S2 E12: Massage Envy: How Stephen Vereb and Henry Kim Are Building an Empire and Closing the Recruitment Circle
Stephen Vereb and Henry Kim have been in business together for more than 15 years. Now the owners of seven franchise units, they’re solving the problem of finding qualified employees. Find out how.
From backgrounds in corporate America, these entrepreneurs now have five Massage Envy units and two Amazing Lash units in their portfolio.
The Wolf gets into the weeds of financing franchises, getting out of sales, and how Henry and Stephen are solving the recruitment problem by opening their own massage therapist school.
You’ll also hear how their partnership works so well and why they believe everything in life is networks and relationships.
And If you work in franchises, your most precious resource is time. BELAY exists to help you regain control of your time and your focus. They will match you with highly-qualified US-based virtual assistant, accounting, social media, and website contractors. In fact, only about 3% of those who apply to support roles with BELAY are actually accepted. Text WOLF to 55123 to get started.
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Episode Transcription
Stephen Vereb:
I was still working my corporate job at this time. And that was one thing. Cause we’ve looked at a lot of brands in the last 15 years. We stumbled upon a Cadillac brand on number one, massage Misa. We just thought they all were like that. It was like, oh, franchising’s great <laugh>. They give you all this information. They let you talk to these people. They tell you exactly how it’s going to go. If you just do what they tell you, then everything is going to be great. And not every brand, in fact, very few brands did the validation calls the way Massage Envy did. But that’s what happens when you’re successful.
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 we have Henry Kim and Steven Verre. These guys were awesome to speak to as they have a wealth of knowledge. From their experience owning Five Massage Envys and two Amazing Lash Studios, we discuss how they received 90% financing for their first two locations. How relationships with people in their industry has given them an unfair advantage and a lot more hope you enjoy.
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 Wolfpack 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 Wolfpack Franchising may maintain positions in the franchises discussed on this podcast.
The Wolf of Franchises:
Want to hire a virtual assistant, belay knows how daunting it can be. Their staffing solutions and matching process pair you with qualified US based contractors without the stress of having to do everything on your own, accomplish more and juggle less with Filet Text Wolf to 55 1 23 to get started. Well, yeah, I guess a good place to start. I mean, you guys meet, how long have you known each other?
Stephen Vereb:
How did we meet? So shoot, I’m not sure how many years ago it was. We’ve been business partners for 15 years now, but we had known each other through Paul, who I worked with in corporate America in corporate sales. So Paul was always talking about his brother-in-law, Henry, and what a great sales guy he was and his business. And we all played golf together a time or two. And Henry and I bumped into each other at the Paul’s kids’ birthday parties and stuff like that that I was invited to. So we got to know each other socially on the fringe before we became business partners.
The Wolf of Franchises:
Gotcha. And when did you guys decide to sit down and say, Hey, let’s do something together, whether it’s franchises or something else?
Henry Kim:
Well, I was in corporate sales and I was looking at trying to make an exit from that and do something different. I always wanted to own my own business and so I didn’t want to start it from scratch. And so I liked franchising. So actually I hired a franchise broker and I remember they presented Liberty Tax, great Clips and something else, and none of those really got me excited. And then I was on the internet searching, doing my own searches, and then all of a sudden I see Massage Envy. I’m like, huh, I love massage.
The Wolf of Franchises:
Yeah. Who?
Henry Kim:
Yeah, so let me look into that. And started that process and got on some initial calls and validation calls. And so I liked it and I actually asked my brother-in-law and sister if they wanted to partner with me. They weren’t interested. They’re not, they really conservative. So my brother-in-law, Paul said, well, my friend Steven, you know him, he’s ready to leave his corporate job and maybe he might be interested. So that’s when I reached out to Steven and kind of presented Massage Envy. And then we continued to do our due diligence and validation and he was on board and he made an offer I couldn’t refuse. He said, look, I’ll open up our first two locations and be the general manager.
The Wolf of Franchises:
Oh, okay. Actually
Stephen Vereb:
I said I’d open the first one location. Oh, first one,
The Wolf of Franchises:
<laugh>. All right.
Stephen Vereb:
And then Henry and I found ourselves talking to the RD and I went there mentally thinking we were going to buy a location and that was going to be our start. And the guy says, how many of you guys want? Henry goes three. And I remember looking at Henry, it wasn’t a very good poker player at the time. I looked at Henry, what the heck are you doing man? And we didn’t say anything about three. And then the territory that was available was an hour and a half to two hours away. And Henry’s like, that’s cool, we’ll take those three. And then from there we told the guy, because he was sitting on some other local territories that were closer to us, so we said, look, we would rather have those territories, you know, got a week to get back to us kind of a thing. We ended up getting this closer territories with the first three licenses.
