NYC Boutique Wellness Franchise: $2.6M Deal Review

0:00Hey, everybody, welcome to this episode of Acquisitions Anonymous. Just me, Connor, and Heather today. And so we talked about a great deal, quote unquote, in a wellness franchise concept, three units in the New York area. They say that it's passive, it's priced at a premium, so there was a lot that we didn't like about it, but it led to an interesting conversation about not only the landscape of wellness businesses in general, but also the SBA lending landscape and different profiles of buyers where you may think that it's easy to get an SBA loan, but it actually isn't in reality. So stay tuned for the episode.

0:31We had some really interesting thoughts on it and we hope you enjoy.

0:46Hey 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 Capital Pad. 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. So 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.

1:29So 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. It'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.

2:13Connor, good to see you again. Again. Welcome back. Yeah. Thank you. Thank you. We're taking over the podcast, Connor and I, Bill and Mills. Forever? Maybe. I mean, if they don't come back, we can. We'll see if that happens. Yeah. We'll see if that happens. Let's dive into a franchise resale, if that sounds good. Yes, it does. What have you got? Well, so this is a network of three passive, this is a quote, this is not me, because that's my least favorite word when talking about a small business. but network of three passive boutique wellness centers in NYC. All right. So asking price here is 2.6 million.

2:52Gross revenue is just under 3.6. Cashflow is 536K. And the description, it says executive management business model with strong team in place. So network of three locations across 60 blocks in a great residential area of Manhattan. This boutique fitness wellness model is part of a franchise with over 400 open locations. This is a very simple business model, and it all happens in less than 1 ,500 square feet per location. Recurring revenue, less than 1 % cost of goods sold, and a few employees to make this a great quality of life business. This is a network of wellness centers. This network of wellness centers has growing sales and layers of management in place to help make this an executive management business model.

3:32Many franchisees have full-time jobs, and for many franchise owners, running three units is their full-time job. If you are looking for a premier wellness brand in premier locations with great cash flow that is simple to operate and has growing sales, call about listing blank. So this is in New York. Real estate is leased. They don't tell us how much the rent is. They disclose 600K in FF &E. And this business is an established franchise. I have a strong intuition that this is a stretching concept, and we won't share which one it is. That makes sense. And I do know about those stretching places.

4:08I have been to them. I've been stretched. It is kind of a unique concept because it's not a gym. You're not getting a workout. Technically, I guess you could go stretch on your own, right? But it's assisted stretching, the one that I've done. And it does help to have assisted, someone helping you get into these positions that stretch you further and also assess you. like this is an area where you're tight and these are some things you could do and also kind of track your progress. So they're kind of interesting. What do you think? Just to set the stage for the consumer experience, I've never been to one of these, but you go in, my understanding is you lay down on a table that's kind of like a massage table.

4:50Is that right? And then they have all these bands and different contraptions that depending on your treatment plan, they basically help you stretch to improve your mobility, your flexibility, et cetera. Is that, is that correct? That's correct. But it's not like it's an individual room. Like when you go for a massage, you have like a private room. This is just like an open space with a bunch of those tables and, you know, different people working on different, you know, clients that are in coming in and out, but yeah, you're mostly just laying on this table and they're moving you around in almost kind of the way a chiropractor does, but not really a little different, you know, more, more stretch oriented.

5:28And that's it. I think it's a 45 minute session. And, um, you know, like any of these fitness, uh, packages, they want you to buy, you know, either a membership or so many sessions and, you know, so they want you to keep coming back basically. And so the first time that I heard about this business was in 2019 while I was still in the boutique fitness world of franchising. And I thought it was very dumb. I was like, there's no way that it's going to work because like the advantage of boutique fitness or part of the advantage is the labor model, you know, because one person teaching a Pilates class or a cycle class or a yoga class, it's one staff member that can serve 10, 20 customers at one time.

6:09And I was like, so in this, it's a one-to-one labor model. I'm like, I can't see how it works. And I was colossally wrong on that. Like they have done, a lot of them have done really well. And, you know, I think part of it is like the customer retention is very strong because I think that the modality works and it really does produce results, which is at its core important. And the other thing that I think that I missed was the real estate component of this. I mean, you're talking about 12 to 1500 square feet, which when you're running a business in Manhattan, that's a big chunk of the P &L. It's a very efficient use of space.

6:44So yeah, I'm kicking myself over that one, but yeah, it's a solid business. Yeah. I mean, I'll give you my experience. When I went in, it was a lot of young, almost ready to graduate college or just graduated. And they had like degrees in kinesiology and sports medicine. They wanted to get experience in something that was in their field. And a lot of them, if you talk to them, they're also personal trainers on the side. So I think some of them were actually getting, this was their job and also a source of leads. You know, like if you might want to get a trainer, you might end up meeting them here.

