AJ wasserstein Michael Horowitz and Peter mistretta welcome to acquiring minds this is going to be a fun and Rich conversation targeted at acquisition entrepreneurs who might buy a business within a franchise system so this is a scene a theme that comes up regularly on acquiring minds and I have had numerous guests who bought businesses that were franchises including Mr Michael Horowitz here with us today so we're here the three of you guys are here today because you co-authored a recent case note entitled 10 essential questions to consider When selecting a franchise brand for a search fund Journey so I read this note and it provides a great framework and kind of systematic filtering criteria to help Searchers acquisition entrepreneurs considering buying a franchise business to decide which of the many thousands of Brands out there to go with because there are so many Brands so whittling down that list is of course a key part of the process so we're gonna go through all 10 of these questions today gentlemen uh but first let's do a quick round of introductions AJ you want to go first please sure uh well thank you so much for inviting me to be here I'm so flattered Peter great to see you again Michael great to see you again so nice to see uh old friends and smiling faces um my name's AJ wasserstein I'm the Eugene F Williams Junior lecturer at the Yale School of Management I teach a bunch of courses on search funds small business operations programmatic Acquisitions and uh my first life I was an entrepreneur so thanks so much well thanks AJ Peter you want to go next sure and I would Echo the the comments that AJ made thank you will for having us Michael good to good to hear from you again AJ good to see you again um so I I run a company called Knight franchise Holdings which is um a long-term holding company which I recognize is not a very precise term these days uh with the goal of over a multi-decade Time Horizon building a portfolio of scaled franchisee Platforms in category leading consumer retail Brands so today we own 13 Clinics of a franchised concept called The Joint Chiropractic across Florida and Texas and we've been doing this for a little over a year at this point great Peter where are you base I'm based in uh the Bay Area of San Francisco great Michael you want to go next sure great to be back uh so Mike Horowitz um former franchisee as of June no longer a franchisee but I spent five years um running and growing a portfolio of Wingstop restaurants and just exited that business last month so that's pretty exciting Michael you were a guest your episode aired probably two months ago in mayish and we probably spoke a month before that so can you give us the two minutes on on your exit that's big news yeah thank you um so had started to kind of think about that process a few months before we spoke and there's always a an element of Discovery in I would maybe like to sell this business is somebody willing to buy it for what I'd be willing to part for it with and so uh when we spoke were probably still pre-attracting any bids um to kind of firmly understand if this was really something that could happen but fortunately Wingstop is a really great company and a great franchise system to be in so there was a lot of interest and uh we ended up selling to a group that was already operating in Wingstop and really looking for big growth opportunities and given that they knew the system quite well we were able to close that deal in about 45 days so probably as fast as you're ever going to see a small business M A Deal even in the franchise World get done which was awesome and did you approach them or did you just kind of put out whatever messaging more broadly that this was for sale I worked with a small franchise Investment Bank called unbridled Capital they were great um I knew the buyer from right when I started in the system we'd known each other for five years but the fact that there were other people who were very interested in buying the business certainly resulted in the buyer paying more than they would have paid if I just approached them directly and negotiated a deal that way well that's great Michael um congratulations um we'll certainly be linking to your previous episode in the show notes of this episode and maybe um in some months from now have to have you on and tell you that have you tell us the entire story of this sale because that's um that's always exciting okay before we launch into the 10 questions why don't we just do a quick introduction on why buying a franchise established franchise business or multiples in the case of Michael can be an attractive path for an acquisition entrepreneur so just kind of setting the stage of this larger conversation AJ could you could you address that yeah so will um a few months ago with Peter we wrote a case node on why uh post MBA students post MBA graduates aspiring entrepreneurs don't pursue franchises as a entrepreneurial opportunity and why they should at least consider pursuing franchises so do you want me to touch it all on the reasons why they don't or go right to why they should let's start with don't and and then go to do so I'll be real quick what don't I so the the biggest reason I think uh NBA students don't consider entrepreneurship in a franchise context is that is that I got put it out there right away Mike Peter disagree with me if I'm wrong but there is a stigma uh to being a franchisee entrepreneur and we jokingly wrote In the case Peter that this is about as uncool as you can get so so if you think operating HVAC business is uncool being a franchisee entrepreneur is one step below that uh so it's it's not cool and there are a handful of other reasons uh franchise systems tend not to have the contractual recurring Revenue that search funds entrepreneurs crave so much um same store growth could be capped or linked to CPI it's hard to really uh escalate growth in in the same store so more growth tends to be very Capital intensive because it's either through acquisition or opening new stores uh in order to grow there's this real gating mechanism in the franchisor they get to approve whether you open up new units organically or do Acquisitions within the system so they're uh they're always going to regulate how much you could grow there are barriers to entry to get into a system so this is like joining a club and it's not a given that you will get into any system uh despite Mike's success in exiting uh sometimes there are limited buyer opportunities when you do choose to exit and it's very common to see what Mike just told us exiting within the system but that can I'm sure this wasn't the case in Mike's situation but they can suppress multiples at times yeah franchisees tend to be labor intensive so they're complex Labor Management issues turnover uh it's not really talked about in MBA programs so there are no courses as far as I'm aware we have Harvard here we have Stanford here we have Yale here but I'm not aware of any franchise entrepreneurship courses at these schools there might be a case or two but no course uh yeah so those are some reasons why people don't do it and and we think they're all valid we we don't want to minimize or uh say that those potentially aren't true but we think there are a lot of really compelling reasons why uh people post MBA students should consider a franchise opportunity should I pause Catch My Breath do you want to follow up in any of the reasons why not before we go why you should let me pause you just to ask Peter because as I recall from our pre-call Peter you um your eyes were opened to franchising because you heard of some sort of big success stories right so so you were um not considering it then then heard about some some stories in the ecosystem of people who had done very well by accumulating large portfolios of franchise franchises and then you said huh this seems pretty interesting wasn't that kind of how your your eyes were open Peter good good memory well um to when I was in my second year of business school I was considering abroad array of opportunities that kind of generally fit the consolidation strategy approach um but they were primarily consolidation strategies around independent operations as opposed to franchised retail operations um the I would say Platinum standard case study particularly relevant uh at Stanford GSB which is where I was getting my MBA at the time is a restaurant entrepreneur uh named Greg Flynn who I'm gonna forget his his graduation Year from Stanford but he runs something like at this point 2300 franchise restaurants across the country I think he actually just expanded his operations for the first time internationally with uh an acquisition in Australia and he started out with a small sub 10 unit acquisition of Applebee's in the Pacific Northwest decades ago and through the course of kind of tirelessly reinvesting the cash flow that his initial um his initial business generated into progressively larger and larger um Acquisitions he built this portfolio that now generates um something on the order of four to five billion dollars of of annual revenue um that's uh obviously a very audacious goal to have when you when you start out and you're a second year business business school student but there are other examples similar um to what uh to what Michael has just successfully accomplished um with entrepreneurs building 20 50 100 unit portfolios uh very Capital efficiently um and have built businesses of a very exciting scale doing so um so yes to answer your question well uh was was largely attracted to consolidation opportunities um I think AJ called them programmatic acquisition strategies before um and it just so happened that an introduction uh to the franchising space seemed to line up quite well with what I was looking at but it wasn't being taught in any way at Stanford this was just kind of through through your own informal education process that you that you learned about these opportunities that's correct yes yeah yeah well maybe conversations like this and and these case notes that you guys publish will start start opening people's eyes more in a more formal way in the in the MBA programs so AJ let's now turn to the positive so why are these opportunities exciting yeah so so I'm going to quickly rattle off some facts I I think before I I share will why Why students should consider uh franchisee entrepreneurship I if I could just put so put it in context so my goal is for my students and other students recent MBA