e26343d496e3-headshotIn this episode Josh talks with Jon Ostenson from FranBridge Consulting. They discuss blue-collar businesses and franchising.

Jon Ostenson is a consultant, investor, author, and international speaker specializing in the area of non­food 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 serves as CEO of Fran Bridge Consulting where he helps clients understand all aspects of non-food franchising in the process of introducing them to opportunities from the over 300 high-growth brands that he represents. Additionally, Jon oversees Fran Bridge Capital where he and his partners own 17 territories across 5 property service franchises.

In today's episode you will learn about:

  • Why would someone choose a franchise vs. a startup or buying an existing business?

  • Franchise sales are projected +40% in 2021... what types of businesses are people buying?

  • How do the financials of franchising work?

  • How do you explore opportunities?

Transcript

Narrator:        Welcome to Cracking the Cash Flow Code where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.

In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh Patrick:   Hey, how are you today? This is Josh Patrick and you're at Cracking the Cash Flow Code. And, today, we're going to have an interesting conversation with Jon Ostenson. Jon is from FranBridge Consulting. He is a consultant on non‑food franchises which is perfect for us because we're going to talk about blue-collar businesses and franchising. And not only is he a consultant on franchising, he owns like a zillion different franchise operations which are blue-collar businesses. So, we'll probably mention one or two as we go through the conversation. But, instead of me going on with a long introduction, let's get Jon on so he can start sharing his wisdom with us.

Hey, Jon, how are you today?

Jon:                 Hey, Josh. Doing great. Love the show. Appreciate you having me on.

Josh:                Oh, thank you so much. I appreciate you love the show. We've been doing it for a while now.

So, at any rate, this is a really interesting thing. The first thing I’d like to talk about is, when you start a business, you have a choice-- or, actually, when you go into a business, whether you start it or you buy someone else's business, you have a choice, you can start from scratch, you can buy someone else's business, or you can buy a franchise. So, when you go through your franchising clients, how do you run them through those choices?

Jon:                 Yeah, absolutely. You articulated that well. And, you know, franchising isn't right for everybody, but it should certainly be considered by any would‑be business owners, in my opinion, as an alternative path. And, really, one that's, frankly, quite popular right now. We're actually seeing an increase in interest in franchising to the tune of projected sales of plus‑40% this year over pre‑pandemic levels. That’s across the country, across different brands. And we're actually tracking ahead of that. So, unprecedented levels of interest.

And I think what people are realizing is, with franchising, on day one, you're working towards profitability. You know, what that roadmap is. You're not trying to figure out how to become profitable or if you can become profitable. You know, with franchising, you've got that franchisor who's essentially your coach on the sidelines. They have aligned interests. You've got franchise owners in other markets that are essentially your peers and you're learning from each other. And you've got the playbook. And it's all about executing. So, we do see a lot of interest.

I do tell some clients that “You're too entrepreneurial for franchising. You don't want to stay within the lines. You'd like to put your thumb prints all over everything.”

But one other thing that you mentioned was the entrepreneurship through acquisition which is a very popular phrase these days. And a lot of people are looking to buy existing businesses. And I've had many, many clients come my way after realizing that what they thought was a great opportunity wasn't, after they looked under the hood and understand the books. Now, understood the books to be something different than what they were originally represented.

So, you know, again, there are pros and cons. Some people like being able to cash flow day one, you know, in an existing business and getting into it that way. But others see the benefits that franchising provides and go that route.

Josh:                So, I have a question for you. So, I just had a thought that occurred to me and I've never really kind of explored this at all. What if I was to buy a business and then buy a franchise to turn that business into a franchise because it seems to me--? I mean, one of the things I like about franchising-- franchising would never work for me because I'm not organized enough. But when you're buying a franchise, you're basically buying a business in a box. All your operating systems. All your stuff would go in there are tried and true. And when you buy someone else's business, you're buying their systems which usually don't really exist very well. So, if I was to marry the two, does that make sense?

Jon:                 It's an interesting idea. And I would love if we had time to get into all the case studies. In fact, I have many clients that have started their own business and really go one of two routes, as you described. One is they look at a bolt‑on opportunity that may be complimentary to their current business and maybe provide some structure but at least it provides some referral marketing on the front end. And on the back end, maybe some economies of scale. You know, the shared services that you can leverage. I also see a number of people, in the blue-collar business world, that have businesses and they've had a proven model and they want to scale but they would rather use other people's money to scale across the country and let other people put skin in the game. And so, they choose to franchise their business.

