Financial Freedom Through Franchising
Updated: Jul 3, 2022
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Christopher H. Loo, MD-PhD: Today we have Jon Ostenson. And he's going to talk about the world of non-food franchise opportunities. And a little bit about Jon, before beginning he's the foremost expert on the fast growing world of non food franchising. So he's had experience as an Inc. 500 franchisor, a multi-brand franchisee, a franchise investor, author and consultant. And he's here because he has a passion for educating and supporting others as they explore business ownership opportunities. So Jon, welcome.
Jon Ostenson: Thank you so much for having me, excited to be here. Love the show and love what you're doing for so many.
Christopher H. Loo, MD-PhD: Yeah, yeah, I know, we were talking about a little bit backstage. And really, we're trying to expand and open up and see different worlds of possibility. And typically my niche was interested in real estate investing and consulting. But you have a very interesting background and experience as a franchisor. So we'll talk all about that. But before we begin, just tell us a little bit about yourself, how you got started, and go from there.
Jon Ostenson: Yeah, absolutely. Well, like many of your listeners in my case, I was not a physician, however, I certainly appreciate all the work that they do, and do a lot of work with them. But no, my background is in the corporate world, did the ladder climb as so many do and had a good run. But about six years ago, I made the move from a public company to a private company, with a ShelfGenie franchise system. I had the opportunity to come in to serve as their president. Supporting our franchise owners all across North America, their marketing and their call center and the technology teams and all the support engines, in it really opened up my eyes to this world. I've now dubbed it non-food franchising.
The fact is, there are a lot of ways to make money out there. And a lot of people would rather not do it through the food space. And so that was really eye opening to me, that fast food is not the only area of franchising. And so, the long story ended up spinning off with the founder of ShelfGenie along with other partners, we've invested in franchises ourselves as franchisees. So we've been on both sides of the table now. And, and fortunately, we've got good people in place running those businesses, which a lot of my clients follow down that path as well. And it allows me to spend about 90% of my time connecting with entrepreneurs or existing business owners with opportunities. And there's roughly 4000 franchise brands in the US, about half of those are in the food space. And we'll hit on all these industries, I'm sure in a few minutes, but we will focus on those other half and represent about 500 brands that we've vetted, that we feel really good about for our clients. And we get to walk them through a process where we play matchmaker and introduce them to the opportunities that are best fit for them, as well as those that we see resonating with others with similar backgrounds around the country.
Christopher H. Loo, MD-PhD: That's awesome. That's such an amazing introduction. And I know you know, we have listeners from newbies all the way to experienced. So, in a nutshell, briefly what is franchising? Why is it so hot? And we'll go from there.
Jon Ostenson: Absolutely. First off, I'll say it's not right for everyone. I do have some clients, as a member of entrepreneurs, organizations that some current business centers come to me and I have to tell them, No, you're too entrepreneurial. You want to put your thumb prints all over everything. And don't think it's the right fit. However, for so many, I'd say the vast majority franchising does make a lot of sense from a business ownership standpoint. And some of the reasons are you know, you've got a playbook on day one you don't have to go question Product Market Fit instead that path to profitability, and you can start executing on it. It's been proven out already in other markets, you've got a franchisor on the sidelines, that acts as a coach the better you do, the better they do and not all franchisors are created equally. That's why we carefully vet them because that's an important relationship.
You've got other franchisees, other owners and across the country or across North America, and they're living the same thing day in day out and you know, you're constantly exchanging best practices, whether it be in testing marketing vehicles, or finding areas with pools of talent, exchanging those learnings back and forth. And, and also obviously, as a business owner, you're building a cash flow, you're able to write off expenses, but you're also building an asset that should have exit value down the road. And a really interesting study that was done recently that I think opened up a lot of people's eyes to what that looks like. The Rinker School of Business looked at 4000 business transactions over a 20 year period. And what they found was, they looked at franchised and non franchised, and light kind industries. And they found that franchise businesses traded at a multiple of one and a half times non franchise. So there's value to that resale buyer down at the end of the line, as well.
Christopher H. Loo, MD-PhD: Awesome. It's so powerful. So for example, in business and entrepreneurship, we talk about what you discussed, the product market fit. And then another thing that a lot of entrepreneurs business owners talk about is scalability. So how is franchising ultimately a scalable business?
Jon Ostenson: You know, we see a couple of different paths. Very often clients of ours will buy three territories or five territories. We've had several by 10 territories recently in a few businesses. But what they'll do is they'll start operating at one and then scale to the others over time. And in a service based business, which say home and property services, typically, territory is defined as 250,000, or three or 300,000. Population, so you're buying an area. And other cases, if it's a retail customer facing type business, you're purchasing locations that might have a radius around them that's protected from others moving in. So yeah, that is one path to really go deep with a brand and build it out maybe in that market, as well as additional markets.