graduates to live incredibly fulfilling rich and exciting lives of which entrepreneurship I think is a wonderful part um and I think uh these are all risk-adjusted return adjusted lifestyle adjusted questions so I do not believe for half a second that being a franchise entrepreneur is the right choice for everybody I don't but it absolutely might be the right choice first for some subset of MBA students to consider so I just hope that my writing these conversations helps some people open up their aperture so I'm at dogmatic this is the right thing this is the only thing for everybody it's not uh but but I hope for some people they consider it and they might just discover hey this really fits every everything I want to do and I I should at least give it some time so it's four we jumped into some reasons I'll also say uh with Craig Flynn being the exception Peter um it's unlikely that you're going to become a billionaire or even maybe a center millionaire being a franchise entrepreneur but there's probably a decent likelihood that you could become a multi-deca millionaire and I don't want to measure success exclusively for exclusively through Equity proceeds or net worth but it's one dimension worth considering so so think about risk adjusted open the aperture okay so franchising's a big part of our economy so there are eight million jobs and it franchises in the U.S it represents three percent of our the sort of Industry Association franchises states that there's 787 billion dollars of franchise output in the us annually so so this is a big part of our economy and for students to sort of close their eyes and say hey I don't want any part of material component of what's going on in the U.S might be short side okay so why why should people consider us um first and foremost ETA is all about trying to get into a proven business model and that's why you buy going concern well franchise buying a franchisor starting a franchise takes that notion one degree further so not only are you buying a going concern but you're getting proven systems uh protocols processes in the business which can help aspiring entrepreneurs and decrease the risk of execution so franchisees actually have very stable and predictable cash flows despite many of them not having contractual recurring Revenue so I hope we get uh my computer into the Holy Grail of franchise information the uh FDD franchise Disclosure document but I I won't get ahead of myself but if you look into um brand fdds who often see that same store sales is relatively consistent year over year so despite not having contractual recurring Revenue they're still pretty persistent revenue and cash flow streams um uh these tend to be very fragmented systems so we think of those as either uh Dent systems or lack of density in the system so if relatively few owners own lots of units that's a very dense system but most systems aren't dense there are lots of owners that own relatively few units and that presents an opportunity for programmatic Acquisitions which can be a compelling way to grow so if you pursue those programmatic Acquisitions because you're buying uh similar operations same logos integration might be a little bit easier which can be very appealing aye yo some students are going to scoff at the notion of paying royalty fees uh to franchise ores but just think of the power of renting a nationally recognized brand that most people know so Mike Wingstop uh you are paying royalty fees but tons of people knew where the Wingstop was and you didn't have to create that brand value and Equity so that that's really a reason why people shouldn't do this um so we see this in the ETA ecosystem there's this great camaraderie and community of how to operate build nurture businesses that exists in franchise systems as well you have hundreds or thousands of Co-operators who can help you and advise you on how to build a business uh some banks are specifically geared with specialty lending units towards franchise entrepreneurs which might make financing on the debt side slightly easier all right so I hope we get into this in the second half of our conversation but but the the the the the the the four wall unit economics on some Brands can be incredibly compelling so we'll dig into that a little bit more I hope um there can be very unique real estate economics with sale lease back opportunities uh and this is perfect the next item is perfect for my MBA students you do not have to have a great idea so the uh that's a very compelling fact for MBA students so that was a joke it doesn't get better guys if you don't laugh at that it's not gonna get good um uh and I want to say the next item uh carefully but I I don't think franchise systems are overrun with incredibly talented uh and educated people like Mike and Peter and that means the competition might be a little bit more shallow and not as deep and that can be an opportunity to sort of differentiate yourself as a leader an entrepreneur and finally uh post MBA students might have a profile that's very appealing to franchisor and they might give them preferential treatment so those are approximately a dozen reasons why uh MBA students should at least consider being a franchise entrepreneur that was great AJ a couple follow-up questions for you you know some of those reasons are kind of the reasons more broadly somebody might consider ETA um and and one of the things that you you said was you know unlike under the cons um I guess or was this the pros anyway unlikely to become a billionaire or a centimillionaire but a Deca millionaire there's a pretty you know it's not unrealistic to think you can get there not unrealistic at all right right Peter and Mike would you agree I can't speak or something all right Deca Mike no I I think like time is is your friend in this stuff um to to AJ's point just a minute ago about maybe the competition not being as strong um I think about it a little bit that if you're coming in Highly Educated with enormous Financial connections and ability to get loans and things like that you can probably expand faster than a lot of these people but a lot of the people that you see make a ton of money have been doing it for 30 years and their businesses generate a lot of cash and they just gradually reinvest that maybe it's buying one store every two years then buying a store a year two stores a year opening stores and the cash flow pile keeps spinning and growing bigger and bigger every year so it gives you a great opportunity if you're just willing to sit in it a long time to reinvest that money and you can hopefully reinvest it at pretty great rates of return so it's not that um you know franchise buying a single unit is like such a compelling irr that you're going to make 10 million bucks in a typical PE hold period but it is a industry where you're gonna have a long reinvestment Runway to compound that money at a very reasonable rate which if you're willing to do it long enough you can definitely get into big numbers Mike I I think that's really true so thank you for highlighting two facts one uh we're we're not will uh proposing that post MBA students by a single store we hope they're buying uh a portfolio of stores and then scaling into a regional multi-unit operator over some time frame and I hope we talk about this and what makes the right brand mic but part of that multi-decade or a very long time Horizon is making sure you picked an enduring brand that is not fadish and has legs and will will stick around for you enjoy that reinvestment and compounding it's just reminding me of of the kind of delicate point that was made earlier around there maybe some of the operators or other participants in the in the franchise and franchising generally um maybe don't have the same level of uh pedigree or sophistication um and maybe appetites so I my kind of sense of franchising is that historically it's been targeted franchisors Target kind of mid-career people people with some experience who want to be an entrepreneur and here's a way to buy a job and earn a few hundred thousand a couple few hundred thousand dollars a year but it is kind of the the kind of the NBA crowd the bigger thinking crowd that's saying oh the more interesting opportunity is to roll these up or buy a lot of them but that's not actually how franchisors position their systems to the market correct and in fact some franchisors are uh allergic to that to that thinking like for example restaurant Brands International which owns among others uh Popeyes and and Burger King won't allow franchisees anymore uh to own operations in markets that they are not local to so they require their franchisees of record to be local to the operations that they're overseeing so in some cases this is just this is just no longer in some Brands this is just no longer even actionable other brands want that Peter right they want more sophisticated more capitalized uh better capitalized cylinders it and will I don't want to uh imply for half a second that that people that own handfuls of units are not good operators they very well might be uh and are and they're hard working and they deserve respect and appreciation uh but they might not have the the financial ability or desire to scale a business the way Peter uh wants to or or Michael has yeah just and then so circling back to the unlikely to become a billionaire is sent to millionaire I just wanted to compare and contrast that with ETA more broadly non-franchise ETA do you think the ceiling is lower when you compare it to rolling up not non-franchise doing ETA in a non-franchise context AJ or anyone or or the ceilings kind of no different necessarily my perception is if if you're exclusively focusing on how much money can an entrepreneur walk away with being a franchise entrepreneur is akin to being a non-franchise ETI entrepreneur I don't think there's a difference in scale I'll re-emphasize that I think that's a very narrow way to view your life but if you're focusing exclusively on economics I don't think franchise entrepreneurship constrains the economic outcome for someone considering small business ownership ETA ownership uh it where that might be different is if someone is thinking about doing something in in technology where where uh more ventral Capital Finance where there can be a uh extraordinarily great outcomes with much greater risks yeah how my computer would you agree or disagree I agree with what you said I don't have much to add to it all right let's get into the 10 