So, I oftentimes talk with clients about what the day‑to‑day looks like, going down that road, because I've been a franchisor. As you mentioned, I'm now multi‑brand franchisee. So, I've sat on both sides of the table.

But, as a franchisor, again, it's not cut out for everyone, but it is a great way to scale your business fairly quickly if you have something good to offer. And, you know, private equity loves franchising so it's a great way to work towards an exit as well.

Josh:                Private equity should love franchising because they don't know how to run businesses unless they're really, really big.

Jon:                 Wouldn't disagree.

Josh:                We won't get into a long conversation about private equity but there are some issues that they have along the way.

Jon:                 Yeah.

Josh:                So, when you run a franchise, if you're going to be a franchisee, what are the three or four things that you need to look at from the franchisor before you make a decision?

Jon:                 Yeah. You know, when I work with my clients and we walk through the process together, and I educate them on franchising. And I share with them how we, you know, really differentiate based on different dimensions. You know, we talk about, you know, the leadership team of the franchisor. And if they're an emerging franchise, do they have prior leadership experience within franchising or did the industry guy and they brought in our franchise experience around them?

You know, we talk about, you know, the size of the business, how many territories do they have. Do they have territory availability where you would like to operate? We obviously talk about the item 19, and the item 7. So, every franchise system has what's called the Franchise Disclosure Document with 23 items or sections, if you will. So, we talk about the financial representation of what you can make, if you were to buy into the franchise. We talk about that all and investment costs. We figure out what is ROI?

And then, of course, we look at the local market. What are the needs? What is the competition like? You know, is there a differentiator? You know, if it's a market where there is competition, you know, we think through. Is it speed, quality, or price that you're going to differentiate yourself on?

And then, we talk about how are you going to scale the business. Is it going to be a strategy where you expand territories? Do you go to three territories, five territories, seven territories? Or, similar to what we're doing in Atlanta with some of our businesses where we purchase complimentary businesses and we're able to leverage some of the resources and, again, some of the marketing and drive those efficiencies.

Josh:                So, when you take somebody through the process of considering whether they want to be a franchisee or not-- I mean, obviously, if you can't follow the rules or stay between the lines, you're probably not a very good candidate to be a franchisee. But assuming somebody is willing to-- you know, basically, coming out of a career in corporate America, they’re used to following the rules and they really don't know a whole lot about running their own business. They've been a good employee. How do franchisors-- let's say we're using a seasoned franchisor, not someone who’s new out of the box. Somebody that has, you know, 20, 30, or maybe 50 units already. How do they help this person become competent at running a business and get rid of an employee mentality or don't they?

Jon:                 Absolutely. Well, they certainly make the effort and try. You know, back when I was on the franchisor side and ran the home office, day‑to‑day, for ShelfGenie Franchise System which is custom‑built shelving for your kitchens and pantries. We had marketing teams. We had a call center. We had a technology team. We had a product development team that I had. And our day‑to‑day was supporting the franchise owners.

And so, I remember, when we had franchise candidates come through the process, the discovery day, and we inevitably got a blank stare at the end of the day. They looked at us and said, “Wait a minute. Your team presented to us on how they're going to support us on the operation side, on the marketing side, on the call center side, and in technology.” They went through the whole thing.

They said, “What do we do day to day?” And our answer was always, “Hey, follow the playbook. Get involved in your local market, whether that's in the chamber of commerce or in sponsoring the little league baseball team. You know, whatever makes sense to that local market. But then, really, the number one factor of whether you're going to be average or highly successful is your ability to work with people, your ability to attract and hire great talent to retain and incentivize them and, ultimately, to make tough calls when needed. That really is your core responsibility. Outside of that, you're following the system, following the playbook, letting their marketing team run the marketing for you in a lot of cases.”

You know, one quick thought I did want to mention, Josh, is, you know, I know a lot of the listeners here are in blue-collar style businesses and many of those tend to be like in property services, or home services, or other type of fields. When I look at my clients, especially those coming out of corporate America, there is an attraction right now to the non‑sexy industries. Non‑sexy is the new sexy, if you will. You know, that $500‑billion home services, property services market with all of its different niches within that, whether it be roll‑off dumpsters, whether it be pool cleaning, whether it be kitchen remodeling, or roofing, or driveways. People are gravitating to that in a very, very large way.

