Level 5 Capital Partners: Unlocking The Secrets Behind Franchise Investment
When you’re franchise investors and operators, you’re writing the playbook as you go.
Join The Wolf as he talks to two of the best: Scott Thompson, CDO and MD and Dennis Campbell, VP of Franchise Development, both at Level 5 Capital Partners.
They get into why buying into the mission is key to scaling, the balance between too many heads and meeting development timescales, and growing a brand for independent success.
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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LinkedIn: linkedin.com/in/denniswcampbell
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LinkedIn: https://www.linkedin.com/in/scott-thompson-618a91/
Twitter:https://twitter.com/smthompson1979
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Episode Transcription
Scott Thompson:
Yeah, we buy mission based businesses, as Dennis said, values based businesses. And we buy honestly where founders are involved and they understand their business, they have command of their business and they can convey that to us to a potential franchisee. And that gets us excited, right? If you can get up in the morning and the business has a strong mission, strong values, really solid founders that are passionate about both of those, we can come in and really help them scale that and go quick.
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’s bonus episode includes Level five capital. They’re one of the biggest franchise focused private equity companies out there. And we dive into their model. They not only invest in franchisors, but with every investment they make, they’ll also open 20, 30, 40, 50 plus locations for the brand and function as an anchor franchisee. It’s a fascinating model and we get to learn about both the inner workings of multi-unit franchise ownership at scale, as well as investing in franchisors and what their business model looks like. I think you’re gonna enjoy this one.
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 work. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. The Wolf Work Week and Wolf Pack Franchising may maintain positions in the franchises discussed on this podcast.
The Wolf of Franchises:
Scott and Dennis, thanks both for coming on. Really excited to learn more about the world of franchise private equity and I think a lot of listeners are too. Do you wanna just as a primer and feel free either of you guys can take this, just what is level five, what size funds were raised and generally what’s the investment thesis?
Scott Thompson:
Sure. I can give it a start. And Dennis, you can add on. So Level five capital is a small to mid-size private equity company. We tend to focus our efforts on efforts in personal services, family services, health wellness started off as actually the founders of Level five were level three communication executives back in the day in Colorado. And while they were in Colorado, they were looking at other opportunities too from, they didn’t, corporate jobs aren’t forever, so they were always trying to find new opportunities and they found this company called Power Yoga and became early investors in that as franchisees franchisors. And that’s where Level four Yoga came about. And then fast forward in 2017, 18, we wanted to scale more into, we invested in Big Blue Swim School as an opportunity investment and then we wanted to kind of scale beyond that and we raised our first fund, which was a hundred million fund that’s been fully utilized to date, that’s already realized some returns.
Our Restore investment, we had an exit recently with General Atlantic back in December, mostly on the franchise or front. Part of our ethos too is when we go into an early stage investment, we obviously wanna make sure the unit model is sound, but we also help the unit model get better by using some of our kind of what we call our acceleration services team. And we really, with our new store opening process with our real estate and construction teams also we have Fran Dev as a service. Finance is a service, HR is a service, those types of things to help scale the executive team, scale the opportunity, make sure that the business has enough capital to get through the acceleration curve, if you will, from a peak negative cash flow. And that’s where we focus on. But Restore was one of those investments where we exited the franchisor investment, but we actually also maintained the franchisee investment today.
So we do like to say we drink our own champagne, if you will, with each of the brands we invest in. We also become a anchor, large anchor franchisee, heyday skincare where heavy will be a 75 unit operator, kid strong, same thing, will be a 60 unit operator. And we set those businesses up as their own entities where they have a CEO and as board of directors, et cetera, to manage those businesses. So trying to teach the brands how to build units and systems at scale to so large other large investors will want to be attracted to the business model. We’re on to fund two now. It’s 300 million. Now. Some of the investments I just mentioned to you are also part of that process as well. Dennis, add on, I know I talk a lot, so Go ahead
Dennis Campbell:
<laugh>. Yeah, I think just to Scott’s point, one of the main drivers for level five capital is to come in and stand up a brand, give them an opportunity to have everything they need to actually start to expand across a region or a state or a country or even international. And then you start scaling and then ultimately they stand alone. And at some point our services are not always required. So I think that’s a pretty responsible piece that Level Five brings to all of the portfolio companies that we’re involved in.