questions let me preface this by saying this is a conversation just meant to kind of um wet the appetite of the audience everybody interested in the subject should read this case note I mean it really is a road map uh that you that one can use to kind of systematically decide um what brands to go after or if you're looking at Brands already how to think about whether or not they can work for you it's a really really helpful document and we're basically going to go through it starting with the number one of the 10 questions asking yourself what does a successful outcome for you look like does anyone want to jump on that question that topic I'm happy to start on this one because it's it's one that I'm pretty passionate about when I talk to people um there are so many different ways that you could be successful to a lot of the things that AJ's been saying if your goal is to have a five hundred thousand dollar stream of passive income live in a Beach town and get a residual check from someone who's running your operations you can do a lot more or a lot different things than someone whose goal is to sell their business and personally take home 10 plus million dollars and there's all sorts of spectrum in between of what you want to be doing on a daily basis how complicated you want the business to be how many people you want to manage how much you want to invest how much risk you want to take in developing versus acquiring Etc et cetera so I really think it's important to start with if I'm five ten years out into this journey what will I be really happy with achieving and then once you have a picture of what that is you can start to identify the franchise systems that are best suited to deliver an outcome like that anybody want to add anything to that here here um just to kind of set yeah I think Michael you already did with your the kind of the living on the beach example but kind of the bookended example in the document is Searchers hoping for a 200 000 annual salary with a few million dollars of equity value will pursue some Brands While others who long for millions of dollars of yearly compensations and tens of millions of dollars in equity will will probably need to pursue others so you know a huge range here uh and that's something to to Really Define for yourself before you before you embark on the journey I I guess I would just add well and this was this was brought up by both you and AJ The Stereotype of a franchisee I think historically has been a corporate nine to fiver who is in the middle of his or her career building a side hustle as a nest egg for for retirement maybe for uh for their children or grandchildren um and I think to Michael's Point that's that's still possible and that it's still a uh that's still a worthwhile Venture if if that's the goal but um opening up the possibility for something of a much greater scale as well if that's your goal um so I I think the you don't have to be anchored in this historical stereotype of a franchisee as a corporate nine to five or being a franchisee as a side hustle to think of another example let's say you do want to have the potential of a 10 million plus outcome for yourself and you decide to invest build by whatever it may be in a franchise system with 30 units the odds are that each of those 30 units in most systems let's assume they're qsrs are maybe worth plus or minus a million dollars per location so the total value of owning every franchise in that system as a franchisee is give or take 30 million dollars so you're probably not going to own in fact I can say you're definitely not going to own 100 of the franchises in a system so you if you want to make 10 million dollars doing this are also going to have to bet that that system is going to grow maybe from 30 to 100 units and that you're going to be able to own 10 of the system give or take and so if that's your goal I probably would not look at systems with 30 units because you not only have to successfully buy build and run your business in that system you have to bet that the system's going to expand dramatically whereas if you go into an RBI brand or Wendy's or Wingstop or whatever and there are thousands of locations you can get to a 10 million dollar outcome by being a single digit percentage of that system or maybe even less can I just amplify uh there is no right or wrong about what the successful outcome looks like so some people are going to want um eight figure exits and some people are are going to be ecstatic with that beach small town half a million dollars a year image that Mike painted and uh yeah it's not our place to to articulate what what is the right outcome for anybody it's just is this a potential vehicle to achieve your personal and economic Desires in a fulfilling way exactly and and and so the important exercise here is first to Define what you want and work backwards from that um but just two other kind of kind of filters or criteria that were described in this part I'll call out um you know owning multiple units within different franchise systems which I think Peter is your is your you you envision doing something like that longer term yes we currently only own locations in one in one system right right so um so you know that that that is a different Vision than just owning one or two or three units within a single system and then also how long do you want how long do you want to be on this adventure do you want to be you know do you want to make as much money as you as you can then in the next five to ten years or are you Warren Buffett buying forever and you and you know you just want the long the longevity and the compounding um to just play as out as long as you can so um all questions to Define for yourself and then apply to the Matrix of your search okay number two second question what is the right industry or category for the project of course a question that non-franchise ETA entrepreneurs also um look at deeply anybody I can start with this one and I think in that in the case note we we Echo what you just said well which is this is a question that all ETA entrepreneurs grapple with and I think the assessment for a franchise entrepreneur on this on this topic is similar to the assessment for a non-franchise entrepreneur being specific to to franchising the question is I guess the first order question is qsr or non-qsr uh the plurality at least if not the majority of franchise locations in the country are are probably qsr um oriented and qsr stands for Quick Service restaurants for um for those who are not familiar with the acronym um and examples of non-qsr locations might be ones like Fitness Concepts Planet Fitness is a is a great example of a multi-thousand unit big box uh Fitness Concept and I think the criteria to consider uh when evaluating this question of qsr versus non-qsr is just the primarily the durability of the demand for services in that category a and the economic characteristics uh of of businesses that operate in that industry just as you would uh in a in a non-franchised context I can give you a little bit of um specifics as to how I consider this question we were evaluating our first brand to me it was important to be in a slightly less competitive category so we currently operate in uh in health and wellness broadly and very specifically in Chiropractic Services where there's really only one skilled uh chain player franchised or independent operator and so it was important to me to be operating under an unambiguous category leader in a category that I thought had attractive growth Tailwinds uh at its back excellent that's that's really helpful yeah and and so Michael maybe let's hear the other perspective because you and in fact did buy into qsr and qsr also fast food kind of fast food chains um is just another more colloquial way of describing it um and to to the point of the case note like for a lot of people that's what franchise means it's you know it's McDonald's it's Burger King but of course as we all know that there's franchises for everything under the Sun so Michael what did you how did you decide on qsr the main driver was that you could get the most scale in in restaurants and those who heard our first conversation might remember that I started off with two partners and so part of our lens and from day one was we've got three guys who work in finance make good salaries who are going to quit to do this we've got to get something big enough that we can afford to pay three guys and give them a financial opportunity that lures them away from a hedge fund or whatnot and in qsr there's dozens of choices of systems with many hundreds if not thousands of units where you could start off buying 20 30 40 Restaurants and there's so fewer number of systems outside of restaurants where that same thing is true so we just decided we would focus on restaurants primarily for that reason with the follow-on reason that most of those brands that are that large have been around for a while have long operating histories and you can go back and look at their performance historically and get comfortable that in recessionary periods these Brands tend to still do well because they're value-based options or that the gradual share of consumers dining out versus preparing food at home has grown for decades and I think will continue to grow and so you have some kind of bigger macro supporting elements to qsr being a good long-term place to be that you don't have to go industry by industry and understand what's happening in Dog Daycare and Chiropractic in this Fitness Trend in whatever else it may be and Michael what about Peter's point about competition so you you know for every time somebody stepped into one of your Wing Stops they had maybe considered nine other food options before you got them in the door uh did you feel that in any tangible way certainly I imagine for Labor uh that that's one place one way the competition plays out do you want to talk about that yeah I think for Wingstop specifically they have probably one of the best competitive positions in the restaurant world there really aren't a ton of other brands particularly in the format focused on delivering carryout that do chicken wings uh on any scale or competitive level to Wing Stop obviously there are tons of dining out options in general um I think the honest truth is we didn't worry about that too much it was we looked at Wingstop and said boy these guys have been averaging million plus unit volumes for a while and they're growing every year and