KidStrong Franchise Deal: Smart Buy or Overpriced Risk?

0:00Hey, everybody. Welcome back to another episode of Acquisitions Anonymous. I'm Connor Gross, and Heather was with me on this episode, and we broke down a deal that was a multi-unit KidStrong franchise. It's a franchise in the youth enrichment space. They do things like kids' fitness and character building and things like that, several different units. And so we talked about the pros and cons of the industry in general. We talked about how this one's actually split between two different metro areas, so some of the challenges that can come with a business like that, as well as the multiple at which they're asking, which we broke down.

0:31So be sure to give this one a listen. We're excited to break this down with you and we'll see you on the other side.

0:43So many founders and operators still use their personal number to talk to customers. And sure, that works when you're just starting out, but eventually it starts costing you time and money. That's where OpenPhone comes in. It's a modern business phone system that lives in an app. You get one number and your whole team can use it like a shared inbox for calls, texts, voicemails, all in one place. Somebody reaches out to you, your ops lead can reply. Your co-founder can follow up. You don't have to be the bottleneck anymore. And if you miss a call, OpenPhone's AI agent picks it up, answers questions, and even logs new leads for you.

1:25It's one of those tools that makes you wonder why you didn't switch over sooner. 60 ,000 businesses already have. OpenPhone is offering our listeners 20 % off your first six months at openphone.com slash A-A-P-O-D. That's O-P-E-N-P-H-O-N-E dot com slash A-A-P-O-D. And if you have existing numbers with another service, OpenPhone will port them over at no extra charge. OpenPhone, no missed calls, no missed customers. Connor's back. How are you doing, Connor? Connor is back. I'm good. How are you? Must mean we're going to talk about franchises again. That's obviously what we're going to talk about.

2:11And yeah, I've got a good one today. This one is interesting, but have a turnkey multi-unit KidStrong franchise opportunity in Texas. We'd love to dive into that. So where's Michael? He's not here. So we'll have to talk about Texas. Or Michael. Yeah. Yeah. Yeah, like I said, turnkey multi-unit KidStrong franchise opportunity in Texas. Asking price is$5.1 million. They share about$4.8 of gross revenue. And then just over a million of EBITDA. So, Description, own a thriving portfolio of seven fully operational KidStrong centers across the Austin and Houston metro areas. This business is backed by a proven brand, strong leadership teams, and scalable systems for recruiting, training, and sales.

2:59with high member retention, recurring revenue and immediate growth potential through expanded marketing and staffing investment. This is a rare opportunity to step into a well-structured, mission-driven business. Ideal for an investor, operator or multi-unit franchisee looking to expand in the booming children's fitness market. Financing available with conventional loan at fixed rate with 20 % down. So yeah, we'll come back to that, but they disclose about 500K FF &E. um yeah that is pretty much it so what do you think uh their intention was in mentioning that financing available with conventional loan well let's come back to that because before we go there i would like to we can come back to that here i want to just have you describe for those of us who don't know what is a kid strong franchise what do they do yeah so my understanding not super I'm not as familiar with this one as I am with a lot.

3:56But my understanding is it is a youth enrichment franchise. It is brick and mortar. So they have these locations and they have a curriculum that is built around both like, it is a gym. So like they have a curriculum built around like fitness and then they also have more character oriented lessons that they teach kids. And so the point is it's a membership base. I don't know the frequency that people usually bring their kids, but it's a monthly membership where people bring their kids on an ongoing basis for both physical activity and character enrichment. I didn't know about the character. I just assumed it was all exercise.

4:34I didn't know about the other side of it. So that's kind of interesting. And it looks like a pretty big space here. Did they say how many square feet this is? They did not, but I bet we can. A small gym in an industrial building is what it looks like to me. So fairly good sized facility with mats and some kind of equipment. I don't think it's, I guess maybe there's some weights back there, maybe some balls and different apparatus that they might play games or do something around. So it looks, looks colorful. It looks like a lot of fun, but that's, so it's some kind of membership, recurring membership revenue type system.