Scott Thompson:
Yeah, it’s not just capital coming into the business. We have the capital piece and the investment team and the fiduciary responsibility, but we also have the executives, we’ve got about 120 person team, like I said, across all those different areas of expertise to help the brand, make sure they don’t make founder level mistakes and get themselves in a hole where they don’t need to be. And if they do, we’re there to support them on both the operational side but also the capital side. And we continue to refine the AS services because it is an area where when you go into a founder-led company, there might be the founder, some good solid mid-level managers at their locations that corporate stores, but they don’t have a senior staff of people that know how to build out marketing plans that know how to build out territory plans that don’t know how to build out utilization and finance models to help really make sure that their franchisees are profitable. Cuz the key is if you have profitable franchisees, everything is really becomes easier.
The Wolf of Franchises:
Definitely. Yeah, I totally agree with that last line. And I think sometimes franchisors maybe miss that. So I love that that’s part of your guys’ thesis. What do you guys look for in franchisors? Cause you’ve invested across a few different industries between Big Blue Swim School Heyday and I know recently Go Dog, right? GoDog only has, I think, if I’m not mistaken, three locations and that’s it. But it was a 20 million investment. So
Scott Thompson:
Yeah, here’s the Go Dog. Yeah,
The Wolf of Franchises:
Yeah. I mean guys, is it any specific average unit volume you’re looking for? What kind of peaks or interest when you see an emerging franchisor?
Scott Thompson:
Well first off our experience with Big Blue, we love large CapEx business models. It creates a natural note around the defensible moat around the business, right? Cause not, you know, think of health and well think of just fitness. How many concepts are out there that are 150 to 500 grand and they’re just on every corner. I mean the competition level for that market share is pretty high. Whereas, you know, go into a dogs and kids, first of all, that’s a business model that there’s a need for it. People need to drop their dogs off of boarding or daycare, people need to have their kids learn how to swim. So there’s a strong need in the marketplace and the competition is fairly minimal. I mean, if it’s not minimal, there’s not a lot of, so for instance, Dogtopia, the other one Dennis, that that’s out there, camp Bow Wow, right?
Yeah. Those types of businesses, if they are in your area and you try to have your dog get into daycare, chances are if you don’t get in pretty quick, you’re not gonna, it’s like other day child day facilities, he’s just not gonna get in. My wife gets an email every morning from Camp O saying, oh we were sold out if you haven’t scheduled your appointment yet so you can’t get in. So there’s this, there’s a real high demand. So we tend to look for really strong demand businesses in the market, but the high cap X is critical too because that gives us that defensive amount around that and then allows us to capture the market share.
The Wolf of Franchises:
Interesting. So do you not worry though on the franchisee side maybe that it’s because like you said, right, the investment range is so much higher. Does that worry you on the Azure side for growth in finding more franchisees or No,
Scott Thompson:
I’ll let Dennis answer that question.
Dennis Campbell:
Yeah, it’s really interesting. I mean for those of you that are familiar with franchising and when you work on the development side, there’s a lot of head trash that might come along with higher investments. But we actually find that as we go through the mutual evaluation process, our candidates are buying in faster and they’re actually really comfortable and supportive with that higher initial investment. And it is not something that outwardly, somebody would just see and assume to be a fact. But we have very high conversions and a good unit model solves a lot of problems. However, I think that the comfort that comes along with someone being able to, as Scott said, have a defensible moat around your business. For a big Blue swim school for example, if you’re 2, 3, 3 and a half million dollars to get a pool open, somebody’s not likely to come along and build a 5 million pool
Scott Thompson:
Or out position you in the marketplace. I mean at the end of the day with all of our analytics to find the sites and put the 3 million in the ground, they’re not gonna get out positioned. Right.
Dennis Campbell:
And I think a lot of people say you can’t own a utility company and the cool thing is you can own the swim school market share in your community.
The Wolf of Franchises:
Definitely. And you said something there, a good unit model solves a lot of problems. Is there a specific potential payback period that you guys look for in brands on an annual basis?
Scott Thompson:
Yeah, I mean we don’t just look at payback, we look at return on invested capital, we look at IRRs, we’re looking at just what is the long term. What we love about Big Loo is the demand is there, the the higher CapEx and the inflation and the interest rates and everything. But there’s no price elasticity in the business. Meaning I can raise rates $10 a half hour and nothing really happens to the attrition of the customer base continues to scale. I mean we just went through a board meeting today and we’re seeing across all our pools somewhere, what we call paid weekly lessons are up over 130% for the year. I mean that’s just continues to scale and like as the brand continues to grow, we’re not seeing a, I mean we have a couple pools that have some operational challenges, but overall the unit model, the business itself continues to hit new marks if you will. As we open pools, we just opened our Paramus New Jersey pool and it had over 3000 kids in the first week. That’s day one. You open your pool and when you think of these businesses, probably about 1200 kids is where your break even point is. So you can imagine that franchisee already said I’m buying two more locations even though they’re three and a half million a piece.