The Wolf of Franchises:
Nice. And today, for folks who don’t know, massage m b found in 2002. Today it’s owned by Rourke Capital, over a thousand locations nationwide. But what timeframe is this? And if you remember generally how big is the concept when you’re evaluating it?
Stephen Vereb:
2007.
The Wolf of Franchises:
2007, okay.
Stephen Vereb:
Yeah. And there was about three, somewhere between three and 350 open. It was still founder level at that time. It had not changed hands to any PE companies at that time. Well, but they did a good job. They had monthly or biweekly. It was biweekly validation calls. Validation calls. And so we sat in on a handful of those and every of ’em, they would go over their numbers. They were all making money. They were all doing very well. I remember the one Davey clinic with Jerome Kern, actually Jerome Kern who is a co-founder of Orange Theory, he was a massage interview franchise. And I remember that validation call. He did. They were crushing it back then.
The Wolf of Franchises:
Yeah. All right. So 300 locations. Yeah, that’s a more than enough proof of concept. So you agree on the three pack? How’d you go about financing that
Stephen Vereb:
Sba,
The Wolf of Franchises:
You used sba?
Stephen Vereb:
We didn’t know anything <laugh> to speak at that time, and SBA was the most logical place to go. So through some networking, we had found a rep, what was then bb and t, now they’re truist, which is more of a regional size bank on the east coast. And we went through the SBA process for the first two.
The Wolf of Franchises:
Gotcha. So with five today, you’ve the rest via, I’m assuming, right? The other, the cashflow from the existing two stores?
Stephen Vereb:
Not exactly. So I was playing beer league softball and a group of entrepreneurs were kind of on the team, one of them being a number two, number three guy in a local community bank here. So after the games over a soda in the parking lot, I started picking his brain on banking and SBA financing and how to not have to go sba. And he gave me a nice parking lot education. And from there I started smiling and dialing, probably called probably 10 to 15 different small community banks basically saying, look, we have two locations we want to get out and refinance. We don’t want to do sba, we’re looking for conventional financing and we’re not going to put any liens on our houses. We want to be out of that and we’ll cross collateralize the business using the cash flow. If you can do the deal, great.
Let me know if you can’t, that’s okay. I don’t want to waste your time, don’t waste mine. And I was dictating the terms we were looking for to see who was willing to do that deal. And we ended up whittling that list down to probably about three places, which is what we were looking for. And then we negotiated with those and we found the right partner that we ended up not just becoming partners with them from a banking perspective, but Henry and I ended up investing in that community bank as shareholders. And so we rode that wave for a while. That was the best paper investment that I had personally ever made. It worked out very, very well. Not to mention getting your app, they still have to do their underwriting and whatnot, so it’s not like you’re going to get a loan you don’t deserve, but it sure is cool to be able to pick up the phone and get your app put to the top of the stack because it’s a relationship deal. You’re not the number with a big bank and lost in SBA land.
The Wolf of Franchises:
Yeah. I’d love to dive in a little bit into the weeds of the financing, just because a lot of people write, they see the investment range for franchises and they think they need that entire pile of cash already in their bank account to afford it. But I’m going to guess, right, with the Massage Envy at the amount of locations that had ’em, when you got in that relative to the investment, the loan was probably close. I am guessing here, like 80% of the investment where you’re probably able to afford with that level of proof of concept in the country already.
Henry Kim:
I think it was an 80 20 deal. Did we? I don’t know that we actually did put 20%. I think it was closer to 15, I think it was with the fees. I think it might have been 20%, but they counted the franchise fees and other fees as part of it.
The Wolf of Franchises:
Gotcha.
Stephen Vereb:
Part of that 20%, or it might have even been 90 10. Well, so I think you’re right on both accounts, I think it was 10% down. Our rep got really creative and she took the license fees that we had already paid to massage and be corporate, and she utilized that as toward our skin in the game. And then we only had to put a little bit more capital and above that. So when it was all said and done, and that capital really worked out to be the SBA guarantee fee, and actually we financed that, we were able to finance the SBA guarantee fee. So we put very, very little skin in the game outside of the licenses that we had already purchased. So it was sub 20% at that time. Yeah, maybe he and I total hour cash, maybe a hundred thousand a piece. It was 90. I remember the check over. Yeah. Yeah. 90,000 a piece maybe. And then we just used leverage, we used that.
The Wolf of Franchises:
And now that’s for the first two locations,
Stephen Vereb:
But they were one at a time. But em we’ve, we financed.
