Latest / The On The Rise Podcast / Franchising as an Asset Class
Transcript
- Rise48 Equity: All right. Welcome back on the Rise Podcast listeners. Thank you again for jumping into yet another episode of the On the Rise Podcast. So glad you're here with us again today. I've got another amazing guest and a friend of mine, Scott Jones. Scott, welcome to the show. Thank you, Jeremy. It really is great to be here. Yeah, absolutely. I'm looking forward to chopping it up with you. So, Scott, ⁓ for my listening audience here, ⁓ Scott is ⁓ really his work has primarily been with franchise over the last, you know, I guess maybe decade or two. ⁓ he's owned multiple companies and he helps mid-career professionals, executives, and business owners lead ⁓ lead companies. And he serves tens of thousands of franchise locations really across the country. And it's really, you know, through his franchising, you know, as a as really his tool for gaining access to what what he would call a practical path to independence. So would love to learn a little bit more. You know, Scott, about you know, kind of your background, what you're focused on today, your journey, et cetera. We can take the conversation whichever direction, you know, the wind blows us. Sounds great. Let's dive in. So, my background, as you mentioned, I have been in and around franchising for over 30 years now, in probably every possible way. I have been a multiple brand, multiple unit. Franchisee, added another franchise a few months ago at developing several locations with. I was an executive with one of the largest franchises in the world. I was a CEO for a company that provides support services to over 80,000 franchised locations all across the world. And as you mentioned, ⁓ for actually the last 21 years. I have worked as a consultant and an advisor. And I work with institutional groups, but where I spend most of my working time now is working with individuals. And sometimes they're in a career transition trying to determine what's next. Others they're They're in a job where it makes sense to stay there for at least some period of time, maybe forever, and they're they're looking to diversify the same sorts of people that you're working with on the real estate side. So it's that diversification. And then I work a lot with existing business owners, whether it's a franchise or not, on diversing or diversifying their businesses. So I've seen this from the seats of a franchisee, a franchisor, and a supplier at scale. Yeah, that makes total sense. And I know you mentioned that you've been, you know, a franchise consultant for 21 years. But if I'm doing the math here, I mean you've really spent more than 30 years in franchising, ⁓ which is, you know, three decades. ⁓ and I know both you and I are really talking to the same people day in and day out. And that's really these career professionals that or maybe looking to replace the dependence, you know, on the W-2, ⁓ or they're looking to scratch that entrepreneurial itch and and start up a side hustle. You know, obviously, you know, there's the difference between an active and a passive investment. And we'll kind of talk a little bit more about that later. But I would love to hear, you know, from your perspective, what do you think is the biggest misconception that people in general have about franchising and why does it keep so many people, you know, that are qualified on the sidelines? I I I think there are a number of misconceptions, one of which, and I think ⁓ particularly those that maybe they're at a more senior level. They've got a lot of experience in the corporate world, and they equate franchising with, you know, slinging a sandwich, which it can be, or buying a job, which it can be, but there is enormous opportunity and I think that can best be demonstrated by the level of institutional activity at the unit level in franchising. They're not just buying the entire franchise. They're coming in, they're acquiring franchises, doing roll-ups, and we're not going to see that institutional activity unless there's substantial opportunity. So I think that's one of the big misconceptions. Another Is that all franchises are three million dollars? Some are, but that's not where the day-to-day activity takes place. Yeah, that makes total sense. And I I'm glad that you highlighted, you know, franchising as really kind of being an asset class. You know, we talk a lot about, you know, investing in multifamily or assisted living or data centers is kind of like the new, you know, shiny object out there to invest in. But you refer to really franchising as being, you know, another asset class that people can invest into as opposed to just buying themselves another job. So maybe talk through like what that mindset, you know, is and how investors should should evaluate franchising type opportunities compared to other investments, like for example, real estate, you know, stocks or owning other independent businesses. At the highest level, I do view franchising business ownership as a financial asset class. It's an alternative asset class. And I think a well distributed portfolio has different pieces. Real estate, an important part of it. You and I have done several deals in real estate. So that Is one piece of my financial portfolio. Another is this business ownership. And if you really