S4 Ep7: How to Choose the Right Franchise and Play the Long Game
There’s no one way to get into franchising, but plenty of pitfalls.
Dru Carpenito is the Founder of Franchise Investment Systems, helping potential owners evaluate high-quality non-food franchises.
The Wolf and Dru talk through how getting the right foundation in place will stop you from making terrible business decisions, why you need a business model that fits your life, and why the world of franchise brokership can be like the Wild, Wild, West.
Plus, you’ll also hear Dru’s inside track on the info you need to identify a good business opportunity.
If you’ve enjoyed listening to Franchise Empires, I’d be so grateful if you could drop me a 5-star review on Rate My Podcast. Thank you so much!
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Episode Transcription
Dru Carpenito:
Like I was talking to somebody today, Kevin Wilson, who’s the chairman and CEO of Buzz Franchise Brands. These are the guys that did Mosquito Joe, right when the mosquito repellent thing was coming into play, and they have multiple brands now, and that dude is sharp, and he’s a venture capitalist from Banyan Company, and he has applied a lot of those same principles to British Swim School, home Clean Heroes, pool Scouts, and now they have a new one, which is outdoor holiday lighting. So it’s like these dull, mundane-looking businesses, right? You’re like, come on, how much money can you really make with one of these things? And if you peel back the onion on some of those business models, those guys are super sophisticated.
The Wolf of Franchises:
Welcome to Franchise Empires where aspiring entrepreneurs learn exactly what it takes to become a successful franchise owner from one location to 10 and beyond. I’m the Wolf of franchises.
Hey everyone, it’s The Wolf. Today on the show is Dru Carpenito. And this episode is a lot different than some of the other ones I’ve done. Dru is a franchise broker and has been in the industry for well over a decade at this point. He’s seen a lot; he’s learned a lot. He knows a lot about many different franchise brands, similar to me. So we kind of just riff and talk franchises from emerging brands we’ve seen over the years, why they’ve taken off and what’s made them successful, as well as stories and deals that have been done in the franchise world that surprised us. I think you’re going to enjoy this and think of it as sitting as a fly on the wall and just listening to franchise industry folks chat.
Narrator:
The Wolf of Franchises is the CEO of Wolf Pack franchising as well as a creator at Workweek Media. All opinions expressed by the Wolf and podcast guests are solely their own opinions and do not reflect the opinion of Pack franchising or workweek. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The Wolf Workweek and Wolf Pack franchising may maintain positions in the franchises discussed on this podcast.
The Wolf of Franchises:
Can you maybe just give a background of how long you’ve been in the industry and kind of your road to where you are today?
Dru Carpenito:
The short story is I’m a franchise lifer, so I fell into it back in 2006, straight out of grad school. Went to work for a disaster restoration company called Advan Clean. And a couple months after I joined the company decided a franchise. And so I had all the assumptions everybody else does about franchising when they first hear about it and did a little bit of digging and I was like, whoa, okay, this is the thing. And there’s this whole non-food side of franchising and sticking around and Jeff Doden the founder who’s now he’s famous inside the franchise circles he gave me way too much responsibility at a young age. Probably people, you wouldn’t draw it up that way. So I stuck it all in and we ended up growing Advantage Clean to, I don’t know, I had a hundred twenty five hundred fifty locations when I left eight years later.
And I did everything. We were using salesforce.com back in like 2000 thousand six and doing a lot of value add things on the backend for that business, centralized call center, all kinds of stuff. So got a ton of experience doing a bunch of stuff and then got tapped to go do some international franchise development for Tutor Doctor, which is a one-to-one tutor matchmaking service. I knew nothing about international stuff, but we ended up IT tutor doctor had, they were the darling when we were growing. Ale Tutor Doctor was the darling back in oh 8, 0 9 2010, that kind of timeframe. So I lost a lot of deals to tutor doctor, so was when they tapped me, I was like, all right, I’m interested. It’s a lot easier to sell education than it is disaster restoration services. So anyways, did some international stuff with them and I think we ended up growing in 14 different countries, which is fun and all that kind of stuff. But I had a young my, I have twins and ended up leaving the corporate side to be a broker into what I’m doing today. So
The Wolf of Franchises:
Wow, that’s interesting. Were you guys doing master franchisees, PlatU doctor?
Dru Carpenito:
In some countries we did. And then in some countries we did not. Like the UK was amazing and we did not master franchise it. We had an operations team there and the UK is a great place to franchise. It was, I mean the market was ripe, they love franchising. And then Australia, we did it ourselves and then some other countries, but South Africa, couple countries in Africa, we mastered that one.
The Wolf of Franchises:
Okay. Yeah. And if folks aren’t familiar master effectively in the international market, you sell the rights to the concept to an individual or a company and there is still a royalty payment that franchisee has to pay back to the top franchisor, but the master franchisee has to set up their own billing, all the infrastructure, and then they can also sell franchisees to anyone within their country. And then they’re from the franchisees, they the master franchisees collecting royalties from them.