Josh:                Yeah, it makes sense.

Now, that challenge they're going to have-- and I actually just wanted-- this is a question that, again, just popped into my mind. When we're working with our private business owner clients, first thing we'd focus on is “What are the personal values and how do we transfer that into their business?” Now, I'm going to assume that when you buy a franchise, you're actually buying into the franchisor’s culture and you sort of have to adopt their culture. You don't get a chance to really have your values become primarily exhibited. So, it would make sense to me to understand your values and make sure that they mesh well with a franchisor. Does that make sense?

Jon:                 Oh, absolutely. It all comes back to the values. And that's why the goal, when you go through the franchise process, and you're looking at several different opportunities, and you're comparing and contrasting when the values piece comes in huge. I mean, it's culture. It's what do they believe? What do they stand for? Why are they in business? And you really get to go in eyes wide open. So, you're not surprised once you sign up. I mean, you're able to talk to other franchisors along the way through what's called validation. Again, you're having multiple calls with that franchisor or you can-- them personally. And they want to get to know you personally. They want to make sure that you're a cultural fit for them. So, you know, it all starts, as Simon Sinek would say, with the why and the values behind it. So very important.

Now, one thing I do remind my clients, oftentimes, as they're going through the process, they're having a lot of interaction with the franchise salesperson for the brand. Ultimately, once you're in the system, you're not dealing with that salesperson so you may like him or you may not, you need to have that relationship with the franchisor where you can see that partnership going long term.

Josh:                So, when I'm examining a franchise, I know that the franchisor is going to send me to their franchisees who have been highly successful. Is it a good idea, if you're examining a franchise, to say, “I want to talk to one or two of your people who aren't working so well, who are struggling”? Do you recommend that?

Jon:                 Oh, absolutely. And you, through the franchise disclosure document, you should have information on every existing franchise owner. So, I would call a good representation of them. Yeah, some franchisors will point you to the ones they want you to talk to. Others let it be a little more arbitrary.

What I do find happening a lot right now, Josh, again, just, it's a great time to be in franchising. It is extremely competitive out there. So, you know, within a given market for a hot brand, it's going fast.

Every one of my clients is matched up against other candidates going after the same territories for that brand. And so, from a sheer efficiency, a process standpoint, most of the franchisors are now setting up validation calls once or twice a week. And people can join and then ask questions, but it is more of a group call.

Again, no question is off limits. Anything can be asked. They're able to share information, but they are trying to streamline it a little bit more just based on supply‑demand.

Josh:                So, let's talk a little bit about this 40% increase in franchises being bought? What's driving that? I mean, we could say COVID, certainly. But it's got to be more than COVID. I'm sorry.

Jon:                 It's a combination of things. So, I will say, backing up pre‑pandemic, before COVID (BC), there was a high level of interest in franchising. Every month, we were doing more deals than we did that time next year. So, I'd say that was already going on.

And like so many things, COVID did accelerate the pace. And, you know, as COVID hit, its slowest point, we got to maybe four deals in a week. And then, it came right back. It was that V‑shaped recovery. And just, it is insane right now.

And I think it’s a lot of people have always had that entrepreneurial itch and they've decided, during COVID, “Hey, maybe it's time to think about the path that I'm on. And let's scratch that itch.” And you've also had a rise in the stock market. A lot of people are cashing in their retirements are tapping into-- not cashing in but tapping into those. And there's some vehicles for like a ROBS program, where you can utilize funding from there. I think there's more cash on the sidelines. People are more nervous about the stock market potential and, you know, potential inflation and, really, concerned about tax increases. And, really, small business ownership as maybe your listeners know, small business ownership is one of the last bastions of favorable tax treatment, knock on wood. So, I'd say it's a combination of all those things.

I think and a lot of it comes down to the core fact that people like being business owners, by and large. Not everybody but a lot of people like that idea. And they're now finally raising their hand and saying, “Let's dip our toe in the water and see what it's about”.