step back and look at that, whether you're trying to replace W-2 income, or maybe there's been a liquidity event, that's great. But then what? You know, what do you do with the money strategically? The way that I look at my portfolio is I want to have allocations that are balanced across the board. Now, you mentioned this in passing, but I think it's important. If if I'm working with you on ⁓ a deal that you've got, it's passive. I give you the money, you're doing all the hard work. In a franchise, there are different levels. of involvement, of engage engagement. There are some franchises where that is a decision of I'm going to step out of corporate or I'm going to sell my business or I've already got that business running on autopilot, but I've got the ability to spend all of my working time on that business. All of the franchises that I've owned, I operate in a semi-passive way. And so I'm building a team, I'm building an infrastructure. ⁓ right before coming on, I was interviewing a general manager. So that opportunity to be able to just diversify horizontally and use some of these different asset classes. One of the questions that is obvious is okay, passive investment, no time. Franchise, semi-passive, semi-absentee, whatever we want to call it, it's going to take some time. How much? Some of that is driven by the franchise. Some of it is driven by how effective a manager and leader the candidate is. I had ⁓ I had ⁓ I don't know, maybe six years ago, two people, same franchise, both in Nashville, neighboring franchisees. One Was involved in the business maybe 20 hours a week for the first three months, had his team in place, was able to back that down considerably. The other, it took him a lot longer. One was a better manager of people. So those are some of the distinctions, but that ability to, with or without a job, owning other businesses or not. Franchises is an asset class that for many makes sense to at least consider. Yeah, that makes total sense. And I want to double click on this a little bit more if if you're okay with it. And that is you kind of talk about this transfer of skills, right? ⁓ a lot of our listening audience are high income W-two professionals. You know, some are active owners in real estate, many are passive, but For the lion's share of our listening audience, they're they're high, high income earners on the W two side. In your opinion, what what would you say are some of the signs that somebody is truly at the point where it makes sense to take the leap into franchising? Whereas what are some other signs that maybe point to them, this is not gonna be a good fit for you and you should probably stick to your day job and what you're currently doing? Yeah, that's a great question. There are north of 4,000 unique franchise brands. So there's some different different iterations. If I'm working with a senior executive that has a demanding schedule, then what we're focused on is a business. Hey, it's got to be meaningful. It's got to, you know, bring enough to where it's interesting. But that time that I was Talking about whether it's five hours a week, 10, 15 hours a week, whatever. My definition of a semi-passive business is five to fifteen hours a week. And the reason I emphasize my definition, it's something that's very loosely thrown about. At the beginning, it can be a little bit heavier than that. It's not just about the time. I'll have somebody that says, well, sure. I could carve that out nights and weekends. A lot of it could be done, but where you know you've got the capacity to be able to come in and do that is you've got the ability to take a call from your manager. So you've got enough flexibility of schedule where if there's a question, you can deal with it. It might just be five minutes, but it can't wait for eight hours. So it's not just the quantity, but it's when are you available during that day? ⁓ If you don't have that, if you have a very rigid schedule, then you've got to have probably somebody that has a little bit of skin in the game that can be that sort of active GM that maybe does have a little bit of equity, or A solution like that, that this franchise that I just brought on, that's the situation that I have. I won't spend very much time on that business because I've brought somebody in that does have a small piece and they're able to do the things that I can't do. Yeah, that makes sense. And somebody coming from somebody like yourself that's got 30 years in franchising you. probably have a pretty good indication as to the type of profile that that individual is going to need to have in order for them to be successful. ⁓ I think about the types of occupations out there that maybe have might have a bit of a challenge in terms of having a flexible schedule. I think about that surgeon, for example, in the OR room or that airline pilot that's flying internationally, you know, might be a little bit of a challenge, you know, for them to be able to have a flexible of enough schedule in order to be able to You know, effectively own, manage, and operate a franchise business. Does that make sense? It c it can be. ⁓ and a a lot of times the answer is a spouse, a partner. you you you you just offered a great example, a pilot. I've done a lot of work with pilots. And they have schedules where when they're on, they're on. But