Dru Carpenito:
Yeah, they’re like a mini franchisor basically for that country or for that area. And they split the fees essentially. And the splits are always a little different depending on who’s doing what. But
The Wolf of Franchises:
I’m curious if you’re allowed to share what’s the biggest mean? Obviously the big food brands, I mean to be a master franchisee and the big ones happened decades ago, but McDonald’s, Japan, burger King in Australia, I mean these to own the rights to a brand in other country, it’s usually for those guys it’s multiple millions. It’s tons of millions of dollars. So you ever, was there large price tags on these or
Dru Carpenito:
For tutor doctor? It was an owner operator kind of single person kind of business. So it wasn’t going to be a $5 million or McDonald’s kind of thing. So it was a couple hundred grand. We would map out the territories and stuff like that, but it was typically a couple hundred grand and then dude getting money in and out. I never knew how this whole crypto thing was going to go because <laugh> understanding how hard it was to get money out of countries, I was like, there’s no way these countries are going to try to
The Wolf of Franchises:
Collect the royalties
Dru Carpenito:
To collect the, collect the money and taxes. There’s a lot that goes into it. I was always like, there’s no way these governments are going to let crypto become a thing because then they’re going to lose out on understanding how the currency flows in and out of their country. That’s a big thing to look at if anybody’s going into a new country like taxes and the currency flow exchange rates, there’s a lot to it.
The Wolf of Franchises:
Yeah, I remember even for emerging franchisors, sometimes it can be appealing where you maybe get an international inquiry and do you think at least the emerging franchises I used to work with, we got excited by, it’s like, oh, well if we’re going to sell master deal, it’s going to be a bigger price tag and that franchise fee revenue can be really helpful early on. But we were close to doing a deal in China with a coffee brand this is four years ago for me. And at 1.1 of my coworkers was like, it’s realistically though if we sold this franchise, they take the concept, they take the branding and they just never pay us a royalty. They’re like, we don’t have the money to sue someone in China. So that’s an interesting aspect too for these master franchises where you really got to know what you’re doing and have the capital to enforce things if things go south. Cause apparently that happens where there’s brands just take the playbooks, the IP and just they’re like, we know you’re never going to do anything with it. And they basically hijack a business model.
Dru Carpenito:
It’s like, which country are you going to assume and whose laws are going to apply? Right, exactly. Exactly. Yeah. And what controls are you going to have in place to understand what revenue is really being generated in these foreign countries? Yeah, no, there’s a lot to it. Exponential fitness I think is doing a pretty good job, but they’re publicly traded.
The Wolf of Franchises:
Yeah, they’re massive
Dru Carpenito:
Monster. So yeah, go to Canada first if you want to international, go expand internationally, go to Canada first, which is in and of its own, the different provinces. They all have a couple different regulations. So that’s a good first step. And you don’t even need Master Canada really like that. You can support Canadian operations typically with your US based stuff.
The Wolf of Franchises:
I’ve heard of us, there’s stories of one of my old coworkers who’s been in franchising basically around the same time as he has met Pete Bill in the Middle East, who basically just buy out American brands and don’t necessarily do anything with them. They want to be the master franchisee for American brands or Western brands in general. And yeah, they’ll shell out one to 2 million for one of them was an education concept. It is kind of a trophy where I guess he want this person, I don’t know if it was oil money or what, but just very wealthy out there and just likes to show his friends and brag and
Dru Carpenito:
Yeah, yeah, yeah. No, it’s the cultural differences in different countries and how that can play into a business model are significant. We did a deal, oh, I forget what country it was, it was somewhere in the Middle East and tutor doctor’s, whole business model was the franchisee typically would go and meet with the parents, meet with their child to understand what’s going on and get a feel for the child’s personality so they could match ’em with the right tutor. Well, their culture was that you, a female could not go into somebody else’s house. So that eliminated a lot of female tutors from the business model, which is half the tutor base. So it’s like, okay, well how do you work around that? So the cultural aspects and how that plays into, I think you’ve written a lot about it too. There’s different menus of food businesses and different countries and stuff like that for a lot of those same reasons.
The Wolf of Franchises:
Yeah, no, it’s a good point. It’s so interesting. I just feel like when you dive into the weeds of the industry, I mean they’re almost like franchise brands are. They’re treated just assets internationally at times. And it’s just fascinating. I don’t know, you have these, what starts as a small business becomes a sellable concept. And then there’s just this whole, it’s not the biggest market, but you and I obviously on the inside of it just know what’s going on. But I mean there’s this whole group of people and that’s all they do is it’s about buying franchise brands expanding or in some cases just buying it just to brag to your friends that you have it. So
Dru Carpenito:
Yeah, it’s like you’ve done a good job of, I think helping people understand the inside of the world of franchising. Cause it’s massive, especially the non-food side, which is kind of the side that I run on mainly, but which is big and it’s probably less talked about than the food side, but it’s significant if you drive around town and you start looking at every brand and which ones are franchised and which ones aren’t, I mean every third business kind of thing. I mean there’s this whole world of this emerging non-food side of franchising, which changes a little bit, but it’s definitely not on the mainstream in terms of the media and stuff like that except for Orange Theory and Planet Fitness, those kind of things. But if you’re driving around town, man, it’s like, I don’t know, one out of three, one out of four businesses or typically on the non-food side, franchised.
I was talking to somebody today, Kevin Wilson, who’s the chairman and c e o of Buzz Franchise Brands. These are the guys that did Mosquito Joe when the mosquito repellent thing was coming into play. And they have multiple brands now. And that dude is sharp and he’s a venture capitalist from Bain and Company and he has applied a lot of those same principles to British Swim School, home Clean Heroes, pool Scouts, and now they have a new one, which is outdoor holiday lighting. So it’s like these dull, mundane looking businesses, you’re like, come on, how much money can you really make with one of these things? And if you peel back the onion on some of those business models, those guys are super sophisticated.