The Wolf of Franchises:
That’s amazing. And I want to get to, because obviously, right, that’s a lot of leverage. It’s great to minimize your cash down, but I want to ask you about how those first two locations went when you launched and what the first few years were like. But while we’re on the topic, right Steven, you were saying that after those first two, you didn’t want to go sba, so maybe whoever wants to take it, just kind of summarize why a conventional lending looked more attractive to you basically after you had those first two locations up and running.
Stephen Vereb:
So again, going back to you, you don’t know what you don’t know when you first get going. And there’s still tons of stuff that we don’t know. We learn something new every day about the financing piece or landlord lease negotiations. But at that time, you know, just do what you have to do to get open. We were very passionate about Massage Envy and the concept SBA was the path of least resistance. We didn’t know there was another option. And quite frankly, there may not have been, but once we proved ourselves and we had really, really solid cash flow, we were watching the banker’s eyes when they would look at our PN ls and they would light up because of the cash that the business would throw off. And so the conventional banking side was less concerned with the collateral because the business was a proven model at the beginning, there was a lot more risk because nobody was really sure.
Landlords some turned us down to even put a Massage Envy in their strip center because they were thinking it was a trend. They were thinking it was a seeding kind of a adult bookstore kind of business. They didn’t know what they were getting into. So from a conventional standpoint, our main goal with me leaving my job, I did not want any liens on my property. Not that I would want them on if I had a job either. Yeah, SBA and this is a little, everybody, the bankers blame everything on the sba. They’re the big bad wolf, right? And what we’ve learned over time is the SBA has guidelines, but the banks that are doing the deals, they kind of utilize the SBA as the big hairy monster to be afraid of. And you can’t do that because SBA says no. They say no, they say no.
A lot of that also comes into play. The SBA gives guidelines get whatever collateral is there to be gotten, but they’re there as an insurance group to get liquidity into the market to help people get open. So just because you go to one lender and they say one thing about their SBA program, you could go to two others and get completely different requirements in terms of collateral. But we wanted to get the liens off of Henry’s house. And once we had the ability with the cash flow to do that well and my brokerage account and they leaned it up good, my rentals and
The Wolf of Franchises:
All right. So you guys had some stuff on the line.
Henry Kim:
So much. I had a lot of equity in all those properties and then my brokerage count and then I had to get life insurance on top of that. That’s right. And that was for the second one, but the first one, they didn’t really ask for any of that stuff. They did put the liens on, but for some reason, the second one, they wanted to lean on my brokerage accounts and get life insurance as well.
The Wolf of Franchises:
Yeah, so it sounds like, I guess once those first two locations you had some proof of concept, that’s when you were like, let’s go to these regional banks. That proof of concept gave them confidence to give you a loan without you guys having to put any personal guarantees down on it? Oh
Stephen Vereb:
No. There’s personal guarantees on the loans. Yeah. Yeah. We had pgs, but we didn’t have any direct liens on the houses. And for the audience out there that may not understand some of the lingo were thrown around, if you go to the sba, they’ll say, Hey, well we’ll lend you this money, but if you have enough collateral out there to cover the amount that we’re lending to you, we’re going to put a lien on your house so that you won’t be able to sell it. Like Henry tried to refinance, rates changed and he tried to refinance and he had to get the permission of the SBA in order to refinance it for them to release the lien. So you’re handcuffed at that point. They have you. And like Henry said, they leaned up his brokerage accounts. And the reason for that is SBAs an insurance company, the bank’s only on the hook for 25% of whatever the amount that gets lent.
And that’s why banks love doing sba. Their exposure is only 25%. Community bank banks all have the same goal, which is getting in cash so that they can then turn around and lend it out nine or 10 times, nine to 10 times for every dollar small community bank. The cash in your accounts is really, really important to them. And so one of the levers that we were able to pull with a community bank was they saw the membership fees that would pour into the bank account. There’s a lot of flow in and flow out, but they wanted to have an opportunity to have whatever cash was coming through at their bank because they can work off the float and then go lend nine times off of that. So getting down the rabbit hole on fractional reserve banking and whatnot, but it’s all part of the process and education of learning the banking system. Your first step is probably SBA tough to get out from that on your very first business. But from there, you just want to keep on figuring out different levers to pull to get better financing and better terms. And just developing a relationship with the, we like community banks now. It’s like we have an open checkbook, we just tell ’em what we want and they just have always given it to us. <laugh> love it. I mean, for our amazing last studios, it was over a million dollars for two studios. They lent us for both of them.
The Wolf of Franchises:
Damn.
Stephen Vereb:
So I remember, but the funny thing was to the community aspect, it’s all relationships. Everything in life is networks and relationships. And one of our mantras is your net worth is your network and vice versa. And I remember we sat down with our banker at lunch and this guy was a former CEO of a different community bank, and we had built this relationship with him and we told him that we wanted to be developers for amazing Lash studio. And he looks at the two of us and he’s like, starts cracking up because Henry and I are talking about eyelash extensions and why it’s the next trending thing and this and that. And this guy at this time is probably 65 heading to 70, and he just shakes his head and he goes, if it were anybody other than you two asking me for a million dollars to open up eyelash extension businesses, he’s like, I would ask for the check right now and be like, you guys got to get the heck out of my face right now.