then there's that Off time, that flexibility. And so there are ways to structure this. You know, surgeons, ⁓ same franchise that I'm in, one of the other franchisees is a functional medicine physician with a very robust practice. So there are solutions, and that's part when I when I engage with somebody, these are some of the conversations. That we're having to see is this a practical way for you to diversify? Is there really a viable solution in franchising? So ⁓ I I I I rarely know who my manager, my manager is going to be when I go into a franchise. You know, I can count on one hand how many times that has happened. They're out there. I know the profile. More importantly, the franchise knows the profile. What are the skill sets, the background, the experience of that manager that needs to be hired? You know, Jeremy, with your experience in franchising, you know the importance of how well defined and developed the systems and processes really are. And that's one example of identifying who is that employee, where are they coming from? skill sets, compensation plans, all of that. Yeah, makes total sense. And that definitely reduces that kind of risk profile having the right ⁓ the right person in the right position. ⁓ I'd be remiss for us not to talk a little bit about AI, artificial intelligence. I just think it kind of makes sense. And it's kind of a two-part question. That is, you know, is AI creating any unique opportunities in franchising, ⁓ any headwinds, you know, perhaps in franchising, but kind of second to that And again, I'll remind you if you want to know about what the second question is. But you know, so many people these days are going to chat GPT, right? For for answers on making investment decisions, which probably also includes franchising. So where where do some of these AI tools, you know, get franchising wrong? You know, where do they fall short? And when should somebody actually seek some professional advice or input? ⁓ before investing six or seven figures of their hard earned capital into a franchise brand. I'm Zach Happenstall, CEO and co-founder of Rise 48 Equity. Our goal is to help you protect and grow your wealth by investing in large multifamily apartment buildings. We do all the work as far as sourcing these large apartment buildings from the brokers, doing all of the on-site management with our vertically integrated property management company, doing all the renovations with our vertically integrated construction company. We completely rebrand the exteriors. We will renovate the interiors to our full platinum-level scope, which increases the value of the asset to get that profit margin for the investor. If you'd like to learn about how you can partner with us on these exciting opportunities and go to our website and set up a call with our team. So the the the first part of that question as to what opportunities am I seeing AI create? I think as in many industries, AI can be a really powerful tool. ⁓ I I I was talking with a group last week that they are in the AI business and they're working with large businesses. On not replacing people, but bringing in tools and resources that allow those people to be able to do a lot more, a lot more quickly than ever before. And it's taking care of a lot of the busy work, a lot of the mundane things. And we had a fascinating conversation about. How that is now really becoming so important in franchising and doing some of these tasks and activities that before, well, a lot of times they weren't happening. You take a franchisee, they're in the midst of trying to build a business, and there are some fires that just need to let burn because there's not enough hours in the day. Now AI. Is able to do a lot of that. So ⁓ you know, I I mentor some founders, and that's part of what we're talking about is what tools and resources can be brought in to supplement, augment, take a training manual, take all the institutional knowledge that's in the heads of the leadership team and the heads of the experienced. franchisees and being able to create a twin of that that a brand new franchisee is able to access or an employee that's out on a job. These are the sorts of tools and innovation that I'm seeing coming in to franchising. And I think that the net impact on that Is franchisees will do more, they'll have better margin, they'll hit different mile markers more quickly. We got better tools. Now, on the second part of that, where can it help and where can it mislead? So We all do this. We see some sort of an investment and with Chat GPT or Claude or Jim and I we're in there and we're modeling, we're going away. And the key piece that we've got to remember is a tool. It doesn't always provide the right answers. Franchising it can get it wrong. ⁓ out of curiosity, and I don't know why it didn't occur to me to do this sooner, but it was just a few months ago. And on a whim, I put into chat, you know, ⁓ I took a large franchise. You know, how much does an average franchisee make in a year in X franchise? And I hit return five times in a row, and I got five wildly different answers, none of which were correct. So why? Well When we're making an investment in a franchise, sometimes I think people get caught up in the thing, the widget. And the discipline that we use in investing in most other things can go out the