The Wolf of Franchises:
Yeah, no, it’s fascinating what he’s doing at Buzz and yeah, it’s funny, I think there’s two things that aren’t really to your average surveyor of the franchise landscape. The food brands, McDonald’s, burger King, Wendy’s Dominoes, even Pizza Hut, they were started 30, 40, 50 years ago. So they’ve been around for a while. So that’s a big part of it is it takes time to scale up to the number of locations they have and develop that presence. But also people, for the most part, everyone eats three times a day and it’s a lot easier to have a customer relationship when it’s something that basically everyone in the population is definitely doing. Everyone eats food and there’s so many of these locations. So it’s just more top of mind for the average person to think associate franchises with food. But you’re right, I mean there’s lawn care franchises and mosquito repellent franchises and it’s not maybe something you’re going to interact with from the consumer angle, but it is a massive world out there for sure.
Dru Carpenito:
They’re not the sexiest businesses sometimes. But fundamentally, if you start looking at the lifetime value, the customers, the recurring revenue, the expense structure, the lower overhead aspect, and then how big some of these businesses can get, if you really want to scale ’em, like your mind would be blown. Again, I can’t talk numbers, but the largest operator of British Swim School, which is a swim school without having to build a pool, he mid seven figures is what I’m told.
The Wolf of Franchises:
Big revenue or profit
Dru Carpenito:
Revenue. Yeah.
The Wolf of Franchises:
Wow. And that’s a good margin. Oh yeah. So let’s dive into some of the cooler just non-food franchises that you’ve seen and the successful ones and maybe how you can figure out which one is, if it’s early on in its life cycle as a brand, what criteria you can look for. But I guess let’s just, let’s talk about British Swim School. So just start and we can jump around. That’s a concept where, like you said, you don’t have to build a pool, you’re just using, if there’s public pool facilities, you come in and maybe rent it on a per practice basis or per class basis.
Dru Carpenito:
You rent it from a hotel pool that’s not being used all the time. And they have a national deal with LA Fitness and some other national chains that have these pools that you know, kind of have to have it, but it’s not a revenue generator. A lot of times for these people, these companies. So they rent, they just do a lease and they figured out how to make that work so you don’t have the expense or the time of having to go through the construction process and all that kind of stuff. So any business, there’s going to be some, there’s pains with it, but the swimming market is one, I mean you see the level five guys getting involved with it and they’ve done Big Blue has been, again, it’s not one of these talked about franchises, but the growth that they’ve had up with Big Blue, which is the other end of the spectrum, which is multimillion dollar investment. You are building a pool. I mean they basically almost sold out the country in three or four years. It’s crazy. So it’s a big market like this, the swimming kids safety, swimming fragmented, and which is one of these niches that hadn’t really been gotten after.
The Wolf of Franchises:
Yeah, it is interesting cause that is totally direct opposite lens from a business owner or one year having to shell out multiple millions of dollars, which is interesting. The level five guys, they like that because they feel like it’s actually a moat, just the pure capital that it takes to launch one of them. And so they’re like, if someone wants to compete with us as a concept, they have to go find these big time owners that can actually shell out for it. And they clearly have the network to find the franchisees, they can do it. And they feel that also, right? They’re able to provide a different kind of a better service or different kind of service because they’re building their own facilities. So there’s a different value prop they can offer than that the franchisee can offer the consumer compared to British Swim School.
Dru Carpenito:
And at the end of the day, both of these companies, I believe, spend a significant amount of time and resources mastering their model. Big Blue is not trying to be British, and British is not trying to be a big blue the, there’s probably enough to go around for everybody, but they’re two different operational businesses. And so these companies that spend a lot of time in focus mastering their unit model, that’s where the really good franchise companies separate themselves significantly from all the players that you see on the franchise directories and yada yada yada.
The Wolf of Franchises:
And I think it’s interesting too, because a big question I’m sure you got a lot too, is like, Hey, I don’t have the money to shell out for these big food franchises or even the Fitness and a Big Blue, the big Blue Swim School. Basically brick and mortar brands are out of reach for a lot of people. But there is this class of British swim schools where, cause I think the common belief is, okay, they don’t have cash. I got to go start a home services business, lawn care or plumbing or whatever the case is, which that is probably the epitome of unsexy. There’s a lot of unsexy franchises, but those ones are the least exciting I think to the average person. But there’s British Swim School, there’s soccer shops or newer ones, soccer stars. So there’s these non-home service franchises that don’t require you to buy brick and mortar, but it’s a lower investment and you can still get up and running quickly cash flow. So child services is kind of a big one. That’s where I lump in British Swim School and the soccer stars, right? Yeah. I mean there’s still good models and you can still expand to multi-units and earn a pretty good living off of ’em, if not even just using it as a stepping stone to something bigger.
Dru Carpenito:
Yeah. Cause I mean, like you said, budget being properly capitalized is half the battle for a franchise owner. And it’s half the battle for a franchise company, which is one of the characteristics to look for. And a lot of these emerging brands is they’re overly capitalized and they’re not relying on revenue from the franchise fees to sustain themselves. So yeah, there’s all these characteristics. If I was to break it down, drew Carpenter’s opinion, anybody who’s looking at doing a franchise need to do their own independent investigation. There’s my disclaimer, you got to evaluate all these businesses, but a lot of really the franchises I think that you see take off and not getting on the news kind of thing, but do a good job of expanding nationwide and do create a network of happy and profitable franchisees. They’re not creating a market, they’re taking something that people either know about or are already purchasing and just figuring out a better mouse trap to capture some portion of that demand into their business.