The Wolf of Franchises:
Oh my God.
Stephen Vereb:
But because you, I’ll go throw it in front of loan committee and because it’s you, I’m sure they’ll be like, yeah, sure. Those guys, they got a good track record and their other businesses do well, so we’re willing to take a risk on that. And that’s what they did. And we got a really good deal because we actually had another bank that was courting us really hard, but we stuck with our local community bank and glad we did. Right. Well, yeah, so have a massage school as well that helps to develop talent for our massage.
The Wolf of Franchises:
Ooh, that’s interesting.
Stephen Vereb:
And this bank that had been courting, Henry and I, when we didn’t even note at the time, we’re also courting our two business partners who were spine doctors who had bought and sold their business back and forth from a private equity firm. Sentinel Capital was the second equity firm that owned Massage Envy, and that’s how they learned about Massage Envy, long, convoluted, twisty. So these guys learned about Massage Envy through the equity partner that owned their business that they were still on the board of, and they got interested in Massage Envy. We all recognized that the bottleneck in the massage industry is service providers and the creation of continuing to build more massage therapists. So we decided McDonald’s got up the food chain into the beef and potatoes market. That’s what we decided where we needed to go from a Bolton business is to start building massage schools.
So this bank was also courting our two business partners that we had just joined forces with that we hadn’t even known that. And they funded our massage school, but when Covid hit, they completely turned on us and they asked us to pay off a $600,000 line of credit within 12 months when the world is upside down. And we were so aggravated and frustrated because it wasn’t like we weren’t going to pay them. It wasn’t like we weren’t paying them, but the alarms must have been going off on their side in terms of getting their cash reserves back in order. And they went hammering whatever clients had it and they blew up any relationship it took to get their cash called in. And we’ll never do business with them again, and we’ll tell everybody not to do business with them again because of it. So
The Wolf of Franchises:
That’s tough. But that is fascinating that you guys kind of vertically integrated in a way for just developing a pipeline for your own employees from the massage school. Is that a loss leader or just a breakeven play, or is that its own profitable venture as well?
Stephen Vereb:
It has the potential to be a nicely tidy, profitable little business that the real profit, to be honest with you, and it depends on how you structure it. We didn’t structure it just to feed our own locations. There are some folks that are going at it to really just create a training center and use it as a loss leader or a break even because they know that their profit is going to be seen on the side of the Massage Envy business for producing more service capacity. But the way we structured it is if we’re going to go through the hassle of doing this, we’re going to figure it out. And then when we figure it out, then we’re going to scale it. Because every Massage Envy nationwide. Not to mention all the additional brands in the space, the Me Too brands, massage Envy alone, each location could hire probably 10 to 15 massage therapists right now today, no questions asked to get ’em booked and on the schedule. So if we figure once we get it dialed in and we got it where we’re starting to scale, now we can start building these moving across the country. So we did it, it’s called Ambi, American Massage and Body Work Institute, and our logo is the United States in between two sets of hands, like Massage Hands.
The Wolf of Franchises:
Oh, I like that.
Stephen Vereb:
And we did it from a branding perspective, knowing that the intent was to figure it out and help other Massage Envy owners rebuild their pipelines.
The Wolf of Franchises:
That’s genius. I love that. There is a lot of massage franchises out there now, which I guess, so let’s go back to 2008, I think, right when you opened your first ones where some people thought it was a trend. Clearly you still own five locations today, so the trend is lasting if that’s what it is, but year one Henry is levered up. You guys are probably a little nervous, I’d guess, right? I mean, how’d that first year go? Was it fireworks out of the gates or was there some struggles?
Henry Kim:
No, it was pretty much what we learned on the validation calls. It was pretty spot on. Around month nine, you’re going to start being cash flow positive because you’re going to takes time to build up that member base, and then we just continue to explode from there. And so December of 2008, if you recall, that was the housing bubble. We’re in a recession, but December of 2008 and the worst retail environment in history, we broke a five year gift card record in December of 2008. That was a standing five year record at Massage Envy. And we broke it with our first location in the worst retail economy and ever.
The Wolf of Franchises:
Holy crap.
Henry Kim:
And then that location is still our cash cow. And just in the heyday though, boy, the numbers were crazy. <laugh> crazy. Great.
The Wolf of Franchises:
Yeah,
Henry Kim:
Especially like 2010, 2011.