5:11The kids, the parents are signing the kids up for and bringing them in for all of this fun stuff. Yeah, let's go to this financing point that they made. It's a million dollars. Well, they actually said a million dollars of SDE and the exact same amount of EBITDA. So which one is it? It's SDE should not be the same. But aren't they the same thing, Heather? No, they're not the same thing. And I'm just going to assume that it's probably a million dollars of SDE, which, you know, means we have to subtract out the owner's salary to come up with what really EBITDA would be. But maybe in Texas, that's only$100 ,000.

5:50You can live fairly inexpensively. It is Austin, however, so maybe it needs to be more than$100 ,000 there. So maybe you have$900 ,000,$850 ,000 of EBITDA to work with here, which is great. I think that sounds really good, sounds like a nice margin as well. So you could, when you're paying$5.1 million, absolutely, that fits in SBA. so there's a reason they want you to not use SBA I don't know what it is it could be as simple as the broker had a bad experience and they decided that the bad experience was because it's SBA it could be that they know this franchise concept is not eligible which by the way if you're ever looking at franchises to buy you've got to go to the SBA franchise registry it's back they took it away for a couple years.

6:42They brought it back as of June 1st. And you've got to look it up, and you've got to look up this concept and see if it's on there. So it could just be as simple as it's not approved by SBA. And by the way, the reason SBA doesn't approve some concepts is because the concept doesn't give the owner enough discretion. They feel like they're not really running their own business. They're being controlled too much by the franchisor. If the SBA sees those kinds of conditions, they won't add it to the franchise registry and it's not eligible. So it could be that it's just not eligible. It could be the broker doesn't like it.

7:19It could be the darker side that they know SBA loans are underwritten to tax returns and maybe the tax returns aren't pretty. And when I say not pretty, I mean, maybe reporting higher expenses or not all the income or something like that. But it's curious because this is not, this doesn't have to go non-SBA because it's too large. It's perfectly fine to go SBA based on the size. Yeah, the other thing I wonder is, you know, because I know a couple of KidStrong franchisees and they do not work in the business full-time. One owns other businesses, the other one has a job. So, and that's something that they call out here, like ideal for an investor, which I have my own thoughts about, but setting those aside, is that something that would mitigate somebody's ability to get an SBA loan if they're not going to run the business full-time?

8:10Yeah. I mean, if that's the reason, but they could have said that if you're an investor, you don't get an SBA loan, you get a conventional loan. But yes, that's correct. If you wanted to buy this and run it passively slash as an investor and not quit your job and not be there full time. An SBA lender would not go for that. And incidentally, that's not in the SBA rule book. It's really just that every bank sees it that way, that they just they want to make sure when you buy a business. Pattern recognition. Yeah, that you get in there and you're quitting your job. You're not distracted with anything else.

8:45You're looking at this every day, full time, you know, for the foreseeable future. So maybe that's the reason they said go for non-SBA debt. But I will tell you my two cents on going for conventional debt for something like this. There aren't really very many programs out there. I have heard of one for franchises, though, recently that is non-SBA. It's kind of SBA lookalike. It's called Apple Pie Capital. I'm giving them free press. I think that if you are buying a franchise and you are personally strong enough, you can get something that looks very much like an SBA loan but doesn't have all the same conditions.

9:21So maybe they're trying to steer towards that. Yeah, I think Apple Pie started that program, or part of the reason they did was mainly oriented around salon suites because that's an example of a lane that SBA will not lend into, as we've talked about before. And so they kind of created this program that's somewhat of a lookalike program. I am familiar with them and they come highly recommended overall. So, I mean, as far as the business is concerned, I like the industry. If Michael were here, he would tell us we shouldn't get into this because people aren't having kids. I am not, he literally said that in a webinar we did a couple of weeks ago that he's concerned about the youth enrichment industry.