They don’t, and they typically don’t need to be the biggest player in town in order to have a very successful business. So they’re not creating a market. A lot of times they’re tapping into something like Stretch Lab. Stretch Lab ended up being a runner. And when I first heard about Stretch Lab, I was like, I don’t get it. Well, I had he trash, everybody else did. And I think they went through a little bit of learnings. But if you think about it, stretch Lab, stretching’s not new. We all know we should be stretching more and it’s good for our bodies, good to prevent injury, recover from injury the whole nine yards. But nobody had really mainstreamed it. Well, stretch Lab ended up mainstreaming it and I think they’ll probably tell you something differently, but I think they accidentally tapped into this wide demographic of people from the 15 year old super athletic kid whose parents are paying for everything under the sun to make ’em the next Peyton Manning or whatever. And then to the 70 year old that can’t exercise, but Stretching’s a good way for them to get some muscle movement. So Stretch Lab was one of these businesses that just kind of mainstream this stretching idea and it took off.
The Wolf of Franchises:
Yeah, it’s interesting because I’m thinking it’s a, I don’t know much about the actual, if I was to walk into one, what the class would be like. I don’t know if it’s one to one is, so is it Stretch
Dru Carpenito:
Lab?
The Wolf of Franchises:
Yeah, it see feels like lazy person’s yoga.
Dru Carpenito:
Oh dude, go, yeah, you’re in a, you’re, yeah, go. You’re in Austin, go check it out, dude. You lay on a table, it’s 1,015 hundred square feet, super small footprint and they have eight tables set up. There’s no private rooms. It’s like everybody’s getting stretched out in front of each other and it’s got this cool hip vibe, but it’s simple build out simple construction which drives down the traditional investment to get one open. And again, I don’t know what I’m allowed to say, but put it this way, the people that I know that have owned Stretch Labs, you’d be surprised at what kind of numbers they’re driving out of a thousand square feet of a location.
The Wolf of Franchises:
Is it one employee per person meaning? Yeah. So I just have an individual person stretching me out
Dru Carpenito:
Is a ologist man. You lay out, lay on the table for 25 minutes and a ologist does their thing and stretches out your body.
The Wolf of Franchises:
How much does that cost me? Is a customer,
Dru Carpenito:
Oh man. From what I understand, they’ve been pushing the prices. Cause I, I think it starts at a 25 minute stretch.
The Wolf of Franchises:
I mean we can look this up just what’s your guess?
Dru Carpenito:
I want to say it’s a dollar minute kind of thing typically maybe or more. It could be more than that. I got in under a founding membership and it was like 200 bucks a month for four 50 minute stretches, which I don’t think that they make that offer anymore because that was a good deal. So I think if I had to guess, that would probably be a 300, $350 a month membership. But that’s for the 50 minute stretch. If you do the 20 fives, which you can do behalf that or something, probably
The Wolf of Franchises:
It’s this a stretch where I’m sitting there and I’m like, if anyone’s out, there’s not like I used to play soccer, we would do stretch sessions sometimes and they’re working you where you’re touching your toes to the point you’re breaking a sweat. It’s almost painful. Is that the kind of thing it is? Or am I checking my phone scroll on Instagram while they’re stretching me out here?
Dru Carpenito:
Yeah, no, I mean it’s probably similar to yoga in some ways. There’s breathing that you want to synchronize with the stretching. And so by having somebody else stretch you out, you get a 10 x deeper stretch or whatever the number is, they’ll apply, they’ll keep increasing the resistance or the depth of the stretch and the breathing helps a lot. And then you just have a safe word that you tell ’em once it gets if it’s too much. So
The Wolf of Franchises:
It’s interesting. Yeah, I mean I see, I’m not asking cause I know you can’t say, and it’s not in the F D D, but to close out 2021 and they were doing about 50 K in revenue a month was the average. So that’s close to 600 K a year run rate, which I have no idea what the margin is on these things, but I guess it sounds like the brick and mortars not much. And then you’re just paying the people to stretch Theologists, like you said, I don’t know how much they get paid, but then you got marketing and it’s probably a decent margin. I’d guess it’s not food. We’re definitely pushing above 10%. But
Dru Carpenito:
Yeah, we all thought it was because it had the one-to-one labor, right? We’re like all those consultants that think we know what the hell we’re talking about. We see, we hear about this new brand and we’re like, no way. This thing ain’t going to work. It’s super cuts for stretching and super itchy.
The Wolf of Franchises:
Yeah, yeah.
Dru Carpenito:
Well yeah, we were wrong. So yeah, they, I don’t know what the numbers are, but over the past couple years it’s really hard to find an open market that has any good availability left to open Stretch Labs.
The Wolf of Franchises:
So this is the 2022 F D D, so we can see the past three years. So they went nine franchises opened to 2019 to 64 and 20, 20 to 99, and that’s beginning of 2021 and then 148 open at the end of 2021. So I’m sure though that compounds, so I’m sure the next one guessed they probably have, I haven’t checked, I could find it online. I’m sure it’d be like 300 plus already open and more, way more units sold than it’s being shown. Oh
Dru Carpenito:
Yeah. And they have a lot of, my buddy who I helped buy Stretch Lab here in Charlotte, which I probably should have bought it myself. He’s an amazing operator, but he just decided to, he has four open, going to open two more in Charlotte and he just inked a deal to get the rights to Columbia, South Carolina where he’s going to open three more. So he’s bullish on it.
