you're actually buying a business. Because if you're just buying a job, we only have so many hours in a day, so if the existing owner is working 40, 50, 60 hours and he's doing XYZ when whatever the business is.
Then you need to be prepared to do that, and you're kind of buying yourself a job. But if it's more of a business, I think that's much more valuable, to be honest. Because I mean, I know I'd pay a lot more if I could replace my income and work 10 or 15 hours a week versus replace my income and work 60 hours a week.
Pete: Let me know when you find that one that's 10 or 15 hours. I might go into that with you.
Nat: Yes, that's semi-absentee. And then I think a lot of times people are looking for a franchise resale specifically. They're looking like a new buyer is looking like how can I improve and make this better? So do I have contacts or experience? And usually, like almost all businesses, driven by sales and marketing, right?
So does the new franchise buyer have the ability to do sales and marketing? If the existing business is mostly b2c, can the new owner come in and develop b2b as an example right? And grow revenue or diversify it.
So there's lots. There's certainly lots of opportunities; franchising is always evolving. I feel like a lot of times; the new guys will do really well because they be more open to new ideas.
Pete: Yes, franchises evolve over time, right? It changes.
Nat: Totally.
Pete: So one thing is you kind of come in, can I take it to the next level, right? Can I take the business to the next level? I think another one that I think about a little bit is the team. The people that as you buy the business, it's really important that you understand what you're buying in terms of people. And they could all leave the day you invest in the business, right? Unless you set up something anchors to keep them, but do you see that too?
Nat: Yes, totally. I think when people are buying a franchise resale, they're trying to hedge against risk, right? So with retail, I think it makes a good amount of sense because then you have like a proven location, right?
Where you have like the foot traffic and all that. When it comes to a service business, I don't think the locations as important, right? Because you're typically going to the customers at that point, you're just doing more sales and marketing. I think it's six of one-half dozen another, to be honest.
Pete: Yes. And I think sometimes with resale's, that you might be buying somebody else's problem, right?
Nat: That's an understatement, yes.
Pete: Yes, right? Whether it's something, and I think it's something simple like they they're not doing well, and they want to get the heck out of that lease, right? They want to get their name off that lease, and so they sell the business so that you own that problem of that lease. Do you see that a lot?
Nat: For sure. I mean, a lot of times, if you've been in the industry for a long time, you might know things that are coming down the pipe one or two years in the future. So there might be a reason why you're trying to exit.
So I think you have to do a lot of homework and due diligence and turn over the racks, and make sure that you're trying to manage your risk as far as future landmines.
Pete: Yes. So resale's there's some good stuff with it, and there's some not so good stuff, right? And as we always talk about this idea of knowing where we want to go in the future. As you think about franchises, I mean, it seems like there's so much more opportunity with new concepts, new territories where you can get exactly where you want.
And in this really hard to find resale's. I mean, so when we look at a scale, I think it skewed a little bit more towards looking towards that new territory, that new franchise concept because there's just more opportunity opposed to buying something existing.
And something existing it can be a little bit sexy, but when you weigh it out, I think it tips more towards looking at something new.
Nat: Yes. I was just thinking about this with a different project that I'm working on, but there's this concept of deal fatigue. So a lot of times, when you're trying to buy a franchise resale, you need to have a really motivated seller. And regardless of franchise, or just a regular business.
Like you need to have a very motivated seller, you need to have a very motivated buyer, and a lot of things have to kind of align. I've worked with so many people that started with me to look at a resale and buy a business, and they get to the finish line, and then the seller kind of craps out on them, and they're just like I've changed my mind, it's like oh my god. I have, guys, literally that's happened to two or three times.
So I think you can kind of get that deal fatigue, and then finally it's like, you know actually starting my own thing in my own backyard could be genius, because then I don't have to mess around with all these other million variables to try to get a deal across the finish line, right?
Pete: Yes. I mean, when I was looking for businesses, I spent a lot of time looking for resale's. And you try to find those resale's that are driving kind of to replace that corporate-level income. And I look, and it was very hard to find because most of them are sold before you ever get to them, right?
Nat: Yes, they're like a pocket listing.
Pete: Yes, right, absolutely. So they're really hard to find. And then the ones that are still there, there's something in the closet, right? You got to find the; we'll use the term turd, right? And so I ultimately kind of started with this idea; I wanted to get a resale that could immediately replace my corporate-level income.
And ultimately, I invested in a new territory with a franchise, right? Because to your point, I thought there was more opportunity when it was also.
Nat: I think it's good to be open-minded; I think it's good sometimes to take a parallel path so you can check the box. But again, I think it's kind of six of one-half dozen of another. It depends on; I think a lot of times it depends on somebody's confidence in themselves and their ability to perform.
I mean, if you have been successful in corporate and basically everything you've ever done, I'm pretty confident if you pick the right franchise, you'll be successful at that, too, right?
Pete: Yes. Well, you bring your leadership skills, your business acumen; you leverage a good proven franchise system. And you go make it happen, right? And like you you're a go-getter, you get it done, and you solve problems, and you build the business.
All right, well again, as you look to invest in a business, you got to kind of know what your exit strategy is, it's really important. And there's opportunities when you put it that way. Well, I got to get back to working on my stuff for my Anthony Robbins training, so we got to finish up here because I'm excited about.
Nat: Are you going to get some more monitors so you can do more zooms?
Pete: Yes, my wife doesn't like the idea of building a zoom studio in our house. So I don't know if I can do that. But it's absolutely legend.
Nat: It's a business expense.
Pete: Yes. Well, if you think about 40,000 people on a zoom, and they had the capability of taking and putting people in like breakout rooms, four people to breakout room.
Nat: Oh my gosh.
Pete: Can you think about the technology associated with doing that without any kind of hitches? I mean, it was an amazing experience. All right, my friend, spring is here, go enjoy it, and we'll talk to you soon.
Nat: All right, see you, Pete.