The Wolf of Franchises:
Yeah, that’s fantastic.
Dennis Campbell:
We also wrestle with right sizing. I mean, you know, can have a franchise partner come in and swallow up a large market that has a lot of trade areas inside of that market and you gotta look at the development schedule and figure out how that all works into just enterprise value. Because getting doors open on time is really critical and it’s something that we pay a lot of attention to. So again, for anybody in franchising, you have this grappling between do you have less franchise partners in a system where you have less opinions and it’s just easier to solve for franchise advisory council issues, et cetera. Or do you have more franchise partners that are probably gonna be able to meet their development schedule on time and on budget and get those doors open faster? So there’s just always those types of things you’ve gotta consider when you’re approaching just the growth for any of the brands.
The Wolf of Franchises:
Yeah, for sure, for sure.
Scott Thompson:
And back to GoDog, we love GoDog cuz it’s unit models better than big glues, right? So here’s the difference. So you got your core business, which is the boarding and the daycare, but then you have the social piece. So you’re hitting all these different demographics, boarding is used
The Wolf of Franchises:
With the social dog, birthday parties or something.
Scott Thompson:
Then you pool,
The Wolf of Franchises:
There’s businesses doing that
Scott Thompson:
I’m sure. Yeah, it’s a thing actually. So you’re a single person, you have a dog or a couple or you have a girlfriend and you guys wanna get the dog to, you move to a new area, you want the dog to have a place to play like a playground. Indoor park is beer and wine and a little food truck you can come in, have the dogs play and it’s a cheap membership. It’s very low membership to come in. Obviously the food and alcohol is gonna be where you make your margins but that’s your also leads you into the daycare, leads you into the boarding. It’s a one stop shop, kind of think of Walmart for your dog if you will. Cause eventually there’s gonna be GoDog play, GoDog stay GoDog social go dog behave cuz. So all anything dog related will be part of the facility.
The Wolf of Franchises:
That’s brilliant. I love that. I mean how do you guys balance the unit model, the economics of the Zs? Cause you’re obviously playing, you know, said it before, I think you drink your own champagne or something like that.
Scott Thompson:
It’s important to have separate teams. So the acceleration service team partners with the franchisor brand a lot of times to help them scale, build out the business nationwide and make sure the franchisees is successful. The franchisee business, like I said, we hire CEOs, we hire operational teams, GMs and regionals to support that. We give them the playbook and the framework that Level five is used to doing across other portfolio companies to support them. And then we have our investment team, which is really the board level team that sits and helps really hold the executive team responsible for the budgets and so forth and the goals. So it’s kind of like this cycle, this really nice loop. So we are the friendly ones. We come meaning my team, Dennis’s team, we we’re, we’re their partners. But if we see something that’s not right then and we’re not getting the right support, we go to the investment team who then goes to the board and kind of holds the management team accountable. So it’s nice, we’re always ahead of the board conversations. We’re not like a typical private equity. We find things out at the board meeting, we know going into the board meeting what’s happening with the business.
The Wolf of Franchises:
Okay, yeah cause I’m just thinking about it obviously increasing maybe the royalty by a percentage is good for the Azure investment, but if you guys also own 75 locations now you’re losing 1% of revenue across all those locations as well.
Scott Thompson:
But the way we look at our outcomes and everything, which is our returns for our, our LPs is as a platform we sold a 10 million EBITDA franchise unit business, which has say 40 units open of whatever business it is plus the franchisor investment, whatever percentage we are, if we’re a majority owner or even just a percentage, every store we were a minority owner. And those two, if we saw those blended together to the new buyer, you get a much higher multiple on the invested capital.
The Wolf of Franchises:
And for the most part, the model that you outlined, it seems to be like all what you guys have done, meaning investing in Zs but then also acting as that anchor franchisee. But I know it’s Orange Theory, right? You guys are just a franchisee of like a hundred and a hundred plus locations. Was there anything specific about Orange Theory as a brand that was compelling enough to not just be a franchisee
Scott Thompson:
Unit model? Very good unit model, very good management team at the, and good private equity behind it with raw capital and we wanted to consolidate and create a platform that we could get an arbitrage on and learn from them cuz they’ve done great things. That’s the other beauty of level five is everything we do is there’s tons and tons of learnings Dennis can tell you.