The Wolf of Franchises:
That’s always a good sign when you see franchisees buying up more. And I think the lesson here, drew, is there’s buying a franchise because this is the game you play with the merging franchises as a buyer is you reach out, it’s like, oh, you only have 10 or so locations, or maybe 20 or 30. But either way it’s just not a lot of proof of concept yet. And some people decide to wait, which sometimes that’s the right move. It’s like sometimes it makes sense, but you get to a point in Stretch Lab is clearly hidden and it’ll be really interesting to just know how much they have open now in their next ftd. And also they report in these FTDs folks the number of franchise agreements signed, but not outlets not opened yet. So you’ll be able to know how much white space is actually already taken up, even though they haven’t opened yet. But they hit a point where the market, and I’m using air quotes, just decides there’s enough proof of concept and buyers flood in and before it, like you said, basically the whole country is sold out. So right. Isn’t there this waiting game that it might make sense because you don’t have proof of concept yet, but there’s also the risk that you could be missing out on a winner if
Dru Carpenito:
You wait too long. Stretch Lab had a little backstory that I think could help with some indicators on things to consider. But yeah, I mean ideally it’s a little bit of a crawl, walk, run approach for a franchise company. Okay, hey, they’ve got a couple corporate locations open, they made that successful, they start to slowly expand and into franchising and they bring on some good franchisees, some strong fundamental franchisees that serve at the foundation and those franchisees are successful and happy. And maybe that’s, I dunno, 3, 4, 5, something like that. And that might take a year or two. Well all of a sudden now you have a franchise base that has proven out the business model and then it could be time to start to hit the gas number one, which will take a little bit more time. But that’s typically how I’ve seen brands that sustain the growth.
It’s not just selling a bunch of franchises about helping these people get open and get successful. They typically kind of follow that crawl, walk, run approach. I’ll give you an example, right? There was a franchise that I did some consulting worth that was on one of your newsletters that I can’t tell you who it was. They were getting ready to make a decision that would’ve set them back probably three to five years. And they didn’t know any different. They were getting all this advice from the quote advisors and they were getting ready to, in a deal with a company called an F sso, a franchise sales organization. And they only knew what they had been told. It was a very small portion of the pie in terms of how they could expand. And so I randomly got connected with this group and I walk in there and I was like I dunno what you guys, there’s a whole nother 80% of the pie here that you could approach if you do it the right way.
And so I think that if a, an emerging franchise band can benefit pretty significantly, having a strong franchise development competency so they understand how to manage it and what to look for in a franchisee and just that whole dynamic. So long story short, I helped them get that foundation in place, align with a company that was going to help them with a better strategy. And three years later they just got a massive injection of capital from a private equity company that you and I both know for. But that was one decision, right? That could have changed the whole trajectory of it. But it goes into, as a potential franchise investor too, with Stretch Lab, they had Exponential Fitness, they had Anthony Geisler behind them who had done Club Pilates. So these early stretch lab franchisees, they had to look at the club Pilates track record to figure this out.
But Club Pilates was a unicorn. We all should own Club Pilates that. But again, kind of the similar characteristics, strong leadership team behind that. Both have industry experience and franchising experience. These guys are well capitalized. They have the resources needed to withstand rapid kind of growth. They invested in infrastructure and they have a focus on their franchisees satisfaction and profitability. And if you have those things, I mean, again, you never really know, but those are some of the things I think you can look for in some of these super, super early emerging franchises to figure out if they’re going to be a type runner of a business.
The Wolf of Franchises:
I definitely agree, and it’s almost like we’ve mentioned Level five capital. The private equity firm, if brands mimic internally the level five thesis, which is they find an emerging brand that they think has a killer concept, they invest in the franchisor, which not that doesn’t apply for just a franchisor that’s trying to grow on their own, but they act as an anchor franchisee to prove out the concept. And they have the operational chops. So level five, invest in a brand, they build out 50 additional units as a franchisee of that brand as well. So I think the lesson for emerging brands is what you said was Stretch Lab where they kind of tapped into probably the club Pilates franchisee network, try to find experienced franchisees for your first few territories that you sell. Because the last thing you want is a new brand that hasn’t been franchised in a different market and a first time franchise owner who may, I mean, everyone’s got to be a first time franchise owner at some point. So they may be a killer, but ideally if you’re good enough, you can find someone who’s done it before.
Dru Carpenito:
So I was talking to Jim Donnelly, who’s one of the co-founders of Restore Hyper Wellness, which is another one of these companies that you just saw exponential territory over the past couple years in terms of the growth. And I asked them, I said, what did you do? And they obviously didn’t have this growth coming out of the shoot. They did the crawl, walk, run approach. And I said, what advice do you have for young emerging brands? They’re kind of like the anti franchise franchise. They don’t consider themselves franchise people, they just genuinely use that as an expansion strategy for expanding their company.
And he was like, look, here’s what we did at first. We had West Point connections and we focused on West Point people because we knew that if somebody could succeed in the military and especially on a battlefield, they can operate one of our businesses. This is not as difficult. And then they also focused on med device folks or folks in the biotech sales reps in the biotech field, pharmaceutical field. Because what Restore does is like that has a big health science component to it. And so they knew that, you know, had to have some chops to typically be successful in that field. So they focused on those two categories of people at first, and they had networks that enabled them to tap into that. And they got a really strong foundation of franchise owners and they had a really, really, really good franchise development person and five, six, whatever it is, years later, they’re hard to find a restore to buy these days because they kind of sold out the country. But they got that foundation, that foundation in place. So,
The Wolf of Franchises:
Huh, that’s brilliant from them. Your model should be replicable enough where if you take someone who’s just got the discipline from the military that that’s a perfect candidate. You’ve mentioned capital though a few times. Can you talk about that, what you look for and how can a candidate evaluate an emerging franchise to make sure that they have the capital as a brand to support growth? Because the last thing you want to do is buy into a franchise system. They sell a ton of units, they can’t handle the growth. And then as a company system-wide, just not going well.