that's kind of good enough for us we don't need to try to be too cute in figuring out why that is or whether suddenly something will dramatically change on that front well it's just wonder two themes on this topic of picking the right industry or category um I I wrote something uh several years ago called on the nature of economic care characteristics and I I encourage people when thinking about which industry or category in a franchise context to think about the economic underpinnings so qsr can be incredibly compelling mic but it tends to be more Capital intensive than educational services so Kumon is an example is uh uh educational supplementary Educational Services which has much less cap backs than a qsr sort doesn't mean once right or wrong it just just means that you need to consider that so really understand the economic underpinnings of each of these categories and Brands and then if entrepreneurs can have the self-discipline to literally close their eyes to what the business does a focus exclusively on the economic characteristics and only after they get really comfortable with the economic characteristics should they unmask the business and assess whether it really is a fit for them or not so so some people cannot be in qsr no right or wrong and some people cannot be in other franchise systems where the core service that's provided just doesn't fit or resonate with that but I would encourage people first focus on the economic characteristics blindly and then decide if it's a fit because too often we approach what the business does and come to preconceived conclusions before we actually understand the economic factors at play I love that point AJ and I love that that way how that was articulated in the case note and to just to be absolutely clear you're not saying you're not saying don't consider your own personal interest or whatever The X Factor is for you it's just do in in terms of sequencing these things do it at the end first do your economic quantitative analysis sort of quantitative analysis and then and then once you arrive at you know good candidates then unmask as you put it unmask the logos really like that that's actually the final question so we'll probably revisit it moving on to question number three the brand at what are the brand attributes and qualities being sought by you the entrepreneur so there were um there were kind of a few a few kind of um spectrums here does somebody want to articulate those Mike I think this was your framework so why don't you uh take a crack at this uh sure so I guess the the three that we sort of offered were first the um age of the system and kind of current uh likely implying the current kind of growth trajectory of the system so you have mature systems where there are not significant amounts of new unit growth every year because they've been around for a while and have opened most of the sites that are likely to be able to be supported by that brand or you have emerging systems where it is a newer concept there's a lot of white space so that's going to have implications for can you do more M A or do you need to do more development as a growth strategy along with other implications the second one we offered is kind of where in the um kind of quality versus value tier does uh the brand sit so you may be doing um a high-end brand or a low end brand and how did the investment and returns of those Brands uh compare how to the durability of those Brands during different economic periods compare and then finally we have in favor and out of favor so even within qsr which as a category has been growing and durable for a long time you'll see individual Brands go through Cycles where they're either performing quite well or quite poorly so Burger King was acquired by RBI I can't remember 15 years ago or something like that RBI came in did a bunch of things and really re-accelerated growth and excitement around that system and it had several years of outperformance in the category and it's now kind of come back down and been underperforming the category more recently and similarly people may remember Papa John's had a bunch of issues with the founder and whatnot a few years ago and it kind of completely fell off a cliff over a year or so and got built back up so thinking about where you're entering the brand in the core context of that cycle is important I would say on this one in particular I would be very hesitant on entering a brand and trying to catch it at the bottom of a cycle before a turnaround I think that's a lot harder to evaluate from the outside and rather than catch a falling knife I would much rather look at a brand that's performing well or improving and try to evaluate how much that has room to run versus trying to bet when a a negative Trend will reverse itself Peter for sorry The Joint Chiropractic is the name yes of the system um tell us how it where it falls on these three spectrums classic or classic or emerging it's emerging it's it's emerging it's got uh it's got about 900 units Nationwide uh which is a a sizable brand our our kind of uh finger in the air scale threshold was 500 units Nationwide um but that's not a hard Line in the Sand uh on the premium or moderate Vector um I think honestly the brand is still trying to figure this out to some degree um my personal assessment is probably closer to the value based end of the spectrum than the premium end of the spectrum um but I think there's some work to be done on merchandising at the franchisor to really price discriminate um to to get to the bottom of this question um and then I would say in favor or outer favor it's probably closer to the in favor end of the spectrum than out of favor end of the spectrum just because of the attractive membership-based business model characteristics um that underlie the concept the other thing I would add to to Michael's um to Michael's commentary um when when evaluating these questions is is sometimes this question is a first order question to filter a number of Brands before you actually spend real time on the brand sometimes it's a second order question which is you've identified a brand um that you're interested in and you need to determine where it fits on these three vectors and the question should be asked is if it's a for example if it's a classic brand that offers that that's it if it's a classic in favor brand that you're not an existing franchisee of why are you getting shown this opportunity or why do you have an opportunity to be the franchisee in this situation um and so that's just another it's all to say sometimes this is a first order question when evaluating an opportunity in franchising sometimes it's a second order question and it matters which Step it comes yeah well can I just uh throw in one thought also um in favor is not necessarily good or bad so in favor growing maybe it's classic maybe it's emerging uh that's gonna be reflected in multiples so uh some of those assets are going to be priced um priced up so I think in the paper we use Taco Bell as an example of in in favor classic growing so Mike your qsr guy if if you own if someone owns a hundred or or a couple hundred Taco Bells they're thrilled right now that's a very very good place to be but if you're trying to buy Taco Bells that's an expensive proposition and that's gonna be reflected in the Returns on the investment so I have an acquaintance I wrote a case on Barry Dubin who's buying up uh uh Kentucky Fried Chicken uh and he might be the largest Kentucky Fried Chicken operator in the U.S I think he's got close I I I I I yeah I can't recall is it possible he's got a thousand stores maybe he's got a thousand stores but uh you know I'm not sure Kentucky Fried Chicken is is in favor or growing it is classic but he's figured out that this is the value proposition point where he wants to play uh in the purchase valuation and the returns that he could generate for himself and his investors so just want to double down that hot doesn't necessarily mean that's the right place to play so slightly out of favor can be good uh from a cash generation perspective and my computer would you agree or disagree No Doubt yeah I'd agree I think I I certainly would have a bias towards paying I actually really like where you're talking about kbp very juven's company um you know in a system that's not at the top of its game but not struggling and you're paying kind of average price like that feels like a great place to be but you know take Subway right now if somebody offered me a big Subway portfolio for two times cash flow I wouldn't even bother reading the materials because I don't know what the the revitalization strategy is for Subway but it's not there yet and it's I think very difficult to pay a low enough amount to overcome a declining system but Mike going the other direction if you want to be in Taco Bell as an example my good is that's a top decile entry multiple absolutely uh and and you know that might be a great strategy but it also might just make it harder to generate attractive returns right yeah there's certainly some natural ceiling to the the multiples for pretty much all of these Brands and if you're buying them at the top you're not going to leave yourself a lot of room for multiple expansion or well it sounds like we're zeroing in on maybe it's maybe the spectrum is is kind of three notches in favor Less in favor and then outright out of favor and in favor and less in favor you can play you can justify the decision there but if if a system or a brand is really out of favor unless you're a turnaround artist or really know what you're doing or have some special Insight it's probably not for most people listening to this that that's my personal opinion I'm sure there are people out there making a ton of money scooping up those those low valued ones and doing well with them though well I don't know where Midas uh the automotive franchise fits it's a it's certainly a uh a legacy brand but Brian beers uh has been on the podcast and and Brian has 30 plus units um and that you know that's certainly not a hot brand so I don't know where that falls on the Spectrum but he um he seems to be doing well by it so okay let's move on to question number four I like this one this is what are the franchisers qualities and characteristics and um I like it just because it really gets us into the question of the franchise or which is this whole third partner that you're gonna that you're gonna have or I guess partner that you're gonna have as an