Josh:                Yeah. I've got a couple of questions for you. You mentioned the ROBS program. And I've examined ROBS program. It’s a lot of talk. There's a bunch of very good TPAs. They had always recommended against using that to start a business for a variety of reasons. How many franchises are starting a business with taking money out of their 401K program and using these ROBS programs that you're saying?

Jon:                 You know, I'd say about one in five of my clients. You know, I'd say two in five are using an SBA loan to partially fund. One in five’s using a ROBS. And then, probably two are self‑funding. Oft times non‑retail, non‑brick and mortar style businesses, whether it be an insulation company or a gutter company, where you're able to get up and running for a little bit less than if you were doing a big retail build out. So, a lot of people are self‑funding.

And with the ROBS, it really comes down to the candidate’s personal situation. I think it's hard to make a blanket statement. I mean, a lot of my clients absolutely love that program. Others say, “Hey, I want to leave my retirement at bay.” So, it really comes down to their personal financial setup.

Josh:                Yeah. I just recommend, anybody who's considering going into a ROBS program, contact your third‑party administrators administering your 401k program. Have them go through all the documents to make sure you're staying in line. And the ROBS promoters will tell you the IRS doesn't care. And it’s not the IRS you're worried about. It’s the Department of Labor.

Qualified retirement plans, which is what the ROBS program does, you borrow from your 401k, you have two government agencies who are interested in those. One is the Department of Labor, making sure you're being fair to all your employees. The other is the IRS, making sure you're following the tax rules. It’s the Department of Labor you worry about. And I can tell you, by going through both audits with clients, the DOL is far worse than the IRS so be very, very, very careful. And make sure you to dot all your I's, and cross all your T's, and do it right. Otherwise, you're going to be an unhappy camper down the road.

Jon:                 Yeah. And we work with FranFund, and Benetrends, and Guidant. I mean, these guys, that's what they do, all day, every day and do a really outstanding job. So, no, I would not go at it alone. I think going through those guys, with that kind of experience, that's the way to go.

Josh:                Yeah. And I'd still bring in a third‑party administrator to look at it.

Jon:                 Yeah, absolutely.

Josh:                Or an attorney who specializes in this sort of work. Either one is certainly fine for that.

Jon:                 Yep.

Josh:                So, one of the things that we often preach is what I call operational irrelevance. Because, if you really want to have a sustainable business and ultimately be sale ready, you have to be out of the day‑to‑day which means, I would guess, you would need to have the ability and the plan to have three, to five, to 10 units for you to be able to do that. Does that make sense?

Jon:                 It does. And so, very oftentimes, we do see people buying into multiples of three territories or five territories. That may be defined based on number of addressable households, or businesses, or population, whether or not they have a retail footprint, as we discussed. But you'll start your marketing in a couple of zip codes within one territory and then continue to expand that over time. But it does protect your territory from anyone else buying into it.

So, no, that's definitely the scale old path that most people take. And they'll oftentimes put a GM in place, you know. And the question is, do they want to do that pre‑revenue or do they want to do that once the business is sustaining itself to the point of being able to pay for that GM?

Josh:                So, if I'm considering a franchise and there are many ways for me to go, I could probably buy somebody else's business that already is franchised or I could just buy the franchise. What are the pros and cons between each?

Jon:                 Yeah. I think, the pros and cons-- I mean, the downside of buying a resale is that, you know, you're probably paying a multiple. And so, you're paying a little bit more for it. The positive would be that there's brand awareness in the market. You may already have some key employees in place and business is likely already cash flowing.

So, I'd say, you know, weighing the pros and cons there and, again, understanding that local market, understanding-- you know, a lot of my clients will say, “Hey, I'm okay if I only make $50,000 a year in year one and then get up to $100,000 next year.” And then, there's that path towards, you know, the bigger numbers to get people excited. And so, it really depends on that timetable too, as far as how quickly they need to become profitable. And, you know, whether they want to use an SBA loan or another path to funding. And so, we see both.

I will say one challenge is that there aren't a lot of resales right now, within franchising. People are tending to hold on to their businesses longer. And so, oftentimes, I do have clients who say, “Hey, we’d love to check out some resales” and, you know, we'll always do our checks and look at things on the back end. But it's not like there are a whole lot to go around in most markets.