Dru Carpenito:
Yeah, I mean franchise companies have to publish typically gap audited financials in their F D D. So you can look at the F D D and kind of get a feel for what their balance sheets look like, which the F D D is good black and white information. But again, there’s always an operational reality that’s might be a little more different. And so asking, understanding who’s behind the scenes at these companies, whether it’s, it could be an entrepreneur that’s had a lot of success within another company that he exited or she exited that you can probably reasonably assume that they have capital. And you can ask him that. It might not be on the balance sheet, but if they’ve had a successful exit, then they’ve been through that life cycle and have access to capital. But the F D D and the balance sheet and then asking and just poking around who, how they’re capitalized because you do not typically, well, I’m not going to say do not.
You want to be wary about getting involved with the franchise that I see a lot of young franchise companies, they sell their company operations, they sell the company sort. We just want to focus on franchising. This is a whole new business, whole new game. We got to understand this. But when they sell their corporate operation, there goes the cash flow, the monthly cash flow that hopefully they’ve been using to fund the franchise investment because it takes a lot of investment. And so understanding how all that goes is, is really important because franchising is a long game. You are not going to become profitable as a franchise company until you hit a certain level of franchisees that are open, successful and paying royalties. So that royalty self-sufficiency number is the first mountain top. You don’t want to be making money off the franchise fees or you don’t want to be relying on the cash from the franchise fees to fund the venture. So it’s sparkle in for the long game.
The Wolf of Franchises:
I think it varies from obviously the royalty you’re charging and the average unit volume of the brand. So there’s no one size fits all number, but it can take up to a hundred units cash flow for a system to become, like you said, which I think that would surprise a lot of people to think that it would take that long for the franchisor to be starting to be profitable as an entity.
Dru Carpenito:
And again, there’s no one answer to all this stuff. There’s just all these different layers and things that I think that’s why a lot of people, some people buy franchises the wrong way. You’ve heard about it, they see a widget, they fall in love with a widget and they’re like, oh my God, I need to bring this widget to my hometown. And sometimes I use the example of cookies not named crumble, but I mean sometimes people get lucky and it works. And sometimes people are like, whoa, holy moly, I got to get up at 4:00 AM to get the baker, get the oven going to bake the fresh food and I got to take my kids to school. How how’s this going to work? And it doesn’t jive with the lifestyle piece of it, but they love the widget, they love whatever it is the business offers, but they don’t really look at, number one, the franchise company and number two, what it takes to operate the business to make it successful.
Because I see it been in the game. I mean, we get all the fun information, right? But what’s the real information? What’s it take to really make this business go and how does that jive with what you want to be doing as an operator? So that’s why it’s so hard to, when people come, I want to buy a business that I’m super passionate about. I’m like, cool, go find somebody else to help you. I can’t help you. I’m not going to help you because it’s a trap. It can be such a trap. But if you have an open mind and you’re willing to look at this through all these different factors and lenses, then it can be fun. Because you can look at some businesses and learn about ’em like holy moly, I had no idea that this company and this business could produce these kind of numbers or whatever it is. So
The Wolf of Franchises:
I think that’s really good advice. I mean it’s definitely just off on the surface level. Just because you’re a customer doesn’t mean you, you’re going to love owning the business. It’s totally different. I love eating sushi, but there’s no way I’m waking up at 4:00 AM to go to the fish market every day. Do not love it that much. I would never do that. So you got to understand, just like you said, the operational reality of it. Something that’s interesting that I don’t know if other franchisors do this, I know Culver’s does it. So they have close to 800 locations. I think they’ve been around since the 1980s. Very impressive average unit volume, if people don’t know it, Culver’s, big Burger franchise predominantly in the Midwest. They’re very specific about where they’ll expand. They’ve taken the low and slow approach, like you said, drew, they’ve only had two closures the entire time they’ve been around, which is incredible.
So people always talk about failure rates and the whole argument. Franchises are safer than starting your own small business. Well that depends on the brand and it’s a spectrum. But Culvers two for, let’s call it, I think it’s like 780 open in their last F d D. So only two have ever failed. You are well below a 1% failure rate. So that’s incredible. But where I’m going with it is something they do before you can even sign the franchise agreement to officially become a franchisee is they make you work in their restaurant for a week, a whole week. And I mean, think about it, that’ll filter out some people real quick where they’re like, whoa, your burgers are great and I love your milkshakes, but nah, I don’t actually want to do this forever or for the next five, 10 years. So I thought that was an interesting way of, like you said, that’s a good way to really, so I don’t know if you can shadow a franchisee before you start any of these franchises, but I think it’s a good practice for both the franchisor and the franchisee.
Dru Carpenito:
It is the best advice. It’s like, look, all this stuff, all this theoretical stuff you’re learning about a business you want to cut right to it. Go spend a day with a franchise owner. Exactly. Yeah. And go spend a and go do it multiple times if you can because that’ll give you the insight into what the reality is going to be like and versus cooking it up in your imagination and what you think it might be. Just go do it. And I
The Wolf of Franchises:
Think I would say that the only thing where I could see that hurting Culver, cause I’ve had things, honestly, even content creation with stuff I do on Twitter and the newsletter. I mean it sucked early on I wanted to quit and I almost did, but had some with people. I obviously didn’t quit. But I think early on in adventure and something new, you can maybe confuse just growing pains and learning curves with this sucks. I don’t want to do it ever. Like this isn’t for me. So that would be the only thing where you as an individual have to check yourself and be like, am I saying this Cause it’s new and it’s hard right now? Or do I truly just not like this and this won’t be a successful thing. And I really think only the individual can make that call.