acquisition entrepreneur um that that you know this gating mechanism that that we've talked about can um getting into the franchise you have to you have to work with the franchisor and kind of convince the franchise or Michael can speak to that um and then for the duration of your holding of these of these locations the franchisor is is kind of this element of risk and this partner that you're going to have it all at all big moves along the way so I'm I'm getting ahead let's let's get into to this one franchisor qualities and characteristics go ahead I was just going to say that what I think this section in the case note really all boils down to is evaluating the question of does the franchisor earn the royalty that you pay it so in almost all in all the cases that we've talked about so far during this conversation uh the franchisee pays the franchise or a royalty in the form of a revenue share um and and in in many cases that's a substantial portion of of store level uh operating profit and in some cases for underperforming stores or young stores it could be 100 of operating profit at the store level um so figuring out whether the franchisor in fact is earning its royalty is important and a franchisor can earn its royalty in a variety of ways one it can uh a franchisor can lower customer acquisition costs for each of its franchisees um above and beyond what a an independent operator in the same category could afford for its own four walls um a franchisor could negotiate um beneficial uh beneficial pricing throughout the supply chain to benefit franchisees above and beyond what an independent operator could negotiate for him or herself um a franchise War could have sophisticated menu setting and Merchandising analysis that is more sophisticated than what an independent operator might be able to afford and and on and on WE introduce a couple of other uh a couple of other ways a franchisor could earn its royalty in the case note um so what I would say how we evaluated it when we were considering the joint was primarily from um through the lens of customer acquisition costs um so it became pretty clear that operating a uh a membership based kind of concierge focused Healthcare light consumer retail concept was a dramatically better customer proposition relative to how the rest of the category was offering its services through a more kind of traditional Healthcare focused concept and just with a little bit of marketing expertise on the brand building side and on the local digital side you could you could drive pretty attractive uh demand through the stores coupled with an attractive real estate footprint and a lean Staffing model that customer acquisition and demand Generation Um translated into very attractive unit economics in the four walls so I'd say our assessment was primarily on the customer acquisition vector yeah Peter can I amplify I think uh this is also about training yes uh the the sort of Technology stack that comes with the logo but the infrastructure you get and the opportunity to be the best operator you could be in the system and Mike I think we also spoke about in this bucket whether the logo was institutionally owned or entrepreneurially out so so uh some franchise Wars are incredibly attractive business models and very very desirable assets to own either uh after they go public or by a private Equity Firm but but who owns the brand is probably going to trickle down to the franchise e and what that feels like and what that tone is in that relationship but but if if you're picking a partner hopefully for a multi-decade period this is the marriage so you're you're picking your partner and this is a choice you really really want to get right I think those are kind of two good sides of of this topic like the way Peter kind of outlined hey you what are you getting for your royalty in this brand um you're getting the use of a brand you're getting competitive advantages and supply chain or in marketing or in the network of other locations that people can interact with if they're a customer of yours in some cases what not um and then the second side of does the entity that manages all of those things do it in a we all win let's grow the pie relationship or in a we are on the other side of you every bit of value that we get takes away from you and that's a zero-sum game and institutional ownership can be a a signal um not necessarily correlated in either direction just gives you a kind of point to look at and say okay this is the person behind the brand now let's go figure out what what they care about I I recognize that the answer is it depends but is there any kind of directional historical Trend in terms of oh my franchisor was just acquired by private Equity that of that being either good or bad news I don't know enough to say um but you know there are entities like roork capital is a huge private equity-backed franchise owner they own tons and tons of Brands and by and large everyone I know who's operated in one of their systems speaks very highly of them and thinks that they really understand it they have a lot of franchisees Who start in one brand and go back to a second brand in the roork portfolio which speaks to obviously how that relationship's working you can go Google New York Times articles of other private Equity firms that have bought franchises and allegedly run them in much less favorable ways but I'm not sure there's a a well-known path one way or the other well I just want to um Circle back to something that you talked about at the top AJ about why people kind of reflexively are not interested in franchising and those fees is often one of the first things out of their mouth um but it is but in this section just really highlights the point that that really is kind of an unsophisticated way to approach this because what you're getting for those fees you are likely going to be spending on yourself Marketing Systems um educational materials Etc so so I really like the way that that you all phrase it in this section the question is not you know oh there are fees that's bad news no it's does it earn the fees what are you getting for those fees and by the way you you also have six questions here you say that a great source of information about whether or not those feel those fees do indeed seem to be earned by the franchisor is talking to the existing other franchisees do they feel like these that they're getting a lot of bang for their buck in the terms of the in terms of these fees and you all have outlined six questions six specific questions you can um you can take around to franchisees that you network with what is the franchisor's training and support like for New France franchisees are the marketing efforts directly driving volume to your stores I won't go through all six but actually let me just double click on that point talking to other franchisees um Peter did did you how much talking to other franchisees did you do before you committed to the Joint I would say my franchisee survey work coincided with my acquisition sourcing work so it's it's hard to say specifically like how many franchisees did I speak with before committing to the brand but I probably spoke to at least 15 franchisees before uh before we made the first acquisition in in the system it's a lot Michael what about you that's a great question don't say don't say a hundred no I I think we probably spoke to far fewer we were we were kind of waiting for actionable opportunities in brands that we liked and only then really reaching out we weren't so much reaching out to franchisees as part of the are we interested in this brand Discovery phase but more in the hey on a confirmatory basis to the numbers that we are underwriting in this particular portfolio or brand make sense based on other people's experience so we did it fairly far down the funnel hey I'm I'm working on Mike and Peter which I might recruit you for a sort of a a breakdown of the franchise Disclosure document uh that's why my on Deck projects right now but when assessing the franchisors qualities and characteristics there's information in the FDD so Peter and Mike maybe you could talk about bankruptcy uh litigation but there's information in the FTD that will give you some hints about whether whether the franchisor is a good player or a bad player do you want to talk about that sure and I would add that uh in both Mike's system and my system the franchisor is actually listed so there's a lot of public information available that's presented to shareholders of the franchise or that prospective franchisees can use in their assessment of the the concept um in the FDD uh a couple of helpful sections that come up in each of them and Michael if I miss anything please keep me honest um are the number of resale transactions in the system on an annual basis which should provide some signal as to the level of satisfaction the existing franchisees have with the operations in most cases and this is a generalization in most cases the lower the number of annual resales in a given year the happier the existing franchisees are either with the franchisor or with the financial performance of their locations um and then the second thing I think you're probably trying to tease out AJ's the number of store closures in a given year um which is probably a more pointed assessment of the health of the franchisee base because in most cases even if an existing franchisee no longer wanted to operate his or her store if it was a healthy location either the franchise or would buy it back or there they would be able to find another franchisee to take it over I think those are probably the two most important pieces of an FTD that you're getting it doesn't the FTD also disclose uh litigation yeah there'll be summaries of um passed an ongoing litigation and you can kind of dig more into those I I would expect that in most brands that you'd are performing well enough or interesting enough for a prospective entrepreneur to to be attracted to there shouldn't be too much there I mean even in great systems there'll be an occasional lawsuit here or there over something which is certainly not a big deal um so I didn't when we were looking at Brands really dive through those in in particular detail I think also looking at super large Brands you know if there were a couple Wendy's lawsuits out there or whatever probably wasn't going to rise to the same level but if we were looking at a 100 unit concept and four franchisees have been involved in litigation