Josh:                And that's pretty much true with all business, right. I mean, for years I've been hearing this, the tsunami coming of people - baby boomers selling their business. Well, guess what? The baby boomers are not selling their business. They basically are running them-- oh, I'm seeing plenty of business owners who are 75 these days. And if they become operationally irrelevant, which means they're not involved in the day‑to‑day operations, it's really not very hard work. And the cash flow from an operating business is a whole lot better than the cash flow from a sole business where you're reinvesting the money.

So, first of all, most people who own businesses have not done an adequate job of getting themselves ready for retirement because they can't sell their business and retire on that alone. They should have been doing other things along the way. True for franchises, by the way, as well as people who are not franchises. So, if you're in business and you think your business is going to get you to retirement, I hate to give you some bad news. It's not.

So, you went from the corporate world to serving as a franchisee and a franchisor. Talk about that for a second and we're probably going to have to end at that level. But, you know, what was it like moving from the corporate world to the wild world of running your own business, essentially?

Jon:                 Absolutely.

You know, I had a great run in the corporate world. And it was hard to leave. The whole analogy of golden handcuffs. But when I made that jump, about five years ago, I never once looked back and couldn't be happier. Just, personally, it's worked out very well.

And, for me, I didn't make the plunge right into business ownership off the bat. I stepped in with ShelfGenie which was a Inc 500 company. It’s a private business based here in Atlanta. And we, of course, had locations throughout the US and Canada. But that's what opened up my eyes to the world of non‑food franchising, as I call it, that there's a lot more than fast food out there. And I just thought it was a better path to business ownership for a lot of people.

And so, I really fell in love with franchising and ended up partnering with the founder of ShelfGenie and then one other business partner. And we spun out and are now doing our own thing and, you know, owning businesses. But also, I spend most my time consulting with those who are interested in exploring franchising. And I just love that educational aspect and helping them oftentimes change their lives.

Josh:                Cool.

Well, Jon, unfortunately, we are out of time.

So, this is a really interesting conversation. And I'm sure there will be somebody listening who would be interested in learning more about becoming either a franchisee or a franchisor and I assume that you help people do both. So, how would they find you? I've got your website up on for people watching but more people will be listening. So, tell us where we can find you.

Jon:                 Franbridgeconsulting.com. I would love to have you sign up for our newsletter or reach out to me. My email is jon@franbridgeconsulting.com, that's J‑O‑N, no H. And connect with me on LinkedIn and would absolutely love to get to know you and your situation and help in any way I can.

Josh:                Cool.

And I would highly recommend, even if you already have a blue-collar business, it's worth having a conversation about franchising. I know when I was in my vending and food service company, we likely-- I mean, right when I was selling, Canteen Corporation really went on a major franchise. What they were trying to do is convert present vending companies into Canteen franchises. And the truth was your profitability would go way up becoming a franchisee of Canteen, even after paying their fee because their buying power was 30% or 40% better than ours. And they passed most of that on.

So even if you're in a business today, it would pay you to probably give Jon a call and kind of look at franchise and say, “Gee, what could that do for my business?” It might do nothing. It might be a big help. Who knows?

So, at any rate, I have two things I would like you to do. One is please, please, please, please go to wherever you're listening to this podcast today and give us an honest rating and review. If you love us, say you love us. If you hate us - I hope you don't, tell us you hate us. But just give us a review. It really, really helps with people finding this podcast.

I hear all the time people say, “Gee, I wish I found this podcast three years ago or four years ago.” And we have great guests on like Jon. And we get great information. So, give us a rating and review.

The second thing is I kind of ended up with this thing as a joke which I call The Periodic Table of Business Elements. About 15 or 16 years ago, a friend of mine came up with this thing called The Periodic Table of Estate Planning Elements and I thought was a really good idea. And if I see a really good idea, I have to modify it, and steal it, and use it myself which is what I did. And we developed this little table called The Periodic Table of Business Planning Elements. It has 56 different types of strategies and tactics you can use to move your business forward to help you go from successful, to economically sustainable, to sale ready.

So, this is Josh Patrick. We're with Jon Ostenson. You are at Cracking the Cash Flow Code. Thanks a lot for stopping by. I hope to see you back here really soon.

 

Narrator:        You've been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around a hundred years from now?”

If you've liked what you've heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at jpatrick@stage2solution.com.

Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

Topics: franchise benefits, sustainable busines, franchising, franchise cost, how to become franchisee

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