The Wolf of Franchises:
So yeah, I’m curious and feel free to share as little or as much as you want. I looked at the F D D for the most recent one for Massage Envy and the average unit volume’s a little bit above a million bucks. So in its heyday, I mean, what would a franchisee see top line and how profitable is it? I’m going to assume I feel like the top franchises outside of food seem to be 15% to even, I’ve seen some 25% margins. But yeah, I’m curious for what your guys experience was.
Henry Kim:
Well before our first two locations are still our best locations. It’s the most mature because our last three, the market started getting saturated more, massage Envys, more competitors. We’re diluting our labor force, our service providers, because some of ’em will go to the new location. And so you kind of dilute things. I mean, look, I think the easy answer is in the early days when there is more service providers, this business has never lacked for enough clients. To your question earlier, were we nervous or was it explode out of the ground? There was certainly nervousness because we came into an industry that was used to being a nine to five stay-at-home wealthy type of a service like spa days before the bridal parties. And it wasn’t really an everyday necessity. And that’s where Massage Envy really disrupted the industry. And we had a three-legged stool of professional therapists, only licensed therapists in convenient locations.
We were typically in high traffic strip malls with affordable prices. And we brought massage to the middle market where everybody could afford it. And people started to recognize, because we were educating how great massage is for you, and it’s a wellness business play, and we’re booked and busy in the mornings now from nine to five. The therapists, we spoiled them to a degree because it used to be a Thursday through Sunday type business and they couldn’t get booked and busy during the week and certainly not during the weekdays. And we were like, look, dip your toe and give us a try. I know that you’re working at whatever the Ritz Carlton spa where you’re making as a W two, I mean a 10 99 contractor, you’re getting half of whatever the ticket price is and at 150 to $200, that’s a really good hourly rate. The issue is you might sit around all weekend and do two of them.
So we were too good to be true for them. We certainly, we had a different W two model and our model was one of, you’re going to be booked and busy. You can actually earn a living doing this job, not a hobby job. And really the constriction. So to Henry’s point, our first two locations did really strongly, but once a secret that gets out of what a good business it is, then you just keep building, it gets oversaturated. And that’s where it is today. Not just with Envys, every other Me Too brand that’s come on the scene. Yeah, there’s still more than enough clients to go around, but the real issue is the therapist supply, which is why we’re trying to attack that issue head on 15 years in, we stopped at five and six because we out kicked our coverage. We need to continue to generate more massage therapists. So that’s really where the focus is. Now,
The Wolf of Franchises:
If you work in franchises, your most precious resource is Time Belay exists to help you regain control of your time and your focus. They’ll match you with highly qualified US-based virtual assistant accounting, social media, and website contractors. In fact, only about 3% of those who apply to support roles with belay are actually accepted. You don’t have to do everything on your own. Accomplish more with Belay Text Wolf to 5 5 2 3 to get started. So for, let’s just use your guys’ top location. What kind of labor does a massage location that require? And I hear a lot of people stay away from food franchises because they don’t want, some of them require 20 employees, mix a, you know, got high school kids coming in to man the cash register, stuff like that where people are like, that’s too much overhead from a labor perspective. I don’t want to deal with that. Human capital required. Well, what does it look like in Massage Envy at a typical location?
Henry Kim:
A lot. Yeah. I mean it’s a fee. Look, it’s a people intensive business because it’s a one-to-one model. We have to have one service provider for every client. And so back in the heyday, when we were the second Massage Envy in Northern Virginia to open, we had 25 therapists at that first location, 28 I believe at one time. Now we have 14. And so 14, there’s a general manager, an assistant general manager, and then probably five sales front desk sales associates. And so that’s what it looks like today. And oh, I’m sorry. And then we have three estheticians as well. A lot of people don’t know, but Massage Envy is the largest provider of skincare. We do more facials than any company in the world.
The Wolf of Franchises:
Really?
Stephen Vereb:
Huh? Yeah,
The Wolf of Franchises:
Didn’t know that.
Henry Kim:
Yeah. And we have some really great offerings there. I mean, we do advanced treatments like chemical peels and Microderm abrasion great facials with really high quality products. So the goal is in by 2025 as a company, 30% of our business is going to be skincare. So that’s what we’re focused on as well. It’s a little bit easier to hire estheticians, although in Virginia you have to be a master esthetician. So it makes it a little bit more difficult. But that’s an area that we’re the company in we’re focused on. And that’s more profitable too. It’s a more profitable because there’s enhancements that it’s easier to add those enhancements to skincare than it is for body care.
