🍟 4/10/2023 – $50K Down To Generate $1.4M in EBITDA
$50K Down to $1.4M in EBITDA
Back in early 2008, massage therapy franchises were proliferating. Two partners recognized this, and decided they wanted in on the action.
So they started looking deeply at Massage Envy, which had about 300 locations open nationwide, but none in their local market. After speaking with the franchisor, but most importantly, numerous franchisees about things like profitability, how long it takes before you hit break even, etc. they pulled the trigger.
In December of that year, their first Massage Envy opened.
Since Massage Envy already had 300+ locations open, there were some large banks that were willing to fund loans for this brand given the high level of proof of concept it had.
For the newly minted franchisee partners, this meant that they only had to put down $50,000 between the two of them, while the SBA funded the other $450,000 needed to launch their first location.
Lesson 1 : the more locations a franchise has open, the better your chances are the SBA will a) fund your locations and b) give you favorable terms.
Path To Break-Even
The first location took just 9 months before the business sustained itself, meaning it was cash-flowing enough to cover all expenses. And by the end of 2009, they had recouped their entire investment.
While that is definitely not the norm in franchising, the partners weren’t surprised. During due diligence, they asked this question over and over again to franchisees who were already operating.
At that time, during what seemed like a massage boom, 9 months to breakeven was right on track for Massage Envy.
Lesson 2: do your homework when you speak with franchisees, and it should set the right expectations.
Expanding From 1 Location To Multiple
As of late 2021 (when I was privy to a conversation with this franchisee duo), they had expanded to 6 locations. They largely were able to do this by getting funding from a regional bank (this is much easier to do if you have 1-2 locations already successfully operating!).
That first store was still their biggest cash cow, with some impressive stats over the years (revenue / EBITDA)
- 2009: $2.1M / $438k
- 2010: $2.3M / $513k
- 2011: $2.4M / $622k (biggest year ever)
In 2021, that store was on pace to do about $500k in EBITDA, while the second store they opened was projecting $350k. The other 4 earned $150k – $180k in EBITDA each.
That’s a total of $1.4M- $1.57M in EBITDA between 6 locations!
Lesson 3: leverage is amazing when it works! To generate that much in EBITDA off of what started as just a $50k down payment is incredible.
The partners credit their success for 2 main reasons:
- They bought an established brand that had their systems figured out
- They were the first entrant from a competitive standpoint to their local market, which means they had the first mover advantage
They also stressed the importance of knowing what business you’re truly getting into.
Yes, Massage Envy provides massages, but as franchise owners, their job is 100% a sales and marketing operation. How?
They spend the large majority of their time recruiting and hiring staff (marketing + sales), and the rest of their time marketing to the public (to generate customers).
Being the owner of any franchise is likely going to be a heavy sales and marketing operation – make sure you’re ready for it!
The Wolf’s Take
I love this story because the franchisee partners did due diligence the right way, maximized the cash they could get via the SBA, and ultimately saw massive success.
1 alternative viewpoint I want to offer…
While this group had the benefit of a big proof of concept via the 300 locations that were already operating, they were also quite lucky to still have their local market available (a prime territory around Washington DC).
If a franchise has 300 units open, it would be very likely they also have 100+ more being built. Thus, I’d recommend buyers to not wait until a brand has that many units operating, as there’s a good chance your territory will be gone by the time you decide you’re willing to jump in.
There is no magic number for how many locations a franchise should have open before you jump in. It’s all about your preferences and risk tolerance.
Fewer locations means less proof of concept and less franchisees to talk to, but it also means more territory availability and better terms with the franchisor.
Personally, if I see a brand with 100 units open and operating in diversified markets (i.e. not all concentrated in 1 region), then that would be more than enough for me to know if the franchise concept is a winner.
But everyone has to know their tolerance for risk, and make the decision accordingly.
Have a great week!
Chick-fil-A’s Earnings Top $1 Billion for Second Straight Year
Chick-fil-A Inc. reported record revenue for 2022, although higher restaurant operating expenses including food costs and labor, cut into earnings. Revenue reached $6.4 billion in 2022 compared to $5.8 billion in 2021, an increase of 10.6 percent. Comprehensive earnings, which are after tax however, were $1.1 billion in 2022 compared to $1.2 billion in 2021, a slight decrease of 1.1 percent.
Stretch Zone Gets Princeton Equity Investment After Hitting 250-Unit Milestone
At Stretch Zone, a practitioner-assisted stretching franchise, anyone can be a customer, Princeton Equity Group Co-founder Jim Waskovich said. Waskovich himself is a client. Princeton has had its eye on Stretch Zone for a few years. The brand recently hit the 250-unit milestone, but once it hit 100 units, Princeton “started working pretty aggressively to try to take a look at an investment,” Waskovich said.
Disclaimer: This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this site constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any franchises, securities, or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the franchise and/or securities laws of such jurisdiction.
All Content in this email is information of a general nature and does not address the detailed circumstances of any particular individual or entity. Nothing in the email constitutes professional and/or financial advice, nor does any information in the email constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content in this email before making any decisions based on such information or other Content.