7:17It was not really part of the business model, but I think it's just kind of the way that it worked out. And it was nice. I mean, I think they did. I think they did a great job. I am curious about the one to one, though, like you point out, that's that's kind of an important point. They're saying less than one percent cost of goods sold and few employees. So how does that work? If it is, you know, every client has to spend 45 minutes with one employee. Well, I mean, it depends on how many people they're serving at one time. And, you know, one thing I was going to ask, do you remember how much it cost?

7:45Yeah, it was a little overpriced. Like what I felt at the end of the day was I don't remember exactly what it costs, but I felt like, well, that's I don't know that that's worth it. Yeah. Yeah. The one to one model. I mean, what's what's concerning about that is just the labor rate in general. But yeah, as a numerator and a denominator to that equation. So if they're charging quite a premium and they can afford to pay somebody, you know, a premium, then there's a chance that their labor rate is still somewhat strong. But yeah, I don't know how many how many people they're able to churn. I mean, I guess it depends on, yeah, just how big the space is, how many employees they have at one time.

8:19But they have three or four people working at one time and, you know, three or four people are circling on an hourly basis. That's still strong revenue on a daily basis. Right. And, you know, they had a good reservation system, you know, so it was always crowded. You know, it was always hard to get the appointment exactly when you wanted it. So they were busy. And so, yeah, I think that's what it comes down to is it works. People like anything that's good for them. right? And this is maybe one of the easier things to sort of sign up for because it's not a workout. And you can walk out of there feeling like you did something positive for your health and you didn't really have to try too hard, I guess.

8:54So they put passive in the heading there. And, um, you know, I, I, again, no small business is passive, but I do think that if you're somebody that is working a full-time job and wants to own a business, like these people did it the right way. And the people that get into some sweaty, complex, small home service business and try to keep their nine to five, that is not the right way, despite what some franchisors would tell you. So they're asking, we'll talk about the valuation and everything, but they're asking a premium valuation relative to the size of this. And they have a pretty strong case to make there if their level of involvement checks.

9:32That's exactly right. If it checks out. Right. And I guess this is, I don't know. I kind of feel like businesses like this, it's a lot of marketing, right? So what are you getting? What is the marketing system that the seller has been using? Is it effective? Have they had to change their marketing methods a lot? Are you going to have to be on your toes in that same way to keep these centers or these locations at their full capacity? There's a lot to consider as to how hard are you really working? Frankly, if I'm getting$536 ,000 of cash flow and I'm not really having, and I can go to my job and relax when I get home, I don't know that I would sell it.

10:11So that's where I always think, well, how passive is it really? Yes, maybe someone at the right age and energy level is able to pull it off, but maybe they're getting tired. Maybe it is a bit of a hassle to try to do both. And it's not big enough maybe for them to quit their job. Maybe so. And the other interesting thing about this is if this is the brand that I think that it is. I think that their basis in this is under a million dollars. Like I think that they have, they have created a lot of enterprise value. I may be off on that since it is New York. Yeah. But that's just something for a buyer to keep in mind is that there's, this is not something where they're, you know, they're up against what their basis is and, you know, their expectations are going to be anchored in that way.

10:51They probably will have some flexibility to come down if, you know, they don't get demand at a five and a half or whatever And you taught me the term basis bias. Basis bias. That is a problem. Yeah. And what you're saying is there's not much of basis bias in this particular situation. So that's good. Right. That's correct. Okay. So, you know, yeah, 1 % cost of goods sold. That's, you know, I don't know what they're including in that, but it's clearly not very much. Your major line items in this business are it's rent, it's labor, and it's marketing. Anything else you think? No, that's probably it.

11:28Um, that's probably it. And labor, I guess I would be really interested to know like how well, how much turnover they've had, you know, how much work it is to keep your labor full, because that's, that's the tough part in some of these businesses as well, is the labor doesn't want to stick around very long. Like the folks that I described, I can't imagine if that's your type of labor. I don't know if it's the case in this particular one, but in the one that I went to, it was that they probably don't stick around very long. Those are, you know, young people coming out of college, figuring out what they're going to do long-term and they're not going to keep a job like this long-term.