The Wolf of Franchises:
Interesting. Now, I mean it’s always good to diversify the revenue a little bit. And yeah, I didn’t know that that was a service offered, but something you guys said earlier, I think you said nine months before the first location was cash flow positive. So in the context of franchise due diligence, there’s in the disclosure document in item seven in particular, there’s always a line item for just about all the franchises where they say additional capital required. And that the intention is for listeners who don’t know this, that right, once you launch the location, it’s not going to be profitable on day one. You got to kind of work to ramp up your cash flow so that you can cover all the costs of the business. So for you guys, you’re saying it took nine months and then after that you could pay for all your massage therapists on staff, the rent, if you were leasing the location, it was nine months and then you were free and clear.
Stephen Vereb:
And because the validations were there already and they already knew kind of the trajectory that you’ll be on, it was pretty consistent. Maybe some did less than in nine months and it took more than nine months, but it was around that timeframe.
The Wolf of Franchises:
That’s quick. I mean, that’s great.
Henry Kim:
So because it’s a monthly recurring revenue model, membership model, once you get it to a point where you have those members and then you make sure that you manage your attrition, ever since that nine month, we’ve never had a negative month ever because it’s a consistent recurring revenue model. And so we love models like that. And so we’re willing to be patient and get, if it takes nine months or a year, but then once you reach that it’s pretty consistent. Very consistent.
The Wolf of Franchises:
And I’m curious, you guys have mentioned your validation where you spoke to a franchisees, I’m not looking for an exact number, but generally, how many franchisees do you think you spoke to before saying, okay, let’s do this. Let’s go in on Massage Envy.
Stephen Vereb:
At least four or five.
And then I also, I was still working my corporate job at this time, and that was one thing. Cause we’ve looked at a lot of brands in the last 15 years. We stumbled upon a Cadillac brand on number one Massage Emmy. So we just thought they all were like that. It was like, oh, franchising’s great. They give you all this information. They let you talk to these people, they tell you exactly how it’s going to go. If you just do what they tell you, then everything is going to be great. And not every brand, in fact, very few brands did the validation calls the way Massage Envy did. But that’s what happens when you’re successful. You want the world to know what a great system that you’ve built. And franchisees are happy and proud to get on the phone as kind of a give back and a lifting people up from the rung of the ladder to help them climb up.
It was such a fun time to be in that brand because the information was readily available, people were all doing well. Even if you were not a great operator, you still did well. The model was really, really well architected. And a lot of times in the FTDs they’ll say, okay, you need 50,000 in operating capital. Which really, it’s misleading because a lot of it, it’s based on the first three months. But we knew with massage and be, okay, we need to budget for about nine mo a budget for a year, make sure we have enough runway to cover us for a year. And it was like clockwork. That’s how it happened at every location. I think maybe our last location, it took a year to get cash flow positive, but a lot of FTDs. I see. Don’t you always want to make sure you’re well capitalized? And a lot of times in the fds, they just will give you a number that’s based on,
The Wolf of Franchises:
Yeah, it’s typically three months.
Stephen Vereb:
You can’t really go by that. You can’t really
The Wolf of Franchises:
Go. Yeah, I mean it’s typically three months is what I see. And then some will do six months or maybe 3, 2, 6 months is their range. But even six months, you definitely want to project for more.
Henry Kim:
You do. Cause that’s a big reason why business has failed. They’re just under capitalized. They underestimated what it takes
The Wolf of Franchises:
A hundred percent. And I’m curious, so what is the churn rate of a massage member? I guess
Henry Kim:
It’s always been around 4%
The Wolf of Franchises:
Annually. Oh, per month Of that? Per
Henry Kim:
Month. Four, maybe 5% of month.
The Wolf of Franchises:
That’s still pretty low. But I guess compounding that can get out of hand quickly if you’re not adding new members.
Henry Kim:
I mean, we always have to add members, we always have to add members. But I think the company now is looking at ways to be more profitable to, and so they’ve given franchisees a lot of leeway on, you can set your own rates. You don’t have to come together as a co-op to agree to raise prices, you can just do it on your own. And other things like we’re always known as a discount model and you get your first intro massage at a very low rate. Well, we just now they’re letting franchisees decide whether to offer the intro rate or not. So once we had that opportunity, we were stopping offering that intro rate and charging regular retail rates unless they join and then they’ll get a better deal.
The Wolf of Franchises:
Yeah, it sounds like the system’s just totally dialed in.