Another strategy that a lot of clients are employing that that's one that frankly, I do as well with it with my partners, and that's to invest in multiple franchises that either complement each other, or maybe they diversify from each other. One client of mine is the largest franchisee of two minute truck moving service over in Columbia, South Carolina. 39 years old, he's built up to 10 markets for a $30 million business. Well, he's now got a little organization under him. And he's bought businesses that really don't have anything in common with the moving business. But these other franchises stand alone, both in Colombia as well as in other markets. And in each case, he's put a young general manager in place, 26-27 years old, and in his case, he's given them some equity and incentivized them and set them up for success. And every deal that we've done together, he's come back and bought additional locations within the first year, which is always a great validation right there.
So there's a couple of different strategies that you can deploy, whether it be complementary or diversifying. And you mentioned real estate. I mean, I personally invest in real estate, I'd say more than half of my clients do. And there's a lot of ways to diversify your investment pool with franchising, but also in some cases, there are businesses that very directly complement those real estate investments. So definitely a lot of synergy between those two.
Christopher H. Loo, MD-PhD: Yeah, awesome. And now we've got the nuts and bolts. And typically when people think of franchises you know, they think of McDonald's or subway or Dunkin Donuts, what are some of the opportunities outside of food? Just some examples?
Jon Ostenson: Yeah, and I'll really briefly touch on food. The reason we've kind of focused in other areas outside of food, I think the food's a different animal, it does require a lot of capital to start up, it can be a little more trendy, and obviously COVID wasn't great for food. And so 95% of my clients don't want anything to do with food. 5% love food, but 95% don’t. My background is not food. And so that's where it allows us to go deeper in other areas by eliminating that piece.
You know, really coming out of COVID There's been no hotter area than home and property services. It’s a $600 billion market, and has everything from gutters to insulation to renovations. You know, I'm personally invested in a driveway business. I mean, it's a great niche, no other national player in it, it's a fragmented space, we come in with a white collar approach, and we don't even have to market that business. There's such customer demand, and so we’re having fun growing that.
So home and property services, and some of those can be recurring revenue, like you know, say pool cleaning, others maybe more high ticket like a garage renovation. Just had a client purchase that who's actually a pharmacist. And so that’s a popular space, automotive. You know, when you look at the fact that 15 years from now, less than 10% of cars on the road will be electric, even though it's getting the headlines. There's still a long runway ahead for the auto industry. We had a client recently purchase 10 locations of an oil change concept that allows for prefabricated buildings backed by an investor group in unused parking spaces of a retail or shopping center. So just a very different model. That's very customer-friendly, friendly, but also a great model for the owner on the back end, and very much a semi absentee, semi passive type type business.
You know, I always joke that people spend money on their health, they'll spend money on their homes, their kids and their pets. And so any businesses that support those, and there a lot of different ways that they do, those are great spaces to be in. And oftentimes, they're Amazon resistant, in some cases, COVID resistant, recession resistant. So those are the trends, the themes that we're seeing out there. Certainly look at the macro trend of 60,000 or 10,000, people turning 65 every day. Businesses that cater to the aging population, whether it be in home direct care, or businesses that allow someone to stay in the home longer and age in place, things like wheelchair ramps and stair lifts and retrofitting the bathroom that you know, to make it handicap accessible.
You know, there are a lot of little niches that people just don't think of, I just had a client over, that bought into a dumpster business back in the fall. There's a business, not sexy, and I joke that non sexy is the new sexy, that's what people are gravitating towards. But it's a dumpster business, he's blown out his plans, he just came back and raised some capital, and he's expanding to other markets. Had an engineer recently by a business coaching franchise, and so all sorts of niches that probably 90% of our clients don't know about or don't think about when they first engage with us.
Christopher H. Loo, MD-PhD: Yeah, it's so fascinating, because it's so eye opening to the different types of opportunities, and it's just so great to see people, such as yourself, come on to the show, and just tell us these things are possible, these things are happening. And so I know a lot of the audience are interested in it, so you get into a franchise. Tell us some of the successes, the returns, some of the downsides, pitfalls, what they should be looking for?
Jon Ostenson: Yeah, absolutely. And I'd say, first off roughly half of our clients are what we call owner-operators, where they're looking to make the jump and run a business full time. That is very common, but we also see a lot that are what we call an executive model, or semi passive semi absentee where they can put in a little bit of time, but you know, their preference is to really coach that manager, put someone in place day one that goes through training that can run the business, and obviously, their success is going to come down. I mean, franchising can make the phone's ringing, answer the phones, you can do everything on the back end, but they still need to have a good leader running that business, and we have some strategies to help them find that individual and coach them up.