window. If this is a financial asset class, I'm looking at numbers. I don't care if I like the product. I'm looking for where can I get the superior return on investment and time. Now, franchises are regulated by the Federal Trade Commission. So I'm gonna tell you a little bit why any of these large language models don't get it right. They don't know. The reason they don't know, so the Federal Trade Commission. Requires that every franchise produces a disclosure document. The franchise disclosure document FDD. And format is mandated. There's a section, item 19, the earnings performance representation. It's the only section in the entire disclosure document where format is not mandated. In fact, there's no obligation for the franchise to put any information in there. And many don't. And and and don't take that as the signal, good or bad. ⁓ the there's reasons, and won't go into it today, but they're there are defensible reasons. ⁓ and there are also a lot of franchises that will hide behind that too. But even when they do put information in there, a lot of times we're just seeing top-lane revenue, sometimes full PLs, but a full PL is great, but I don't Have any timing on that? How long did it take to get to break even, to hit some of the numbers that we may be seeing? So, really, the only way to be able to financially understand how sound the investment is, is to do the work. And a big part of that work is talking with existing franchisees. And an existing franchisee, if you approach them right. My experience has been almost all of them will share their numbers. And so after I've talked with a handful of franchisees, I take whatever information is in that disclosure document. Now I can build projections that I've got confidence in. But that's why quite often when we ask AI, they just start to hallucinate. And they might be picking things up off of a Reddit post, you know, right, wrong, or indifferent. So, if nothing else, take away from this conversation, you've got to do the work. And there's a process, as in any investment, that should be used to make a safe decision. Yeah. And for those that have listened to this, rewind the next five minutes, replay it, listen to it again. This is coming from Scott's 30 years of experience in franchising and what the actual due diligence process looks like and why no AI tool or service out there can really bridge that gap. And this truly, in my opinion, what Scott is saying here is what separates those sophisticated buyers from those who are just making expensive emotional decisions, if that makes sense. 100%. So Scott, with Layoffs, you know, kind of rumored out there with, you know, how AI is gonna replace, you know, people's jobs and, you know, technology really changing the the workforce landscape so rapidly. You know, how would you say that franchising can really fit, you know, into somebody's long-term wealth building strategy and also mitigating the risk of their ⁓ job or occupation potentially someday becoming obsolete? It is all about that mitigation and we're all reading about it. I see it. I'm on the front lines of this where I am getting the calls from those that have been impacted by AI. I've got a candidate that I'm working in with right now, large company, ⁓ C suite level. He knows what is happening. Inside this company, part of which will be him. And he knows how many months that remain. So whether there's an imminent threat, and doing this as long as I've been doing it, there's a cycle to everything. You know, right now it's AI, whether it's the economy or whatever, but there's all these cycles that we go through. And that's If I wind back in time, one of the reasons that I began to become more active in owning franchise, it's control. And so this W-2 employee that is in peril, or they see it coming, or they just don't want to have to worry about that any longer. Almost everybody that comes in, they've either got a pain point or it's it really is just you know diversification strategy where they're looking for the best return that they can get. The experience that I've had over the course of my career and my investing, the asset class that I can most control are my businesses. I can control Like in real estate, I'm really looking carefully at the operator, the quality of the of the project itself. But there's things that are outside the control, you know, interest rates, and so I can't control those things. I can't control markets, I can't control interest rates, but I can't control my business and what happens. inside that business. And that's where I've made most of my money. So that is where these conversations that I'm hearing day in and day out, that's a big part of what they're talking about. And it's pretty common where they have been, you know, one after another after I I I I I've got somebody right now that has been laid off three times in the last four years. And it's just this exceptional, talented person that through nothing they can control. So ⁓ you know, and the other part of this, and again, going back years, part of my strategy was to take some of these separate asset classes, businesses, real estate in particular, and there's this opportunity to combine those two. So instead of leasing a space, you buy or build the building. And most often you're not going to do this on your first unit, but as