10:04I wish you were here to talk about that because I'm not at the point where I'm like going to, where I'm like shaping investment decisions around the impact of declining birth rates. I'm curious, do you think I'm overlooking that or is that an actual concern? I think it depends on where you are. I mean, I think that, yes, broadly, the declining birth rates is something to think about in a lot of different industries and different products and things like that. But I think when you're running child-oriented businesses, I think it depends on where you are. And how many competitors, like what's the density per child of this kind of service in that space?

10:40And even if the curves, you know, goes a little bit lower, there are fewer children over the next 10 years of that age range. You know, a business of this size, you probably should be okay if you're in the right place without too many competitors. But broadly, if I was the franchisor, maybe that's a different thought process. You know, how aggressively do you expand when the number of kids is shrinking? Yeah, I agree. And yeah, but as far as like the service is concerned, I really like it. And this is kind of the, like this is the lane in the youth space that I really like, which is something where it's not like it's daycare where you're, you know, keeping kids for all day long and, you know, time for all different things to happen.

11:27And it's like, it's quick. It leaves an impact on the child. It's, yeah, it has to be somewhat sticky in that regard. And I would want to hear, because they mentioned high member retention. I would want to dig into that a little bit, or a lot rather, and understand that. But provided that that shakes out, I like the overall modality. Yeah, now they do have$4 million of expenses. So I think that probably a good chunk of that is rent. and the facility itself, but, and, and staff, of course, because they've probably got to have a ratio of staff to student or to, to kids. But there's probably some marketing expense in here too, that it's, you know, you've got to have the, you've got to have the brand out there, you know, the franchisor is probably, you know, making them, you know, pay in for that.

12:19But, you know, it is, it is a$4 million of expenses. And so it's not, I think there's probably a break-even. I'd want to know how many kids do I have to have enrolled to be at break-even? How far above that am I? How long did it take this business to get to break-even? I'd be curious about all those things. Yeah, I completely agree. Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs, that is people who want to buy a business and need capital, to list their deals and solicit capital from other people who want to invest in acquisition deals.

13:09So if you want to back somebody buying a small business, CapitalPad is the place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions, all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses and the returns can be really, really good. I'm so stoked they exist.

13:47It's founded by my friend Travis. who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out capitalpad.com and tell them that Acquisitions Anonymous sent you. So I just looked at, so KidStrong's item 19, which is the part of the FDD where they show the financial performance. I love when franchisors do this when they disclose the top quartile, right? This is the average for the top quartile. So their average revenue for the top quartile is just over a million dollars.

14:24It's a million, yeah,$1 ,019 ,000. So obviously we don't, oh no, it shows average gross revenue. Yes. And it does show average overall, average gross sales. I missed it initially, but average gross sales overall is about 720 ,000. So they have seven locations, 4.7-ish in gross revenue. So that's about on par with average, right? Yeah, but now you're running seven locations. And I guess this is one of those franchise concepts where you don't really get the economies of scale because you still have to have the same number of people staffing each of those locations. you know maybe I'm thinking about that wrong but I feel like that you may not get that here I think the economies of scale come over the over and above the location over at the four walls meaning like you can hire you know one director of operations that can manage all the managers and you know you could probably afford to pay them you know a reasonable salary for a director here when you wouldn't be able to, you know, if you pay somebody 150K to run this business, it's going to be fine, but not if you have one or two.

15:40It would just kill you. Okay, gotcha. So you can afford the order of management because you are running seven locations, but does it really get you a better profit margin to have seven locations in something like this? Probably not, I don't think. So, and yeah, I always tell people, if that's your goal is to scale, is to, yeah, you'd want to understand what the capacity is for one area manager. Like how many units does an area manager typically manage? And if you're really trying to optimize things, it's like you want to have goals that are in increments of that number. So the point here is, is it possible for one area manager to manage seven units?

16:22And if not, how do you structure that? Yeah, and if you got to keep growing, now you need to afford two managers and you've got to grow even faster to afford that. So yeah, I think someone worked really hard to get to this level, to get to seven locations. Yes, and this is the kind of franchise where it's not to say, it's certainly not easy to run, but I do think that a lot of the hassle in something like this is on the front of the build-out. Like, you know, site selection, going through the process of building it out and stuff. And so it's, yeah, we can talk about the multiple, but they have done a lot of the hard work that the buyer would avoid.