that would be a much more meaningful signal and I think this point the the very existence of the FDD just highlights the fact that franchising is regulation around franchising um that requires these disclosures so you as the acquisition entrepreneur can benefit from from this extra transparency that the regulation sort of forces what were you going to say Michael we should make sure to mention uh if you attempt to find the FDD for a lot of Brands they're not necessarily available for free download on the websites and you'll find a lot of scammy websites trying to get you to pay them to get the document uh any franchisor that is selling units in the state of Wisconsin is required to post their FDD on a government website for Wisconsin and so for just about any brand you're interested in Google Wisconsin FDD search and you can find all of those documents for free easy to download easy to navigate so there's a lot of information out there don't pay anyone for it I would also just add a a cautionary note to over Reliance on the FTD I think it's important to validate with specific calls like Michael described uh information that you're taking from the FTD with existing franchisees because there is some level of discretion that the franchisor has with what it discloses in the FDA great moving on to question number five to what degree is their operational flexibility who wants to take that one I'm happy to go I feel like I've been talking maybe too much but uh see you later coming up next prepare for question number six um so I think that's actually operational flexibility might be the number one reason when I initially searched I avoided franchises is if I'm running a restaurant and I've got a great idea for a new menu item or I've got a different model of service I want to try out I want to be able to do that and I don't necessarily feel like a full-fledged entrepreneur if that stuff is off the table which It generally is in a franchise system um that's not the point of this this question but I think it's an important aspect to consider in franchising uh for us going through covet as an example in a restaurant brand you are getting stuff thrown at you felt like daily for a couple months in terms of new regulations on safety procedures social distancing delivery dine in takeout and so being able to respond by adjusting how you conduct your business to that is really important and in some franchise systems there's going to be wide latitude to deliver the service in different ways or the franchisor may be very quick to respond with uh changing its policies and procedures and in other systems there may be very little room to to deviate so in a qsr brand you can't really change the menu on the Fly there's a lot of work that goes into the supply chain you're not really going to change your menu prices on the Fly there's time consuming stuff and work that goes into doing that you're not going to suddenly be able to rejigger your drive through or your dining room or your space to cater to a particular new method of delivery um and so I think the uh types of franchises that allow you greater flexibility that is appealing and so I think we highlighted like the disaster recovery businesses in the case ServiceMaster servicemax where you're not really being told much more in those Brands than hey you're going to go in and provide these various Disaster Recovery Services how you structure your cruise what equipment you buy how you Market your business how quickly you get to places and quote and get back and go through the sales funnel all these things are largely going to be up to you so that could be liberating for some people that could be not enough value given to you by the franchisor if you want to be told more how to do this well in most cases the examples that Michael just introduced were things you can't do or things you can do the other side of the coin is things you must do um in in evaluating this question there are some examples uh Planet Fitness is a good example where every uh every couple of years franchisees are required to um to invest in entirely new gym equipment which is a very large Capital expense above and beyond what it costs to build out the the location I've heard of other examples specifically in health and wellness where franchisors are experimenting with new modalities to roll out into their stores and they require franchisees to invest in expensive equipment that's new to the stores to support the new modalities that they're trying to roll out system-wide I think in some qsr examples there are also uh franchisors have also mandated investment in things like digital ordering boards in drive-through lanes that might be Capital expenditures above and beyond what franchisees anticipated having to invest in so I think there's both the question of like what can I and can't cannot what can and can't I do as a franchisee and what might I be forced to do uh in the future that I'm not currently underwriting yeah it's a great follow-up Point Peter and this this point about yeah what what might I be forced to do is that is there a spectrum there I mean because you don't know what you don't know you don't know what the franchisor might dream up in two years that they're gonna that they're going to impose upon you is there looser stricter language in in your agreement with the franchisor that can kind of indicate how onerous some future requirement that's impossible to predict might be it's in our that language in our franchise agreement is the franchisor's standard language but I have heard of examples where franchisees will negotiate into their franchise agreements uh bespoke language that says for example we will not be mandated to invest in uh in capital expenses um on any more frequent Cadence than our our franchise agreement renewal term or sequence and so in those cases if there's a new modality that's rolled out that requires a capital investment uh that franchisee wouldn't be required to make that investment until the franchise agreement term renews as opposed to you know in in a year okay question number six what are the demographics of the current franchisee base so so what do we mean by demographics what what kind of crate metrics of the of the of the franchisee base are we looking at yeah so I think this uh in part goes back to the uh to the idea that AJ raised at the top of the conversation around uh the density or lack thereof of the existing franchisee base or the system uh and density again is is an assessment of uh how many locations the average franchisee owns this matters primarily uh in a in an M A or acquisition heavy scaling strategy so on balance a a less dense system is going to be more supportive of a an m a focused strategy than a more dense system for a variety of reasons one um the there are already likely going to be in a dense system uh franchisees of scale who are preferred acquirers for any locations that might transact um and then B there are probably just going to be fewer locations uh that are transactable in a more dense system versus a less dense system all else equal this is one of the primary vectors that we uh that we looked at when uh when evaluating Concepts to to start night franchise Holdings with we wanted uh to find a system that had this critical uh scale that that I mentioned before kind of above 500 units but also one that hadn't yet seen the consolidation activity that a system of 1500 plus units might have seen um and so I'm I don't know the the numbers in the joint right off the top of my head but it's about 900 900 units the franchisor actually owns 150 of those units so for all intents and purposes there are 750 transactable franchise locations uh and I want to say the average franchisee probably owns uh three to four locations so pretty pretty fragmented system the largest two franchisees own about 50 locations um and there's a long tail behind that so this point about how many locations that the the the franchisor May own on the one hand you have to consider like however many locations it owns only the the remainder are those that might be acquisition targets for you but what other what other things to consider there yeah so I wouldn't even say that the point that I raised was the most important point when thinking about whether the franchise or own stores and if so how many I think the most important the two most important points on this topic are one does the franchisor understand how to operate a store in their system uh and two whether corporate is PR the management team of the franchisor is predominantly focused on being a great franchisor or is predominantly focused on being a multi-unit operator because those take very different skill sets to be good at um so I would say again this is I'm generalizing uh on balance a franchisor that owns 15 of the system 20 of the system is going to be a whole lot more focused on its own corporate owned portfolio of locations than a franchisor that owns two percent of the system that primarily only owns stores to test new initiatives before they roll it out to the whole system so I would say those are probably more important on this topic than just like you know how many franchise locations are there to acquire as a prospective franchisee so there's a sweet spot not too many not none but kind of a small handful where you know that they are really getting front line contact with with the the same experience that the franchisees are all having I don't want to be too prescriptive on like what is good what is like the best situation I think it's all situation specific where it's like if they're a really strong operating locations that are not creating distraction for management then like you know maybe more is better than fewer and maybe uh maybe if it's an emerging franchise or the franchisor is going to own a much larger percentage of the system to kind of like develop the brand before it puts that burden on franchisees and so maybe a franchisor is going to own half the system to start and they're going to refranchise those corporate stores over time as the brand becomes more established and the attention from an appetite from franchisees is is stronger um I think also in this uh demographic bucket we spoke a little bit in the case node on institutional ownership versus individual ownership so we spoke a little bit about private Equity ownership of the franchisor but there can also be private Equity ownership of the franchisee so is this a portfolio of uh non-non-institutional