the business matures or as you gain a larger foothold, well, that's when you can start to incorporate a real estate play alongside a franchise. And then when you go to sell the business, well, Sell the business, keep the real estate, and kind of the best of both worlds. So that kind of brings all of this, you know, back together. And that reason I mention this is when we're talking about control and stability. Well, now you own real estate, you've built the businesses, and that stability, that dependable cash. flow that continues to come in, but it starts with taking control in that W 2 situation, whereas whether it's AI or any other threat, that is uncontrollable. Yeah, makes total sense. And I'm glad that you highlighted even some of the risk factors and highlighted, you know, the difference between the jockey and the horse, which we like to talk a lot about, you know, in real estate, which are you investing into and, you know, that There are different risk factors on the operation side. There's risk factors on the execution side of whatever the business plan is. And then of course there's those external market risks that none of us can control, but we all try to mitigate, you know, against those risk factors. So my last kind of question for you, Scott, as we look to wrap up here is so I I reach out to you today. I've got, you know, 250,000 bucks. I'm ready to go. I'm ready to buy into the playbook of a franchise brand. You know, where where do I go first? So you can reach out to me on my website, franchiseguidegroup.com, and we can put this in the show notes. But I will meet with any of you know your audience, Jeremy, one-on-one, talk with them about their situation and kind of what we were talking to earlier. Does this make sense? And then if so, it's a very personal approach. We'll talk about what the objectives are: financial objectives, quality of life objectives. We'll talk about their skill sets. How can we leverage those? Interests. What characteristics are preferred? And walk through this conversation and from that, I create a model which becomes the representation of what that ideal business would look like. And then that's where the depth of experience can come in. Once I understand the model. Start to evaluate well, what's best available in the market or markets they're looking for? And identify those, get a short list, talk about them, and then go into this very disciplined discovery. And at the end of that, the one thing that I'm very confident and promising is anybody that goes through this process. With me will know at the end whether a franchise is a viable solution. And I think either outcome, yes or no, is a positive outcome. Because if not, well, still have the same underlying issues that are trying to solve, but understand, all right, if it's not this, then what is it? And that also is where I try to help. You know how many people that I have suggested talk with you. Some of those, a franchise was not the right solution for some it was. And it is this allocation into different asset classes. So franchiseguidegroup.com, happy to help. That's great. And we'll put the link in the show notes for that guide. So thanks for highlighting that to us again. And Yeah, I really appreciate you kind of breaking down that the conversation isn't just going to all be quantitative, but it's going to be very qualitative and evaluate, you know, evaluate what is truly the right fit because you ultimately want that franchise owner, you know, to be successful on their journey as well. ⁓ as obviously those types of successful placements, you know, can lead to that franchisee, you know, adding on, you know, multiple units down the road. ⁓ obviously. You know, the power of referrals is really powerful in pretty much any business and including, you know, franchising. So it's really important that of course the the franchise consultant, you know, gets that placement correct. And that's why you need to reach out to somebody like you know Scott Jones to help kind of walk through what that process looks like. So I would encourage anybody that's listening to this podcast today, if you've ever considered small business ownership, entrepreneurship, or you want to look into the world of franchising. You know, please do connect with Scott ⁓ Jones. ⁓ Scott, outside of your guidebook, is there any other places that you'd like to leave our listening audience with to let them know more about where to where to find you and ⁓ where to learn more about what you're up to? ⁓ you yeah, sure. You can find me on LinkedIn, just Scott Jones franchise, you'll find me there. ⁓ but those are the two easiest places to connect. And there's resources on my site, a lot of everything I do is to educate. To help people understand franchising and kind of meeting them where they're at. Some that I work with, they've been in franchising for years. Others, it's very new to them. Makes total sense. Well, we'll definitely, like I said, put the links in the show notes for the episode. Scott, really have appreciated the tremendous value that you brought us today. Thanks for coming on the show. Thank you very much, Jeremy. I enjoyed it. Absolutely. And listening, audience, thank you again for jumping into yet another episode of the On the Rise podcast. We look forward to having you join us on the next episode.