Henry Kim:
I mean, look, we’ve had our ups and downs and this leadership, I think they’re doing a good job and certainly doing a better job in terms of gaining the trust back of the franchisees because the regime before that, it destroyed the trust with the franchise door
The Wolf of Franchises:
There. So there was, it’s worth capital now, which is, I mean they feels like bigger every franchise out there, but
Henry Kim:
It was the leadership team at the time where they would force you to buy retail for this promo, that promo and just shoving product down our throats that a lot of it we ended up giving away or just so now that’s stopped with the new leadership and she’s big on just letting people opt in or not. And I love her approach. Yeah. So yeah, it’s better now than it was about three years ago
The Wolf of Franchises:
Now. I mean I’ve seen that’s happened a lot across many different industries for franchises and for me, Quiznos, they’ve obviously contracted massively over since their peak, but that was a big part of it was like the team there seemed to realize that they could make more money off of being the supplier to all their franchisees and they stopped caring about the actual franchisees businesses and their revenue and profitability. So they just wanted as many locations open as possible, selling them all the food products and paper napkins, forks, et cetera, whatever you needed at a restaurant. And they lost sight of the franchisees
Stephen Vereb:
And making ’em pay higher than what they could get it themselves.
The Wolf of Franchises:
Exactly. It was a above market rates, which with a good franchise, the scale is actually theoretically supposed to mean that the franchisee can buy it at below their mom and pop competitors. Oh
Stephen Vereb:
Yeah. There’s other brands I won’t mention, but man, it’s It’s robbery. Yeah, it really is. It’s like crazy.
The Wolf of Franchises:
Yeah, I mean it’s tough, but you definitely got to vett the leadership and kind of got a sense for how they’d operate in these scenarios. Something you guys have mentioned a lot is the hiring right of the massage therapist. So I see this as a mistake sometimes that first time buyers make, which is they look at a massage envy and maybe they think either they love massages as a consumer or whatever. And I’m not saying it’s not a massage business, but would you say that that’s the most important things that makes this business tick? Because to me, I think based on what you’re saying is you have to be a good recruiter is an important part of the business. Which were you thinking that going into it?
Stephen Vereb:
We were just talking about this in the car ride. We’re researching another brand right now. And I was telling Henry about a conversation I had with our director of operations this morning because I was the manager of the first location. And I said to her, I said, look, we’ve never been downward pressure to obtain talent at the front desk. And it’s tough when you’re competing with folks that are paying a lot more than we are to work at Best Buy to scan a barcode. I mean our front desk, there’s a lot expected of them, including the management team. But how I used to do it is I would say, look, if you want an hourly job, you can go to Chick-fil-A or any number of wonderful brands to go punch a clock. But if you want to learn how to be a business owner someday, or if you want to think of this as a business internship on the fly, and even if that’s even too lofty, if you want to learn how to sell, because that’s what Henry and I did, we were sales guys.
If you want to walk away with a skill and more than just a paycheck, I’m never going to be able to pay you top dollar some of these other places are. But you’re going to leave here with a higher level of skillset that will continue to help you earn more as you progress. And so we really truly believe in developing from within and having them go along a track of front desk to some type of a leadership assistant manager program and then general manager program. And then from there, Henry and I have some wonderful leaders that have been with us for 10 to 13 years now that kind of talking. If we don’t find another brand where we can find a more responsibility for them, we’re going to lose this. We, we’ve had a brand come into town that’s picked off two of our general managers in the last couple of months. Instead of getting angry, which I was at beginning, I took it as a compliment to say, well, it’s because we’re developing good people because we have not grown big enough for them to have that next step that’s on us. So we got to get back out and find another brand to scale. Just because we we’re not ready to scale more with Massage Envy doesn’t mean that we can’t find another brand to grow and scale and give more opportunity.
The Wolf of Franchises:
Yeah, no, definitely. That’s something I’ve seen with multi and owners and on this show we’ve had some multi-brand owners and it’s cool what you can do as for you guys as the owners, it just gives more growth opportunities for the employees. And even if the pay could be the, there’s one owner where the pay was the same, whether you’re managed regardless of the brand you were managing, so to speak. But it just a different skillset and a different area for someone to learn about jumping from possibly an adjacent industry. But yeah, I do find it interesting just that this skillset required to me, a lot of it’s just sales. Like you got to know how to sell the customer, you got to know how to sell your employees to join your organization. It’s a lot of sales across the board for the life of a business owner.
Stephen Vereb:
Well, it is. And culture is hugely important. We, we’ve learned that from the woman that was the chief training officer when we first went through franchisee training at Massage Envy. And we’ve really tried to follow what she taught us and it served us really well. We’ve got a really good, in our opinion, retention rate with our core group of folks and doing some due diligence on the brand that we’re looking at right now. We drove to some locations locally here and we visited the locations that are run by one of the, if not the top operator in that brand. And then we went to another location that this person did not own. And it was palpable. The difference, the energy level, the level of detail of this location. One of the locations we went into been open for three years and it looked like it was freshly painted yesterday.