12:01So you're always turning over. You're always having to find new employees. So I would be curious about that as well. I don't know why I had this in my head, but I had in my head that there was some kind of, not licensing, but some kind of a certification. And there may be that they have to go through here, but I'm just like, if you're, you know, you get, that's a pretty sensitive thing to take somebody's leg and put it behind their ear or whatever they're doing. Like I wouldn't want somebody who didn't know what they're doing. Yeah, I don't remember reading that there might be a certification.

12:32And certainly the employees in the one that I went to, they were all the types that would know what they were doing because of what they studied in school, the fact that some of them were personal trainers and certified in that. So maybe it's some kind of personal training certification piece. I don't know, but I would hope so. Yeah, because it would be a little scary if someone doesn't know what they're doing, pushing your leg around. Yeah. The other side of that though, is even if it is a more transient employee base, I don't know, I've seen niches like that where it fits very neatly into, you know, someone else's role.

13:03Like if they're a personal trainer and this is like the perfect bolt on to, um, you know, make extra money or whatever, it's like there, there may be a way to overcome, you know, that, that transient, the transient nature of that workforce. It just depends on, you know, what the certification looks like. Because like in Pilates, for example, that's a 500-hour process to be certified to teach Pilates. And that's not something that people can just do because they want a short-term side hustle type thing. Yeah, that's kind of what I saw. A lot of them were personal trainers. So that may be exactly what your labor pool is, is just sort of a network of folks that are doing something else in fitness and filling out their week and their day working for you.

13:43We've talked about churn. We've talked about marketing. I think that's like the LTV to CAC ratio here is something that's really important because it all plays with each other. But that would be one of my first questions is when you look at the churn on a monthly basis. And again, I don't know exactly how much this costs, but we'd want to understand what the monthly spend is. And then, yeah, frequency, how long are they remaining as customers so that we can figure out how much a customer is worth to us. And then we want to look at their marketing to make sure that they're able to acquire customers in a way that allows us to do this profitably.

14:21Because I've seen some of these lower ticket recurring revenue businesses, that's something that they run into as digital marketing has gotten a lot more competitive, is that even if that CAC to LTV ratio is somewhat strong, as their CAC has gone up, it's extended the payback period where they're having to prime the pump with a lot of marketing dollars. And it's not as capital efficient of a business as it used to be. Yeah, this one, I wonder if they have a little bit of an advantage just because they're in Manhattan. And this, you know, locations in Manhattan can just generate a certain amount of foot traffic, you know, folks coming in, you know, on top of the digital marketing that they would be doing.

14:58I would think that would be the case in these locations versus, you know, a suburban type location. I would completely agree. And let's talk about Manhattan because there's a piece of that that obviously on the consumer side of things I think works to their advantage. I also think there's a piece of this on just the sell side of things that works to their advantage. Because when you're in an area, if this is truly passive, which again, it's not passive, but if this is truly something that you can own while having a job, you're in the place with the highest concentration of people who can afford to pay this amount of money for it.

15:37So I'm just curious, what kind of an impact do you think that could have on their ability to get 5X for this? I think it has a great impact on it. Yeah, absolutely. If you can show somebody, look, I've been working this job and I've still been running it and here's how it works. Yes, absolutely. You have more potential buyers to whom that is attractive and attainable for than you would in a lot of other places. Because yeah, there's some pretty good salaries in New York, but yet everyone always wants to make more money if they can. So yeah, I think that that's a plus here. I still don't, you know, as a lender, I hate the idea of someone buying a business and keeping a job.

16:17Even if the seller has done it, I don't think it's that easy ever, you know, no matter, no matter what, and you're a new buyer. So you've got to learn everything while keeping your job. That's pretty hard to do. So I, you know, if, if someone is going to do it that way, I would say they should have no debt. If they're going to, you know, run it full time and$536 ,000 is enough for them, then great. Quit your job. This, if you want to take debt, quit your job. If you're, if you're going to try to run it, you know, and keep your job, pay all cash, maybe, or mostly cash and a little seller note. It's interesting that you say that because what I tell people a lot of times when they say they want to buy a franchise and keep their job is I'm like, the analogy here is you are very, very highly levered on the operations side of things, right?

17:05There's financial side of things where you're highly levered, but that is what, just like when you're highly levered financially, every little blip in the radar on the P &L, it's amplified the impact, positive or negative. The same is true on the operation side of things. So I always say the art of small business operations is turning crises into inconveniences. You are doing the inverse when you own a business and you have a job where little inconveniences become a crisis because it's a crisis to you based on your commitments elsewhere. Yeah. You have no room, no margin for error for anything to go wrong in your day because your day is already completely packed between job and your, I think that's great.