Dennis Campbell:
Yeah, no doubt. I mean there’s always feedback loops and you’re always adjusting as you learn and perfect doesn’t exist. But I think you can get really close when you analyze the data and data’s not cheap, it’s an investment. It’s really expensive. And the same with software. I mean technology is something that Level Five looks at very closely as well. But because we are an anchor franchisee with the portfolio companies that we’re involved with, I think that that standard deviation of here’s what we expect for a store or a shop to perform at and there’s a high and a low, it’s just you can get as close as you can to that average or above, then you’re just gonna continue to win. And I think that is, it’s almost like an elevated franchise advisory council because you do have people that are in the business and opening multiple units just refining it and ultimately that it all swings back to the unit model.
The Wolf of Franchises:
Yeah, definitely. And since you guys have seen just, you’ve evaluated investments for level five and then you, I’m sure you had some insight into that transaction where a restore they acquired, or sorry Restore was acquired by General Atlantic. Is there a specific criteria when a franchisor is acquired that comes to the forefront? Is like the royalty stream the most important? Or are there brands where a lot of food brands also make margin on supplying the inputs like forks and dough for the bread if there’s a sandwich company? Are there specific franchisors that just command a higher multiple that you guys have seen?
Scott Thompson:
I think again, the most important thing for a brand multiple is are the unit average unit volume of that franchise system growing, right? Is it an appropriate royalty stream? And if there is supply, so for instance, restore owns the manufacturer of the cryo machines. So you’re supplying the franchisees with the machines, how to rate that is cheaper than if they were to go out and buy it on their own, but still a margin enough to where the franchisor makes a profit there. So yes, to answer your question, obviously if there are multiple revenue streams and the contracts that are signed have the length of those contracts is critical. If it’s a five year term versus a 10 versus 15 versus 20, that also, cuz that’s a built in revenue stream for the private equity coming into the business. Also, what’s important is of the people who are developing within the brand, so the developers that have a development schedules, are they on track?
Are they opening a consistent amount of whatever it is, stores quality doors on a regular basis? If that’s, you’re gonna get a higher multiple. If you’ve got stronger franchisees in the system that are family offices, private equity, you’re gonna convey a higher multiple cuz those typically franchisees are gonna perform on their schedules. And then if you have some decent white space for growth or for future acquisitions where you can leverage some shared services, those brands are gonna convey a higher multiple as well. That’s why you’ve seen a lot of these brand, these companies where like Buzz Brands, propelled brands, they’ve got these shared services, Fran Dev, et cetera, similar what Level five does from an acceleration service perspective, but they’re able to share those services across brands and leverage that and build more enterprise value.
Dennis Campbell:
I think one of the other common themes that you’ll recognize with level five is all of the brands are changing lives locally. I think that the mission, vision value is very important to us as well.
Scott Thompson:
Yeah, we buy mission based businesses, as Dennis said, values based businesses. And we buy honestly where founders are involved and they understand their business, they have command of their business and they can convey that to us to a potential franchisee. And that gets us excited. If you can get up in the morning and the business has a strong mission, strong values, really solid founders that are passionate about both of those, we can come in and really help them scale that and go quick.
The Wolf of Franchises:
No, definitely. Yeah, it’s just really in to hear about this. I mean you guys are really the only ones kind of this involved in the franchisor and franchisee level.
Scott Thompson:
I’ll tell you it’s not easy work. <laugh> creating the value. So if you think about it, most private equity buys, let’s say a hundred units, 200 units, and then they take it through 500 units and sell it or whatever. And they manage a good management team building the management teams, we’re building the systems, we’re helping them scale it and through capital and people to get there. And then we’re creating a lot of value, much higher multiples for the partners that are the limited partners that are involved versus standard private equity. I don’t want the SCC to come after me. I’m not quoting it
The Wolf of Franchises:
<laugh>. Fair enough. And I mean for level five, is there an ultimate vision with number of brands or anything like that? How many deals are you looking to do a year or is there no cadence?
Scott Thompson:
Well, I know right now we’re bit off a big chunk that we’ve gotta chew now through q1, q2, I think we’ll start looking at more brands Q3 four of next year. We’ve gotta get, so part of our journey that we like to take our brands through is depending on where they are in the cycle, but stand up scale standalone and some of the brands we’re helping standalone and some of the brands are brand new that we have to build out a lot of work on. Then we we’re standing them up and then we’ve got a couple that are in the scale. So we’ll always be in that kind of conveyor belt mode of taking brands through
Dennis Campbell:
10 to 12 brands has been referenced more than once. So just to give you,
Scott Thompson:
Just from my team, you gimme an example on my team, we have Dennis, we have another vp, we have two directors, two managers, we’ve got an operations team and we got a legal and compliance team all under the Fran dev kind of enterprise.