17:04So on the multiple, it seems high to me, but at the same time, I mean, it's going to depend on, to your point, Heather, that SDE to EBITDA ratio, what that ends up being. But if that truly were EBITDA, it seems high, but like a notch too high, not like egregious. Would you agree with that? Yeah, I mean, a five, yeah, to me, a five in a franchise system feels way too high, but a four wouldn't. And maybe if this has got some great characteristics, maybe over a four wouldn't, you know, so yeah, somewhere between a four and a five is probably okay, especially when you're really getting a million dollars of STE.

17:43And if that's, you know, you feel like that can be pretty consistent. I feel like that is a fair, that is a fair price. So maybe they're just going to go for just a touch under what they're asking, which is nice to see. it's priced fairly. Let's see who's the broker here. Boutique fitness broker. So interesting. It's one of those brokers that this is on a particular industry, which is a fitness, not necessarily child enrichment, but I think this probably fits her category pretty well. Perhaps she knows how to price the deals and bring them to market at a reasonable valuation. So I think that's always good to see.

18:22And maybe you can own this somewhat passively. They've got that area manager. Maybe there's not a whole lot of work and maybe that's why they said SDE is the same as EBITDA because you're not going to take a salary. I don't know. But yeah, I think it's a good sign that the multiple doesn't feel too high or extremely. I'm interested or I would be interested to know. So they're across Austin and Houston, which one is it? It's three hours apart, maybe something like that. They're not close. So I wonder, I'm curious how they got to that point because I feel very confident that there are more than seven KidStrong locations in Austin and more than seven in Houston.

19:03So I'm just curious how they ended up splitting that, which is definitely inconvenient, but maybe a reasonable answer to that. Yeah, good point. Good point. Why does one person own seven, but they're sprinkled in these two places that aren't really next to each other? So that would be interesting to know. And that does create a little more hassle factor for an owner because once in a while, you're going to have to get in your car and drive a spur of the moment between those two places because something needs to be handled. So that's a little less appealing. And also I would mark some off the multiple for that as well.

19:39I agree. And I think that the other thing that would be, or one of the other things that would be interesting to figure out is once you look at the P &Ls by units, or even if it's just the revenue by units and figuring out if they have any dogs. They may have one or two units that are completely sucking wind. And in some cases, that can actually be attractive because if you have a line of sight on turning that around and filling that hole, it can be a shorter path to growing your aggregate EBITDA. But that can also be a huge liability because if there isn't a line of sight on turning that around, and then you've just got this hole there that you have to continue to feed for this foreseeable future, which isn't fun.

20:26So, but we don't do that. So. Well, I think I like it at a lower price. Like personally me, I would not pay more than a four, but that's just because, you know, if I'm going to be in this business where I have to drive between three hours apart, you know, and I've got to manage, you know, seven separate locations and all that goes with that. you know I've got to make more money than I would be at a five so I'd be at more like a four but I otherwise like it it feels like a good space to be in it feels like something also you can be proud of and feel good about what you're doing for your community and I think there'd probably be a really nice just kind of bonus for anyone to be owning a business like this especially if you have kids even if they're grown up it makes you feel good that you're you're doing something positive for the world and your community and kids.

21:18I think that's really nice. I completely agree with everything. I think that, yeah, this would make sense for somebody who is local, who obviously has the capital, but has kids, is just immersed in the circle where owning this business is going to fit neatly into their life. And yeah, I don't love being split across two different metro areas. I do think that it's priced too high. But if, yeah, if the geographic dispersion was reflected in the multiple, this is something that, yeah, I would be interested in. Yeah, I like it. Well, you brought some good ones today, Connor. Thank you for doing that.

22:00It's a refreshing, yeah, it's refreshing for me to bring deals that people actually like. So thank you for, thanks for being agreeable, Heather, as always. Absolutely. All right. Well, it's great seeing you again and hope to see you soon, Connor. You too.