owners or is it a portfolio of institutional owners and then also just the notion especially in a classic brand of what what's the average age of an owner and if an average owner age is approaching 60 or something like that that might present a programmatic acquisition opportunity as compared to if the average age is significantly younger so uh what was there anything else Mike when we spoke about demographics we spoke about density we spoke about uh institutional non-institutional ownership average age what what no I think we've uh We've hit it yeah AJ programmatic acquisition so I feel I should know this phrase is this something is this a phrase you came up with or is this one I should know from I'm showing my own lack of MBA here that I don't know Define it for us please yeah it should it's I've written a bunch about uh about this notion programmatic Acquisitions but the the process of buying on a Serial basis Assets in the either a given industry uh or related Industries to to help scale an Enterprise has compared to Growing organically exclusively so but but I think in the franchise world that there are certain situations that particularly lend themself to considering a programmatic acquisition strategy which can be very lucrative over long periods of time well and and I I think one of those is one of the pros you've had for franchising at the top which is that integration is one of the biggest challenges of a of a programmatic acquisition strategy and that's one of the things that franchise systems make so easy or so relatively so easy yeah one more plug for the FTD franchise Disclosure document and I I agree with you Peter take it with a grown assault but franchise ores uh are required to disclose every single franchisee operator in the FTD so if you are considering a perk Mac acquisition strategy in a given logo the franchisor very conveniently has provided you with the contact list of every single Potential Prospect yeah for anybody who's ever engaged at a roll-up or contemplating something like that just being able to dump the contacts in the fde FTD into your CRM and get to work is pretty enticing I guess question number seven is the system large or small and what are the geographic Dynamics we've talked size already a little bit but let's get into it a little deeper Michael you want to take that one sure I think we've covered size pretty well so maybe quickly on on Geographic um it's generally going to be correlated to size unsurprisingly but the larger the system is by unit count the more likely it's in many if not all of the states and I think understanding where a brand is on that stage is pretty important in your decision on where you're going to go in that brand so if there's a great Regional brand that has a super strong reputation in the Southeast or the northwest or wherever and you're going to be the first person to open those locations on the opposite Coast back to what we talked about and what are you getting for that royalty for the start you're not getting very much in terms of brand awareness for those royalties that you pay because nobody outside of that market has ever heard of this brand you might as well just have started your own independent brand if you're starting to do that in a concept that's growing very quickly and there are other people like you developing in other cities and states nearby that critical mass gets built up pretty quickly which is a definite advantage of being a franchisee but if you're really being the first one out there and nobody else has taken any of those other markets yet you might be asking yourself is it really worth doing all this work paying all these royalties for a brand that I'm going to basically build on my own for the people who live in this community excellent point question number eight this has been touched on as well already a little bit what are the store level economics and financial particulars of the franchise system so really understanding unit economic comics and how money flows in and out of this business uh care to elaborate AJ yeah so when I think about unit economics this is a super important topic to really drill into and when contemplating the store unit economics I like to think about two two ways to approach it one is from the balance sheet how much capital is required to launch a store and some of that information is available in the FDD um and then additionally what is the store level p l statement look like so with those two pieces you can figure out the return on invested capital for a new store similarly you want to figure out uh the return on investor Capital when wiring stores so not ground up but acquiring stores and sort of in this bucket you want to understand the finance ability of either organic or acquired growth how much Equity do you need and how much debt do you need but but this is a really really important topic to consider and in the first case note we we did uh some of the store level economics are really high so Peter I I think you calculated these so I'm going to attribute it to you whether right or wrong uh but Planet Fitness has store level returns of approximately 35 percent European Wax UH 60 uh Massage Envy starts with a four so these are really really fantastic unit economics to Aspire towards a quick disclosure when we calculated return on invested Capital we did not consider leverage we did not consider changes in working capital we did not consider maintenance cap X or episodic franchise or mandated uh yeah I guess you would call that maintenance get back for reimaging expenses periodically so these are directional indicator of unit economics but probably not perfect uh and then I I feel obligated to highlight that franchisor franchisee unit economics do not reflect sort of the corporate SG a or the corporate shared services at a multi-unit operator would need to have so that's really the four wall store field economics and from that to get to a free cash flow number you need to deduct the corporate the corporate drag AJ do you highlight this is something you think is particularly important because simply it's it's just fundamentally it's kind of the business model I mean it's the numbers under underpinning the business and do you find that maybe people don't assess this as closely as they should yeah I'd be I'm I'm working on this franchise Disclosure document thing uh and I'm using crumble as my as my example the ubiquitous cookie uh company and I'm using it because my daughter loves crumble cookies so so over the weekend I was telling him about the FDD and talking about crumble and my wife uh spontaneously said we should open up a crumble complete disregard to the economics just I like cookies I want open up a crumble so yeah I think people are susceptible to uh at least slightly de-emphasize the economic underpinnings and the math for for either service or brand affinity now well can I just double click on something that AJ uh introduced I think is really important probably particularly for your uh for your listeners who I suspect are going to be considering scaling Beyond one or two stores and will likely need above store infrastructure that that AJ mentioned um so it's it's not only an assessment of the headline return on invested Capital that you can generate from investments in de novo developments and or M A in the system it's also like the the dollar Quantum of store level profit that the average store generates um and I'll put some specific uh illustrative numbers around what I'm talking about to hopefully make it clearer if a store on average only generates fifty thousand dollars of annual operating profit it's going to take opening or acquiring a lot more stores to be able to a lot more stores cluster geographically to be able to afford a multi-unit general manager who's going to be tasked with on a daily basis um making sure those stores are are running as you hope they will uh on the other side of the spectrum a Planet Fitness can support uh two two planet fitnesses can probably support um a a multi-unit general manager because the average Planet Fitness probably generates I'm gonna spitball here uh I guess it probably generates 750 000 of store level operating profit um so so I think that's a really important assessment as well that the actual dollars of operating profits the average unit generates when you're considering uh building a multi-unit portfolio of these and is that so so that you're calculating in your own mind what it will like the number of locations the number of moving Parts it'll take to be able to start kind of introducing middle middle layer management or per I think it's something that you talk about regularly well on your your podcast the notion of working in the business versus working on the business um if you start with a two-store acquisition in Planet Fitness you're gonna be pretty close to working spending more of your time working on the business than if you buy a two-store portfolio of uh your joint Joint chiropractic clinics for example well this also reminds me of the phrase I saw on Twitter recently new to me maybe others know it return on brain damage so as opposed to return on invested Capital it's like you know if I have to have you know 20 stores 20 locations each with their own employees and their own interactions with customers to get to a million dollars of operating profit versus you know two Planet fitnesses you know there's there's going to be kind of a lot of a lot less operational pain you would think in option B versus option a uh Michael from your experience do you have opinions here yeah Peter beat me to the point I was going to highlight on on size and one other aspect of that isn't just can you afford the GNA but in his example 15 of these 50 000 a year units to get to the same amount as one Planet Fitness well not only that but those 15 units that you've got probably need more than one multi-unit manager because there are 15 different touch points for things to be managed in verse one so even though you need more units to get to afford the same level of genetic you also need more GNA so it's a really disadvantageous position when the cash flow per unit is quite small well can I just throw in one more element on you in economics without belaboring this issue but but looking at the investor Capital looking at the free cash flow at the store level looking at the genie track I think it's also really worthwhile to look for in the FDD store closure rates so that's what the risk adjusted