Dru Carpenito:
And it goes to are you look like for people that are looking and investing in the franchise, there’s all these things we’re talking about the franchise company, but you got to look in the mirror too. Humility is a big thing for any new thing, whether it’s a franchise or whatever. But being humble and delayed gratification, not doing this for a short term paycheck, knowing that there’s going to be some kind of, there’s something long game that you’re trying to achieve that you can’t get doing whatever it is you’re doing, whether it’s the corporate world or something else, but it’s not going to come easy. Nobody’s going to give it to you and you’re going to have to grind. And I think humility has a little bit that plays into just being willing to do the shit that you’re going to have to do as an owner that nobody can predict what that shit’s going to be, but it’s stuff’s going to happen. And <laugh> that mindset I think plays a big role in the other side of the coin with the individuals who have success with franchise owners or with franchises. So
The Wolf of Franchises:
Completely agree
Dru Carpenito:
You this whole broker world, man, it is the wild, wild west. Everybody’s got an opinion. Everybody’s blowing smoke, especially right now with all these layoffs that are going on. This is,
The Wolf of Franchises:
Oh God bless people’s LinkedIn inbox right now.
Dru Carpenito:
Yes. You know, get those messages from somebody from a different country. Hey, your background is amazing. Have you ever thought about starting a business for a first time franchise owner that is genuinely trying to figure out if there is a franchise out there? You need to know who you’re getting advice from because there is no regulation on the broker stuff. All those certifications don’t mean anything. You need to know who is giving you advice. And the good brokers will give you the tools and advice to help you evaluate any franchise they recommend to you. They’re not going to sit there, be on the calls with you of the reps. They will give you the tools that you can use to gain a lot of experience really quickly to evaluate these franchises. But I mean, man seen the broker will grow. It’s crazy what’s going on out there. And there’s all kinds of crappy and pushed,
The Wolf of Franchises:
I don’t know, man. I guess the FTC probably doesn’t have the bandwidth to focus on it at this granular level. But yeah, I mean it’s crazy. We’ll see what happens going forward, but I feel like at some points things got to tighten up a little bit. Hopefully it does. I’m curious, man, any other, we’ve talked stretch loud, we’ve talked British Swim School and the Canine Resort one as well. Any other examples you’ve seen over the years of just brands that turned out to be runners in own words there?
Dru Carpenito:
Yeah, club Pilates, that was a runner. Again, can’t hard to buy one right now, but again, Pilates, we all knew about Pilates, but nobody had mainstreamed it. Well Anthony Geisler, he’s the guy behind it club. The story with Club Pilates, they had 30 locations kind of founder led company.
The Wolf of Franchises:
I had one of their big franchisees on the podcast, but I don’t know really much about the founding story.
Dru Carpenito:
Anyway, Anthony, who’s had a couple successful exits in the fitness world, he stumbled across Club Pilate, he’s founder led company, I dunno, 30 locations or something like that. Bought it, saw what they had bought it, put his infrastructure team, his what he knows works and boutique fitness. And again, you had, it was a lower investment, recurring revenue, membership-based model. Tapping into this, figuring out a way to take Pilates mainstream and kind of stretch lab. The market reacted in an amazing way. And I mean there’s more guys that I know that own club Pilates that have never done a Pilate in their life that are very successful with Club Pilates. I mean, whatever the level five guys are doing, I’m paying attention.
The Wolf of Franchises:
Yeah, guys are
Dru Carpenito:
A lot smarter than we are.
The Wolf of Franchises:
Yeah.
Dru Carpenito:
What else has been a runner, man? Well, the mental health, have you been tracking that one?
The Wolf of Franchises:
That’s one of the ones that almost worry me in that lot of sold units, not at a lot open, or am I wrong on that?
Dru Carpenito:
Oh yeah. I don’t know what the exact number is, but it’s something in, they sold four to 500 franchises before they had ever opened a franchise location. They had 13 corporate locations open. So they had expanded corporate league, but they didn’t have any franchise locations opened. And so see
The Wolf of Franchises:
That’s where the capital question that you talked about before, it’s like, can they support that growth? I mean that’s a lot of growth.
Dru Carpenito:
And so they ended up taking on a strategic investment from a private equity company.
The Wolf of Franchises:
Okay. Yeah, they probably needed it. Yeah, I mean they also probably had a ridiculous amount of franchise fee revenue. What I mean, what you just said that was never on the front page of some tech crunch or any startup or finance news source. But that’s an insane amount of growth. And that’s what I mean, we’re within our franchise bubble. Some of these brands just get treat, it’s like an asset where it’s like there’s just a rush and everyone all of a sudden is hot on one brand. And I’ve seen them IPGs kind of listing them as one of their top brands, which I don’t know what that means. But yeah, I’ve seen they’ve grown a lot. It’ll be interesting to see how those new locations do when they open.
Dru Carpenito:
Yeah, I mean hopefully it’s, there’ll be some growing pains, but they’ll figure it out for sure. So yeah, that was an interesting one. I don’t know if there’s any other runners out there right now that, but there will be. I’m and you just never know. See it coming. You never know where it’s going to come from next. Right.
The Wolf of Franchises:
Here’s a question for you because we did a little interaction on Twitter. I did a thread folks on a franchise called Funbox. I have no affiliation with them. I just think from a business perspective, it’s super unique. They’ve put up they build the world’s biggest bounce house effectively. It’s a 25,000 square feet of pure bounce house. So it’s incredibly fun for kids. That’s also why I wanted to write about, it just looks awesome. I would’ve loved that when I was a kid, but they’re franchising it. But their F D E numbers were ridiculous where it was showing, cause it’s kind of like a traveling road show where you’re not like, you don’t own a property or lease a property even on an annual basis. You can go into malls, you can set up outdoors. You’re kind of this carnival that travels around your territory. And anyway, their corporate territory did 500 grand in EBITDA in a 22 week period. Or some ridiculous number that folks do your own research in the F D D on this one. Anyway, I wrote about on Twitter cause it was just, I liked, I’m a nerd and love diving into different businesses. But Drew, you were saying you’re not sure there’s value from a franchisee perspective. Yeah. Just thoughts there on what characteristics led you to saying that?