Dennis Campbell:
And I will tell you, when we have candidates from all over the country that are going through our mutual evaluation process, they’re looking at many other opportunities. I’ll tell you, they really connect and resonate with the fact that we are eating our own dog food. We’re out there, we’re growing these, we’re opening them with them, we’re speaking their language. And there’s a huge comfort to that. And I think it is very rare, but it’s also very well respected.
The Wolf of Franchises:
Definitely. I mean I worked for a franchise sales organization, so basically one little component of what Level five has, and it would’ve been possibly made the conversations a lot easier if we could have spoken to the fact that, hey, our company’s also operating some locations. So I can definitely resonate with that mean. So if a franchise or let’s say an early stage franchise or founders listening to this, which I’m sure there’s a few who are probably on the email list at a minimum, what could they do potentially if they’re hearing this and saying, cuz to me, if I’m a franchise or founder, yeah, obviously maybe the dream is to bootstrap it, but you can do a lot more with capital and also just, it’s hard to do everything on your own. You guys clearly have a lot of expertise and can provide a lot of value. So if I’m a franchise or founder, what should I be doing to maybe ready myself for a potential investment from a level five or someone
Scott Thompson:
Really, really understand your unit model. Understand what are the levers that are they have to pull to make it successful. Understand your C, understand your ltv, understand your cost per lead, understand your seasons of the business. If there are seasons of the business, understand utilization. If there’s service based business, understand your cost of good sold and your margins. You gotta really, you’ve gotta own it and know what leverage you need to pull to make a profit If you can do that. And you can also convey, here’s where your growth, here’s your market, here’s your total addressable market, here’s how many doors are open that you’ve done corporately or with maybe a couple franchisees. And then here’s the opportunity. And then if you get the capital, here’s what I’m gonna do with it and why. And if you can convey a lot of that, answer a lot of those questions and the value that you’re gonna be able to create and share the return on that investment, you create a nice story for yourself. There are people out there that can support you to create what we call a sim, which is what a lot of that information will be in. It shows the industry, it shows the market, it shows the competitors, it shows the opportunity, and then it shows your unit model and why you’re unique. Then capital will follow that.
Dennis Campbell:
Yeah, I think one of the other things too is just data and technology and software and do you have a frictionless journey? Do you have ease of use? I mean all of these things come into play, you can have the best service in the category, but there’s a lot of other things that play into that and feed into that so that you can propel that growth and getting to steady state. And there’s just so many different pieces and there’s strategy and there’s tactics. And I think level five just spends a whole lot of time and investment in that arena and I think it kind of makes that much more special.
The Wolf of Franchises:
Yeah, no, definitely. I gotta imagine the founders that secure an investment, I’m sure are pretty excited when it happens. So yeah, look guys, this was cool to chat and get a little bit more insight just how you guys operate, like I said before, right? You’re really the only ones kind of doing this. So I think it was, it’ll be fun to share it with the world and we’ll include this in the newsletter that goes out to about 28,000. So if you’re listening to this, check out wolf franchises.com, subscribe to the newsletter. But yeah, Scott and Dennis, thanks for joining. And is there anywhere where folks wanna learn more about you, both individually or just what you’re doing with level five? Where can they check you out Online?
Scott Thompson:
You can find level five, capital L five. Capital five is spelt out F I V e.com. You can go to any of our brand websites who go to hq.com, big blue swim school.com, kids strong.com, heyday skincare.com, orange theory fitness.com, those are our brands. LinkedIn, find me Scott Thompson, I don’t know what my hashtag is there or whatever, but you can Scott Thompson, level five capital before you’ll be able to find me.
Dennis Campbell:
Yeah, and if you have any questions, just shoot me a note [email protected] and would be more than happy to get back to you.
The Wolf of Franchises:
Beautiful. All right. We’ll find Scott’s LinkedIn profile and link to that in the show notes and same as Dennis’s info. But yeah, thanks again guys, and we’ll chat soon. Thanks.
Dennis Campbell:
You bet.
The Wolf of Franchises:
Thanks for listening to Franchise Empires. We’re coming to you soon with actionable insights to take the next step on your franchise journey. So make sure to subscribe on Apple, Spotify, Google, or wherever you listen.