17:45Operational leverage. Yeah. You're highly levered with your time and that's not a good spot. Just like being highly levered financially is not either. That's exactly right. Yeah. And particularly if it's your first time owning a business, because I do think that there's something, once you've owned a business before, I always say like, obviously you learn about business, but you also learn about yourself in business, which is equally as important. So having owned a few businesses, I know that there are like, I know that there are boundaries for me that I have to set where once we cross outside of these boundaries, I'm not the best owner in the world.

18:15We'll put it like that. And that's something that when you lack that clarity, it's hard to make this kind of a decision and make it make sense. So I'm curious on the SBA front because we were talking about New York, a lot of affluent people with a lot of money to invest. I had a situation with my first franchise where I tried to get an SBA loan. I had some other folks on the cap table who had quite a bit of liquidity. and we had a hard time getting that approved. We ended up going the non-SBA route because this was a learning experience for me, but I guess there's something about how if you have a ton of liquidity, the SBA doesn't like that because they're saying this really isn't for you.

18:50You should use your own money. This program exists for people who wouldn't otherwise have access to credit. Is that correct? And can you talk us through that? Yeah, I mean, you kind of have to be in the Goldilocks position for an SBA loan. So you can't have too little because the banks want to get paid back and they want you to have skin in the game and your guarantee. And so you can't be too small, but you can't be too big in terms of your balance sheet, can't have too much liquidity, too much in liquid assets. The rule of thumb is basically, if you're going to have an equal amount or greater than the loan amount in liquid personal assets, after you put your equity in, after we subtract that amount out, you're probably too wealthy to be getting an SBA loan and you're technically ineligible.

19:34But that's just for the personal guarantor because the folks that are below 20 % might just be in the cap table for various reasons, whether they're investors or something else, they are not submitting personal financial statements. So we don't actually know how much they have. So technically, they could be higher net worth individuals. And that's who you think would be investors typically anyway. But it's kind of a conundrum because the SBA wants you to be not too poor. The banks don't want you to be anyway. and you can't be too wealthy. So you kind of have to be right in the middle, um, in order to be eligible.

20:09And I, and I see the why behind that. It's still, it's still confuses me because again, it's like, if we're actually lending based on merit, the person who has more assets to pledge as collateral is the lower risk borrower. Right. And so to me that this is, uh, yeah, I don't know. To me, it just sounds really inefficient, but I, you know, I get the why that, you know, I, the SBA is just basically saying, hey, this isn't for you. Is that fair? Yes. It's counterintuitive, exactly to your point. We're telling people who are the most qualified they can't get this loan. It comes from this notion though, which is not always true.

20:42It comes from the notion that, well, if you're that wealthy, you have credit available elsewhere. That's literally the language. But the reality is when it comes to small businesses, you don't. There are no conventional programs for businesses under two and a half million of EBITDA. They just don't exist. The SBA has become the sole source for those businesses. So it is, I agree with you. It's actually not, I don't think it's a great policy. I really don't. I get it, but I don't at the same time, because you're saying if wealthier people own small businesses, they should just be able to get loans somewhere else and they really can't.

21:16Not even close to on the right kind of terms that that small business needs. And so, yeah, I don't agree with it. We had a couple of years where that was not part of the rule, but it is back again. And I think it It just has to do with a distaste in our Congress. They think that this is a giveaway program, which it is not. It is almost always zero subsidy, meaning the program fees pay for itself. And therefore, because they think of it as a giveaway program, they don't want rich people getting it. And that's kind of where it comes down to. But I agree. I think it's a little bit misguided in terms of a policy.

21:49Hey, 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 Capital Pad. 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. So 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.

22:32So 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. It'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.

23:16So if the buyer that we're thinking about here, somebody who's in New York has$10 million in the bank and they want to buy this for 2.6, if they came to you and you looked at their balance sheet and were like, hey, you're not going to get approved for an SBA loan, would one of the SBA lenders jump all over that and be like, hey, this doesn't make any sense why you couldn't get an SBA loan? You're a great borrower. You have a great profile. We're going to do this. We're going to circumvent the SBA and do this loan separately. They can't. They literally cannot do that because they would be violating the black and white rules of the program.

23:49And the SBA would come along and not only take away the guarantee at the end of the day, but they would also kind of punish the lender for having gone around the rules. So they don't have an option. What they do have an option to do, and by the way, I am working on this with a couple of banks, is creating an SBA lookalike program for wealthier people. It doesn't exist, like I already said. it doesn't exist for a lot of reasons, trying to work with a couple of banks to see if they would have an appetite for it, you know, keep the same kind of terms, but set the limits, you know, for high net worth individuals.