Dru Carpenito:
I think I made an assumption I tell everybody not to do very quickly and both in a bad mood when I fired off my little Twitter fingers. Got a little issue there.
The Wolf of Franchises:
We’ve all been there.
Dru Carpenito:
Again, assumptions. I’m like, all right, so they developed a relationship with a manufacturer in China, cool. But what else is going to be behind the scenes that they’ve put together to really help the franchisees that are going to provide ongoing value for ’em? And I just, again, assumptively me making a three minute sure, couple trickle down thought process. I was like, I don’t know if I could see it. Gotcha. But I haven’t taken the time to do any of the analysis, which again is the risk in making assumptions. So
The Wolf of Franchises:
Fair
Dru Carpenito:
Enough. But I would think PR is a massive thing in that business. So how do you get connected with local news stations to get all the free PR and stuff?
The Wolf of Franchises:
I think the corpus done a good job in that. So that’s a good point. I think it’s almost some brands, just the businesses they run lend themselves to getting press. And this is, I mean, I’m sure local news stations they see if you open up in the Charlotte area or Wilmington, sorry, this, and all of a sudden there’s some company putting up a massive bounce house and every kid in Wilmington’s going into it, that’s cool to write. It’s fun to write about. It’s F as that element. But my thought is generally, now this is not to be insulting, but I just think it shows how hard it is to do run a business, start a business. I really think most your average person just gutting from zero to one is so hard for them. And that from figuring out the brand, to figuring out all the operational nuances that come with any business, figuring out what are your best marketing channels, what tech stack should you use, all these different things, pricing your pitch to customers, your pitch to hire people and why they should work. There’s so many different things and I think that a lot of people just think, oh, they’re not a big brand. Nobody knows about them. You shouldn’t be paying a franchise fee and a royalty. But I don’t know, I just think for most people it’s like you should buy a franchise because you probably can’t even make a great website, let alone all the other stuff that you have to figure out. Which maybe that sounds negative, but I just think it shows, again, it’s just hard to go from zero to one and that’s what franchises do.
Dru Carpenito:
Yeah, no, no, I think it’s great advice. I think what you’re saying is amazing advice. It is the world for a lot of people and that’s where franchising can be amazing, is not having to worry about a lot of that stuff. And if you get in with the right franchise, it’s the right fit it life changing. Literally life changing. I had a guy text me, I him get into some super cuts and he was like, dude, thank you. This changed my life. And I’m like, shit, that was cool. But it’s the same thing, it’s just a lot of layers to it. Big decision, a lot of ways to go about evaluating the franchises to figure out if it’s the right fit kind of thing. Yeah. But no, it is such a cool thing and you never hear about those life changing stories a lot of times either, right? It just doesn’t get the press, a lot of other stuff. But yeah, it’s a cool thing, man. It’s
The Wolf of Franchises:
Cool, man. I swear franchisees and especially the multi-unit ones are like, I don’t know what the words are, but they’re just rich people in disguise almost like, because all of a sudden I’ve had conversations and on Twitter and you before this, you just kind of, they’re like, oh yeah, I own 15 or 20 of these. And I’m like, wow, okay. And it’s not some fancy title at an investment bank or some other company, but I mean these guys have more access to cash flow than 99% of America. It’s crazy what you can do over time
Dru Carpenito:
And you’re doing a good job of getting those stories out there, right? Telling those stories to help people like their eyes get open to what could be possible. You’re doing a really good job of that.
The Wolf of Franchises:
I appreciate that, man. But yeah, that’s the goal. I mean, it’s really just franchising isn’t best for everyone. Like I said before, a lot of people do have a hard time going from zero to one, but if you’re not that person, if you are a savvy entrepreneur and can figure this stuff out on your own, you’re probably not going to being in a franchise because you’re not going to be, you’re going to have someone telling you what to do, what you already know how to do. So it’s not for everyone. But I do think if you’re looking to start a business, you should at least check the box of, yeah, I did my research on franchises and it’s not for me, but I would bet that for a lot of people, they’d actually be surprised at how many brands are, would it actually be a good idea for them?
Dru Carpenito:
So it’s fun it you get to learn about how businesses operate and make money. So
The Wolf of Franchises:
That’s the thing. At a minimum, you’re going to have fun. All right, man, this has been awesome. A little bit longer of an episode than usual, but I had fun talking, so why not let it go? Is there anywhere online where people can follow you along, whether it’s social media, website, and learn more about you and what you’re doing?
Dru Carpenito:
Yeah, my pathetic attempt to try to be a tweeter is in a work in progress. So do not follow me on Twitter <laugh>, cause it’s Follow the Wolf, then go file, follow somebody else. But no, the easiest way is just to Google me, D r u carto. And I think I’m the only Drew Carto in the country, so I’m pretty easy to find if you want to talk franchising.
The Wolf of Franchises:
All right, cool. Well he’s got a website. I think he’s being humble. We’ll plug your website in the show notes, man if people want to reach out. All right, man, this was fun. And yeah, we’ll talk soon.
Dru Carpenito:
All right, thanks Wolf.
The Wolf of Franchises:
Thanks for listening to Franchise Empires. We’re coming to you soon with
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