SHOW NOTES FOR EPISODE 551: CASH FLOW GENERATION THROUGH NON-FOOD FRANCHISING

If you’re looking to diversify and generate passive cash flow outside of your real estate holdings, non-food franchises may be worth considering.  In today’s podcast, entrepreneur, real estate investor and franchise owner Jon Ostenson shares how non-food franchises have a low cost of entry and can produce excellent cash flow returns.

What You Will Learn

• What is the difference between food and non-food franchises?
• How you can assess the best franchise for your cash flow and investment needs
• Why non-food franchises are considered inflation-proof
• How you can find new emerging franchises
• Why non-food franchising is so hot right now
• What are the advantages of franchising over starting your own business from scratch?
• Average investment costs and profit returns of non-food franchises
• What the hottest non-food franchises are for 2021-2022

About Our Guest

Jon Ostenson

Jon is a consultant, investor, author, and international speaker specializing in the area of non-food franchising. He draws on his experience as both the President of an Inc. 500 franchise system and as a multi-brand franchisee in serving clients across these capacities. Jon is a frequent contributor for publications on the topic of franchising and franchise investments.

More About Jon

• Lives in Atlanta, Georgia
• Has a wife and 3 kids
• His background comes primarily from the corporate world, working for a public company

From Corporate to Private Company

• 5 years ago, he moved from a public company to a private company – to ShelfGenie Franchise System
• Atlanta-based ShelfGenie has custom pull-out shelving for kitchens and pantries
• He served as president of ShelfGenie
• Led the company through rapid growth
• He partnered with the founder and brought in another partner
• They founded a number of other companies as well
• They are multi-brand franchisees in the “property services” space

Franchisor Match Maker

• Since they have good people running these businesses, it allows him time to do some consulting and to play matchmaker with people seeking a franchise business
• He uses a condensed process to help people find the right franchise opportunity
• He loves his job
• There is no costs to his clients (he’s paid by the franchisor)
• The companies he represents are primarily in the home/property services area but he works with a broad cross section of different non-food franchise companies
  • He recently helped a person find a 10-location oil change business
  • He does a lot in the exercise and health and wellness categories
  • He also does property services,  automotive, senior care
  • Non-sexy is the new sexy
    • Coming out of Covid, real estate/property services have emerged as inflation-resistant businesses
• He avoids food franchises because it is a whole different world of franchise
  • It’s what most people associate franchising with
  • 95 percent of his clients have no interest in food franchises
• He’s with FCC (Franchise Consulting Company) – the largest brokerage company in the country
  • He gets to work with all the developing companies – emerging brands
  • They have looked at all the opportunities and has narrowed it down to 300 key opportunities that they feel strongly about
    • Good leadership teams
    • Good profit models, niche and reason for being
• There are 4,000 franchise brands, 2,000 of which are non-food
• He sometimes helps with partnerships, although he doesn’t promote that because partnerships can be tricky

Why Franchising is so Hot Right Now?

• First, it’s not for everyone
• Some entrepreneurs would rather shape a company to their own liking – that doesn’t work well for franchising
• One reason people like franchising is because there’s less risk than starting your own business
  • It’s been tested and known to work
  • You have access to other owners who share their successes and what works for them
    • What works, what doesn’t work
    • They share average financials
    • Share best practices and learnings
    • Marketing tips
  • You start out on 3rd base instead of 1st base – you get there faster
  • You also may have brand recognition but not always
  • You have a playbook going in that has been proven out
  • The franchisor coaches you from the sidelines

Franchise Advantages

• Able to leverage other people’s money
• Leverage up
• Scale faster
• Proven playbook
• Access to coaching
• Access to other owners
• The Rancor School of Business recently did study
  • Looked at 2,000 business over a 10 year period
  • They looked at business that were franchised and some that were not
    • In similar industries – as much of an apples to apples comparison as possible
  • What they found was that, upon exit, they traded at 1.5 times of the non-franchised businesses in value
  • Like with real estate, yes you are cash flowing but you also are building an asset – more than what you are putting into it
  • Investors see the value
    • He gets calls almost every day from private equity firms looking to invest in non-food franchises
    • They love the model

Who is Buying Franchises?

• It’s across the board
• Traditionally, you think of people in their 50s and 60s who take their retirement package from their corporate jobs or tap into their retirement funds
• But he also does a lot of placements of people in their 30s and 40s
• Some are coming out of Covid and thinking, “Now is the time to have more of a sense of control of my life.”
• People have a real interest in being entrepreneurs
• His placements to date are well over 50% over last year
• There’s a lot of interest
• And a lot of his clients are real estate investors
• He is a real estate investor
• Some just want to diversify their investment portfolio

What Kind of Time Commitment is Required?

• There are two paths:
  • Full-time owner operator (40 plus hours a week)
  • Semi-absentee (15-20 hours a week)
    • The majority of franchises allow for this.  Some do not
    • You may have to roll-up your sleeves and get familiar for the the first 3-6 months
    • You need to get a good General Manger in place
      • You may have to cycle through a few people before you find the right person

What Are the Hot Non-Food Franchises Right Now?