So for those I'd say you know, the financial model, if you're paying someone for that definitely comes into play, but no example 75% of our clients purchase investment franchises between deal size of 125-300,000, we have some a little higher, some a little bit lower, but that's kind of the sweet spot, I'd say within there. And that's all an investment that includes your franchise fee, any working capital out of the gate, startup costs if there's a retail space that includes that build out, any equipment, inventory, that sort of thing. So that would be your all-in investment. And the returns that we're seeing on this business really are eye opening, oftentimes to our clients. You get to review what's called the item 19, which is a piece of the Franchise Disclosure Document that every franchise system has. It shows the average of other owners in the system, and what their financial performance has been. So between that and talking to other owners through what we call validation prior to your purchase, you really get an eyes wide open look prior to making the decision. Is this right for me or not? So that's really our goal in the process that we take clients through is to give them that wide open view.
I mentioned the gutter business. You know, we actually have done three deals there in the last two months. One was a Wall Street attorney outside of Boston, late 40s, no background in the gutter business. But he loved the financial model. We had two brothers in the insurance business from South Carolina that got into it, into the gutters. And we had a corporate executive sales and marketing background in New Jersey the recently bought in but what they liked was the average franchise location is doing 1.2 million in revenue across all their franchisees that's the average. And they're averaging about 380 on the bottom line. So very healthy, from a margin standpoint. After you all your expenses are paid. And I say that's the upper end from a margin percentage standpoint, but a lot of the opportunities we work with are not too far off. We've got a great fence and rail business right now that I got 16 clients engaged in and they're absolutely thrilled, the problem is the markets are going pretty fast. You know, but it's a business where your average first year revenue is 1.7, 2nd year is 2.8, third year is 3.8. And that's at a 10 to 20% bottom line margin. They've got Home Depot as a national account, that's driving their lead source, really able to get up and running pretty fast and even run it semi absentee.
Christopher H. Loo, MD-PhD: Wow, that's amazing. So, I know a lot of people are interested, how can they get started? You know, what resources such as yourself? And how can they actually look into starting or buying a franchise?
Jon Ostenson: Yeah certainly they can Google around out there on the internet, the challenge with that is you're going to see the best foot forward from each company, they're going to be delivering their marketing materials, and you'll be able to not not necessarily see behind the scenes. And that's where we come in. I mean, we do more deals than 99% of other brokers out there and we've got the relationships with the franchisors and we can leverage those oftentimes. But we've already done the vetting, we've done the hard work. And the great thing is our process to engage with us is entirely free. There's no cost ever, and the franchisors pay us, and for them, it's a sales and marketing cost. On the back end, none of that ever gets passed on to our clients in any way. So it's a very clean model from our standpoint.
And what we've done is we've streamlined the process, we've done the vetting of the franchisors, what we'll do is we'll spend a little bit of time on a call with the candidate, and talk through the role they want to play in the business, their financial profile. Now, what's their market looking like, where's the opportunity, we go through a handful of different questions. And then based on that feedback, and based on what we see going on across the country with other would-be entrepreneurs and what's resonating with them, we take that insight. And then we drill down to, what are those opportunities that are the best fit that are available in their market? Typically, we end up with somewhere between six and 10 opportunities that we will then review with our clients. You know, we'll do a zoom call, share the screen talk through these different opportunities. And from there, they'll pick usually three opportunities give or take, in which we'll make an introduction to the franchisor. And then they enter the franchisor's discovery process.
And at any point in time, they can say, Hey, that's not for me, I want to back out. It can be an iterative process, we're serving as a sounding board throughout the process and, and helping them think through, if this is the right fit, and things that they're hearing and learning and they're developing that lens from which they're analyzing businesses and comparing A versus B, and what are the pros and cons? So it can be a really fun process to go through. It's very educational. And like I said, we've streamlined it. The franchisor will take them through an overview, the unit economics where they get into the financials, they'll take you through the FTD review, map out the locations in their market, go through the validation, where they get to talk to other owners, then ultimately culminates in what's called a discovery day, where our client will spend typically a day, day and a half with the franchisor, or at their home home office meeting with all the franchisors teams, and making sure both ways, that it's the right fit. And from there decide if they want to move forward, and we help our clients on the funding side, whether it be with SBA loans or through using their retirement plans, that's a very popular way to self directed IRAs and 401Ks it's called a ROBS Program. So we help on that piece of the legal side and just kind of hold their hand the whole way through.