return on Capital so so store closure reads don't tell us if a store is doing well or or just surviving but it is some indicator of how often the store closes in a given system so uh it's something I would look at also when thinking about unit economics okay two more to go question nine was uh what are the actionable entry points into a system Michael I'm going to give you this one because we spent a good amount of time in our interview on this very question so please go ahead sure so we talked a lot about size and how often portfolios come up for sale based on the age of the owners and stuff I think the big piece we have not discussed is the receptiveness of the franchisor to you coming into the system so we highlighted in the case that there are really successful systems that many people would love to be a part of like dominoes like Chick-fil-A like McDonald's that have extraordinarily difficult acceptance processes to become a franchisee and in some cases regardless how talented or qualified you are if you don't meet certain criteria like having worked at a Domino's or been in the McDonald's family you're just not going to be allowed in and that's so heuristic that they use to keep the type of people running their restaurants that they want so I always give people the advice once you've identified a brand that you think is interesting before you start hunting for deals talking to Brokers calling the franchisees trying to find an opportunity to buy something call the franchisor introduce yourself explain to them what you're trying to do where your money's coming from how big you'd like to get all these different things and make sure that they're at least tentatively receptive to you doing that because you could save yourself a lot of heartburn having spent a bunch of money to get a deal to an Loi or further on and then show up on the franchisor's doorstep only here sorry we're not interested in people backed by private Equity or we're not interested in people with no experience in this industry one of the other points made in the in the case note about this was also willingness to build more stores uh and Michael I I think that came up with Wingstop so so talk about that a little bit it did I would say Wingstop um knows that they have a very attractive system for developing and so they don't have maybe as much difficulty as some other systems do in getting franchisees who acquire units to also want to develop them but Wingstop and any other brand will certainly say to you if you're entering the brand via acquisition okay you're buying these locations we think this Market isn't fully saturated yet and can support X number of additional locations we'd like you to buy the rights from us and go build those as well and it's sort of a put your money where your mouth is if you're so interested in buying and operating our locations in this market are you really interested enough that you'll put dollars into building new ones to help grow the brand or are you just interested in kind of consolidating cash flow and not kind of taking any risks which make you a less appealing franchisee to have Peter maybe this is a question for all of you these stories of these outsized successes of people who bought so many franchise um who built up these giant franchise businesses those folks are also probably building a lot of those locations they've just like Michael described they're going to be both buying and building definitely I think it's a combination a combination of both so to be a real serious buyer an acquisition entrepreneur in the franchise World be prepared to eventually maybe you want to sidestep it initially and that's why you're going this path but eventually uh be prepared to to build some some units out and expect the franchisor to smile upon that if not almost require it and and to be honest there's an absolute negotiation around how many units and how long you have to build them but if you look at a system and say God I would never want to build a new unit in this but I want to go buy these I would stop and reconsider whether you even want to buy them if if the math is really that unappealing to you to develop new locations it's probably not the greatest system and you might want to walk away you might only want to build three instead of six very reasonable to you know have that conversation but if you really want to build zero I'd kind of be waving the the red if not the yellow flag and Michael was the the agreement that you had like were you contractually bound to build out a certain number of units in in your markets when you made your initial acquisition we agreed to build five after our first acquisition and once we had built those we agreed to build five more and then after doing another acquisition down the road we agreed to build 10 more on top of that and that was all negotiate you were that was part of your negotiation you arrived at those numbers after back and forth correct the the consequences for not doing it were only that I would have lost The Upfront investment I made to buy those territory rights it wouldn't have impacted anything regarding the restaurants I already had up and running but it would have left me in a position with the brand where now I've made a promise and made an investment saying I would grow the brand I've renegged on that investment for one reason or another they're probably not going to want to see me grow any more than that and I've sort of burned that relationship so not advisable well Michael your point about you know it being a yellow or maybe red flag if if you yourself really just for whatever reason find that you don't want to have to ever build any more locations in a system you're considering acquiring into um is a nice segue to the final question kind of The X Factor question do the entrepreneur do your personal goals fit tightly with the system um AJ also just touched on this with the crumble story AJ why don't you take this why don't you take this this final one we've been we've been circling around it for a while but let's make it explicit well the crumble system fits my wife's and daughters subjective so I don't know if it's my object um yeah I think this was just sort of our our casual sort of trying to bring back the examination analysis process to is this a match for you so so somewhere towards approaching the 10th question you unmask what the what the brand does and you decide whether it fits based on your your skills your strategy your Capital your growth expectations but but you know some people can't see themselves in a oil changing business so not for that um some people have to be in the premium logo within a given category that's fine but but just trying to assess does it all come back to a place where you could actually build a meaningful fulfilling life with this brand or logo part of it as your entrepreneurial Channel and does it generate the financial outcomes that you individually seek and require and just sort of making sure it all lines up and fits for what you're trying to accomplish in your your life I love this line for example a model with compelling Financial attributes and an auto services concept might make all the sense of the world for some Searchers but could be met with flagging energy for others who just cannot see themselves building a career underneath the hood of a car very very well put um can I take credit for writing that my computer did I write that one a hundred percent it's a great line I have it here underlined um but AJ let me actually now that I'm we're talking this out let me push back on it a little bit the whole point here is to unmask at the end but if I'm so averse to not working in a premium brand or working under the hood of a car why wouldn't I want to know that sooner rather than doing a lot of analysis and only and then only later unmasking and being like Oh well I you know I could have told you from the start there was just no way I was going to get involved in Midas you know why not do it kind of contemporaneously contemporated sure sure good question will will I hope I hope curious uh an open-minded students get to the end and when they unmask they say oh my gosh I never realized Midas is going to give me everything I wanted maybe I really should consider Midas and it really fits everything I absolutely wanted creative need I just didn't realize that at the beginning of my journey and now after going through this process and exploration analysis I realized I really should consider that and if they can't still do it that's fine that's always their choice but if a brand or logo is going to fulfill every one of your personal and economic needs maybe you should consider it regardless of what the business does as long as it's legal and ethical Michael how much do you like chicken wings I am a huge chicken wing fan I would not have said that when I started with Wingstop I was average enjoyment of wings and I have more appreciation for them now uh than I did before Peter do you you know the question yeah I would say the same thing about chiropractic care I'm I'm not a chiropractic evangelist but I get adjusted when I'm when I'm in Market with uh with our clinics um and I think for a lot of people it is uh it is highly therapeutic and often cases um addresses things that Western medicine might miss gentlemen this was a fantastic conversation thank you all for giving me so much time was there anything that we didn't touch on it was a really a comprehensive rundown um but was anything left unsaid about this whole question of how to choose a brand well thank you so much you've been so generous and kind to uh include me and uh I'm really grateful well you're welcome AJ as I said at the top it's really an honor to finally be face to face with you and get you on on the podcast I'm sure there will be more opportunities for more appearances um this fantastic case though will be linked in the notes of course as will the the other note that you refer to AJ which kind of talks about franchising more generally from an ETA perspective um and all your contact information linkedins will also be in the notes gentlemen so thank you all for coming and and that that does it thanks have a fantastic day thanks well bye everyone thank you you as well I hope you enjoyed that interview make sure you subscribe to the acquiring minds Channel below we are now publishing twice a week so tons of new interviews and stories to come stories that will help you along your own path to acquiring a business