• Driveway pouring and repairs
• Dumpsters
• Home services
  • Pool cleaning
  • Serve-Pro model
    • Restoration
• Essential type services
  • Oil change
    • Prefabricated buildings in non-active parking lots
    • Can get in for $150,000
  • Health and Wellness
    • IV drips
    • Senior work-out gyms
      • 1,200 square feet facility
      • For people 50 and over
    • Waterless Car Wash
• Anything related to kids
  • Education
• Pet-related franchises
• Business Coaching
  • He’s doing at least one placement a week in this area
  • Where you can share your business experience
  • You can wrap a brand around it
  • Assessments, methodology and training to legitimize your place in the coaching world
  • Get 8-10 clients paying you $2,000 to $6,000 per month
  • You get on 3 to 4 calls a month or 15 hours a week
  • You’re giving back
  • Making a good income with variable overhead on the side
• More often than not, he ends up placing clients in a franchise that wasn’t even on their radar when they started the discussions

How He Helps Clients

• Gets on a call with the client
• Spends roughly 30 minutes
• He knows what questions to ask to understand their framework that they would be using
• He streamlines the process
• He gets off the call
• Has the client complete a questionnaire that takes roughly 10 minutes
• After evaluating the questionnaire, he schedules a Zoom call
  • On the call he presents roughly 5 to 7 opportunities that:
    • Meet their criteria
    • Are available in their market
  • Then they narrow it down to 2 to 3 opportunities
    • The client then has phone calls with the companies they are considering
    • He tries to make it manageable – not overwhelming – that allows the client to focus
    • The client will continue to have phone calls with the companies
    • Jon has 10 minute calls with the client as well to answer questions or help the client narrow down
      • Acts as a sounding board
      • Reviews funding options
      • Making introductions as needed

Costs and Profits

• Every franchise has a franchise disclosure document
  • Within this doc there are 23 different items/articles
    • Item 7 – “This is what the investment would be”
      • Typically a franchise fee of $49,000 for the first location, $39K for the next, $29K for the next (people often buy into 3-packs or 5-packs)
      • If it’s a retail storefront, brick and mortar franchise, it will include the build-out costs
      • If it’s a remote work type business, or services type business, it will include what initial marketing you will need
      • Also, if you need a vehicle, equipment
      • It may also include 3 to 6 months of working capital that may be needed
      • Typically, people may need (on the low end) $150-200,000 all in
      • Retail storefront is generally between $200-400,000
    • Item 19 – “Here are the average revenues and profits across our franchisees”
      • If it’s a home services type business (i.e. roofing, gutters, insulation)
      • Let’s say you’re all in for $125,000
      • Often, the revenues, for that one location, can be $400-500,000 at a 20-25% put down margin
      • You can get a great ROI at what you put in
• Returns
  • Looking at the operating margin, you can commonly see 20-30% returns on average – as a percentage of revenue, not of return
  • Using a franchise gutter business as an example:
    • Investment of $125-150,000 (includes working capital, everything)
    •  Average revenues are $1.2 million, with $383,000 drop to the bottom line
      • During Covid, one business did $800K, another $1.2 million and another $2 million – all in their first 12 months of operations
    • Even if you only do a third as well as the average, you will still see enough profit to be very excited
  • Even with such good returns, he always recommends to his clients to take a conservative approach to their pro formas

Funding

• There are a number of ways to go about funding a non-food franchise
  • Some people use cash
  • Others borrow from a rich uncle
  • A lot of people use SBA loans
    • He has great lender partners that work with all the franchises
    • He works with FranFund
  • If you have a self-directed IRA or 401K, he suggests you use the ROB business financing program
    • Taps into your retirement accounts funding without the tax implications
    • There’s a way to set it up as a C Corp
  • Portfolio Loan
    • Not as common but still possible
    • He has a great partner up in Charlotte
      • Walt Hammond at Cedar Valley Capital
      • He has a program with a lot of cool benefits to it
      • If you have $150,000 in a non-retirement brokerage account, you’re able to borrow against it without having to sell any equities or securities.  Can borrow up to 70%, 2-4%

Passive Cash Flow

• If I person wants to take a more passive role as an owner, you can still make great returns
• But you would definitely have to hire a strong manager to make that happen
• Only 20% of the franchises Jon deals with require owners to also manage as operators.  80% of his franchises allow for owner absentees

Start-ups vs. Franchises

• If you start a business on your own, you have a 10-20% chance of making it succeed
• If you buy a franchise, your chance of success boosts up to 75%
• He is an investor in driveway franchises
  • It’s a great model
  • Low overhead
  • No brainer
  • Get in under $100K
  • The only national player in the space
  • They pour new driveways
  • But the sweet spots are in extras: leveling driveways, fixing cracks, decorative overlays, sealing driveways
  • They were recently bought by private equity
    • Private equity also took a product and turned it into a franchise system that is a rubberized coating system that does
      • Garage floors
      • Retail floors
      • Pool surrounds
      • It’s a great complement to the driveway business
      • So when you buy into the driveway business, you can also take on this other brand – getting two brands for the price of one
        • They complement each other
        • You can do joint marketing
          • He just does Home Advisor and Angie’s List
          • He also does some SEO
          • And the phone doesn’t stop ringing
      • He’s done 5 or 6 client placements on the driveway business and every one has been successful
        • Some come back to buy additional territories