Christopher H. Loo, MD-PhD: Awesome, awesome. You know, there's so many topics and ideas from your answers. And the other question a lot of the audience would have is: they’re retired or semi retired, they start their own business, and they realize they go into business, and they actually own another job. And so, how can franchises be run as passive or semi passive?
Jon Ostenson: Yeah I'd say passive is tough, very few lend themselves to truly be passive. However, if you find a good general manager to run the business, and again, I've got client case study after client case study of ones that have been able to do that, where they set them up on day one, they go through training, essentially the better that they perform, the more money they make. You're aligning those interests, but setting them up. And then you know, really playing your high payoff activities is that, getting involved in local chambers, using your network, maybe some of your real estate investing clients, they've got networks of brokers or other personnel in the market that they can leverage those relationships from a referral source standpoint.
So it really allows them to get out of the weeds of the day to day and focus on their activities. And it comes down to having a good manager which is easier said than done. Your first one may not be the right fit, and then you have to scramble to find and find another one. So one thing that we do is, one of our clients that's been very successful at finding great general managers and just has had a lot of success is now coaching our clients. And so we will actually fund a couple of coaching calls out of the gate with this guy. And he will share with them all of his learnings and best practices and really get them out of the gate strong.
Christopher H. Loo, MD-PhD: Wow, that's.. the other question I had is, what type of person personality or what type of industry is a great fit for, for franchising, because a lot of the clientele they come from either law, dentistry, medicine, a lot of real estate investors. So what type of industries are a great fit for transitioning from one industry into franchising?
Jon Ostenson: You know, some of our clients have a sales background, I'd say that's always an asset, and no matter what you're going to do, but that's not a prerequisite because maybe you're more on the admin-operations side, and your first hire is going to be a sales driven General Manager, let's say. Sometimes you can't pigeonhole people. We have a general manager who's 28 years old, running that driveway business that I mentioned. Well, his background over the past five years, he's been a CPA for one of the big four accounting firms, but he was eager to break out of those four walls and go build something. So you can find diamonds in the rough sometimes, they certainly can't prejudge.
But when I was at ShelfGenie, and I had hundreds of franchisees across the country, and you know, oftentimes they would come in me at the very beginning to say, wait a minute, again, you're you're running the marketing for us, you're making the phones ring. In our case, we were actually answering the phones for them, booking appointments. You know, you're doing the product development, you're doing the technology, you're training our teams, what do we do on a day to day basis? And my answer inevitably was, it comes down to people. Being one with your team, it's finding talent, incentivizing, retaining them, and making tough calls when needed. But then also, some of that grassroots involvement on the local level, even if the franchisor’s running marketing Google and Facebook ads for you, let's say, if you can still get involved and sponsor that little league baseball team, or get involved in the Chamber of Commerce, or get the name out there, and your friends and family, that's always very helpful.
Christopher H. Loo, MD-PhD: Well, this has been so fascinating, I have so many questions. And we'll maybe have a follow up interview afterwards. I know that there's gonna be a lot of interest in this show. So what is the best way to contact you, find out about you, read more about you, or even work with you?
Jon Ostenson: I'd say the first step is to come out to our website, franbridgeconsulting.com. And we have a place where you can sign up for our monthly newsletter, and we try to deliver great content there every month. And so that would be a first step, we'll also make sure that all of your listeners get a copy of our book that releases in Q3 on non food franchising, so really excited about that.
And then secondly, if it is an area that you'd like to explore further, certainly reach out to me, Jon[at]franbridgeconsulting.com. And we'd love to engage in a quick call and kind of figure out if it makes sense to take next steps. And we can certainly share some additional resources as well. So connect with us on social media. I'd say LinkedIn is where we're the most active, posting five or six times a week. But we try to put good content out there and educate people, and certainly if we have the opportunity and privilege to work with you, all the better.
Christopher H. Loo, MD-PhD: Awesome, awesome. Such a fantastic discussion. I know franchising just opens a whole world of opportunities. So, Jon, thanks so much. And we'll see you again in future episodes.
Jon Ostenson: Sounds great. I look forward to it.
Christopher H. Loo, MD-PhD: Many thanks again for being here. If you’re new, you can find me online at Christopher H. Loo, MD-PhD, where I have links to other episodes or links to online resources that will support you on your financial literacy journey. I’ll see you there in on next week’s show. While I bring you thoroughly vetted information on this show regarding a variety of financial topics, I cannot promise you a one size fits all solution. This is why I caution you to continue to learn. Educate yourself and seek professional advice unique to your situation. If you want to talk to me, I welcome it. Please reach out via my website or email at Chris@drchrisloomdphd.com. I read and personally respond to all of my emails. Talk soon!
Editor's note: This transcript has been edited for brevity and clarity.