The staff was sunshine and engaging and we felt great. We’re like, Woohoo. Yeah. And then we went to the location of the underperforming. What we anticipate is probably we won’t be surprised, I think when we see what the performance numbers are of this other location. And we walked in the two at the front desk, were bickering about something going on with the franchisor and the new ownership and how they didn’t have what they needed and didn’t even make eye contact with us at all to acknowledge our presence in the lobby. We started walking around the facility. We could have been walking stuff out the front door, stealing stuff. They never even looked at us. Now, right there at the front counter, I just had my arms on the front counter and watched them to talk to each other. And then literally maybe about eight minutes later, because I, oh, can I help
The Wolf of Franchises:
You? Eight minutes? That’s far too long. Customer service 1 0 1, got to make eye contact, greet customers as they walk in.
Stephen Vereb:
It was awful for sure. But just that simple concept that we all three on this call agree to, it’s common sense, but it’s not easy to execute on. And I said to Henry when we got back in the car, I’m like, let’s not pretend like some people aren’t walking into our locations. We hope to goodness that doesn’t happen, but it happens. But it was a good reminder to understand the difference of great culture and not such great culture and to continue to drive your management team because somebody doesn’t quit their business or their brand, they quit their manager. And to kind of go back to what Henry was saying earlier, doing this for 15 years, we’ve been bought and sold three times, maybe four. And sometimes that energy comes from the private equity group, but more often than not, it comes from the leadership of the CEO or the C-suite folks. And it can be contagious or it can take you to the depths of hell. It depends on that, the leadership, it really does start there.
The Wolf of Franchises:
Definitely. No, it’s fascinating just hearing it from you guys on the franchisee level, but then also on the zor level. Given that you guys have seen so much since you joined. My final question, cause I know we’re out of time here. If you guys, I’m putting you on the spot a little bit. One thing that you wish you knew going into this journey, and if we already talked about it, feel free to just say it again, but what would you say is the one thing you’ve learned that you wish you knew when you started?
Henry Kim:
I wish I would’ve learned more about how big to scale. To get to a point where if you want to exit that you’re going to have a lot of potential buyers that are going to want to buy you. And so we know what it takes now to get to a level where we’re now we’re thinking bigger and this next brand could work out really well. And eventually down the road it could be our biggest exit.
The Wolf of Franchises:
Are you saying five locations? Is that kind of in like no man’s land of size where maybe too small for private equity and too big for individuals?
Henry Kim:
Yeah. Well, in Massage Envy, there are private equity firms already. And so yeah, we could sell to the private equity firm that has acquired a lot in our area. So we have that. But I’m talking about just general private equity firms that focus on franchising. Once you can get to probably around 12 locations where now it’s a platform, right? It’s not just locations. You’re just offering a platform that you’ve already scaled it. <laugh>, right now you’re going to command multiples of six to eight x or more, but six to eight x on a platform like that, doing that kind of ebitda.
The Wolf of Franchises:
Now it’s funny you say 12 locations too. Cause that’s so far, the largest franchisee I’ve had on this show is a guy named Jamie Weeks who owns about 140 orange theories. But he said once he got the 12 orange theories, a lot of private equity came knocking and they already had been, but that was when they were really put the foot on the gas. And it was at that stage where he partnered with a PE firm and they helped him. It was a recapitalization, but they helped him go from 12 to 140. He’s probably well beyond that now even. It’s been a few months. But
Henry Kim:
Yeah, so there’s that going on in Orange Theory and there’s consolidation and Massage Envy. So we didn’t know that going into it. And so now when we’re looking at something, we’re going into it thinking that <laugh>, right? And not just, oh, we’ll have four or five or six locations and we’re doing well, so do we want to do anymore. So yeah, we’ve learned that and I think that’s now our approach to things.
The Wolf of Franchises:
Sure. Yeah, it’s a different mindset. I get it. Well, all right, guys. Look, this has been awesome. Really appreciate you coming on the show. Before I let you go, is there anywhere online or website, social account that people can follow along your journey?
Henry Kim:
I don’t do social media as much. I tried, I’m trying to cut that out and I’ve have <inaudible> things, but I guess if anyone wants to, we have our Facebook pages for our locations and Instagram. And probably the best way is if someone wants to talk to me is just reach out to me on Instagram and it’s henry underscore h, underscore Kim zero one. You can message me on Insta for me, just shoot me an email. It’s Steven, s t e p h e n, vere, V as in Victor, e r e, B as in Bravo, 88 gmail.com. Happy. If there’s anything that we can do to help or point someone in a direction or we’re never short on an opinion, <laugh> happy to help.
The Wolf of Franchises:
Love it. All right. I appreciate that, guys. My audience will definitely as well. So yeah, great chatting and thanks again for coming on.
Stephen Vereb:
Thanks Wolf. Great to meet you. Thanks Wolf.
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.