Biggest Mistakes Made by New Franchisors

• Franchising is not always right for every business from a scaling standpoint
  • When he councils on the franchisor side, he always tries to encourage them to set the tone and set the culture for what is to come and to be so careful that you bring in the right people up front
  • Don’t jump the gun and get too excited about selling your first few franchises – be patient
• Think about where you spend your time
  • It is very easy for a new franchisor to get caught up on the sales side of selling franchises
    • That takes a lot of time with
      • Qualifying candidates, etc.
    • He usually recommends using an outsource sales organization that specializes in selling franchises
      • There are a couple he usually works with
      • They can complement their efforts and can act as their team
      • The franchisor still can ultimately decide who to sell too

Traits of Successful New Franchisers

• He looks back at when he was with ShelfGenie
• He got to work with a lot of candidates
• Six months later or two years later, he could see who the real winners were
• The franchisor does a lot for you
  • You don’t have to know a lot about marketing or have a marketing background – they have a marketing team
  • Often, they have a call center and tech support
• A lot of pieces are in place but it ultimately depends on your ability to work with people
  • To find. attract, retain and incentivize talent
  • As well as fire people who are not working well
• The key determining factors between average and great success
  • A record of effective sales success
  • A history of success in leading a team where you’ve had to make tough calls
• When you put on that business owner hat, many people change for the better, others, maybe not

Advice for Old Dawgs Looking at Non-Food Franchising to Help Them in Their Retirement Years

• First assess where you are at and where you want to be:
  • How much time do you want to give to the business?
  • What role do you want to have? Customer contact? Counselor or coach to someone else who is dealing with customers?
•  There is s new renovation business based in Nashville, TN
  • Newer franchising system
  • They have a team of designers in Nashville
  • If you have a large network of real estate agents, there could be good opportunities there:
    • Often, when you’re selling a home, you have cosmetic needs for a home, especially in the kitchen
      • Could be resurfacing of cabinets, backsplash or countertops, paint or hardware
      • You could go in with $20-30K and make a dramatic difference – Instagram-worthy
    • This franchise can take pictures of the area requiring work, send it back to their design team in Nashville, have them do their 3-D design software make-over, with a great professional design and send it directly to the contractors
    • If you have access to a team of realtors, you got get a major jumpstart to that business
    • Network with the local Chamber of Commerce, Realtor Boards, sponsor a little league team etc.
• Do you want to work IN or ON your business?
• What’s your exit strategy?  Do you want to sell in 4 or 5 years or hold on to it for a long time?
• Some investors look to add second and third brands into the mix as well, to diversify or complement your other investments

Current Business

• He is in his early 40s, with three young kids
• Once he understood what he really loves in business, it made a big difference
• He loves working with clients
• He loves working partners – franchisors
• He realized that he does like having a lot of employees
• He would rather have a business partner who manages people
• He’s client driven – not employee driven – he only recently realized that
• When he sees someone (a client) realize their “sweet spot” and step into something they love that matches their skillset, that’s really satisfying to him
• He loves what he does:
  • Educating people
  • Helping people who want to be business owners but don’t know how to go about it
  • Seeing how franchising can be a great way to get started
  • To see people achieve their dreams
• Business ownership is at an all time high

Franchisor Support

• He feels that all of the companies they work with have great support
• Of course, those who have hundreds of franchises out there have seen more and know most every situation and challenge and can be very helpful in assisting new franchisers
• They know the best ways to spend your marketing dollars
• The downside is that you may have to work around someone else’s existing prime territories
• Maybe you may be franchisee #701 and won’t get as much attention
• But they also have new emerging brands that give new franchisees lots of attention
  • You can get the best territories
  • You can get the best “hands-on” attention
  • When he (and his partners) invest, they always go for the emerging brands
• Ramping up can be pretty quick

Finding Good Employees

• It is always a major issue – trying to find good employees!
• You’re always playing “Whack-a-Mole”
• Labor is the big challenge
• They do apply special incentives
• They’ve upped salaries to get the best people
• They do, however, have some franchises that only require a few employees, that are very popular

Rap-It-Up

• Favorite franchising book: The Franchise MBA by Nick Neonakis
• Favorite business book: The Compound Effect by Darren Hardy
• Most valuable web sites for success (other than your own): Bainbridge Consulting, Fox Business
• Favorite app: Slack, Google Drive and LinkedIn
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your business? I would do lots of grassroots networking, send hand-written letters and use most of the $1,000 on postage stamps to send to his network.  Everything good has come from people he knows.

How to Reach Jon

• Website: FranBridgeConsulting.com
• Email: jon@FranBridgeConsulting.com

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