This Franchise Cleans Fryer Oil… But Is It Profitable?

0:00Welcome to Acquisitions Anonymous, the internet's number one podcast about small business buying, selling, and operating. Today, we dug into a deal that was super interesting. Alex, our friend from Franzi, brought it. And it is a business that the other three hosts all liked, and I hated it. So stick around for the whole thing, and you can figure out how we felt about it and why I didn't like it. All right, here's the deal. Hope you have fun. We'll start Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % ears anymore. And thumbs down on just the plus inventory.

0:35One of the biggest risks in entrepreneurship through acquisition is buying a business with fragile systems. Unclear demand or a single owner who holds all the knowledge. Franchising approaches that problem differently. You are buying into an established brand with documented systems, unit-level data, and repeatable operating playbooks. The hard part is knowing which franchises are actually worth evaluating. That's why Alex Merezniak, former CEO of 2U Laundry, built Fransy. Fransy is a free platform that helps acquisition-minded entrepreneurs explore franchise ownership without broker bias. You answer a few questions and Fransy shows you franchise opportunities that align with your capital, lifestyle, and long-term goals.

1:08You also get free coaching from people who have actually built and scaled franchise businesses. If you're exploring ETA and want to understand whether franchising fits your acquisition strategy, visit franzi.com. That's F-R-A-N-Z-Y.com. And thanks to them for sponsoring today's episode. All right. Well, we were just starting to talk about the bloodbath that is the drive-through coffee, Dutch Brothers, Seven Brew Market. So continue on. It's not just a land grab, but it's also just like a brand grab like we need to get our name on as many corners as possible and in as many places yeah what's your perspective on the space alex yeah i was just telling the group we you know we work with a lot of the large franchisor brands and one of the ones that you mentioned you know well-known national chain told us that they are only selling 70 units plus at a time to incoming franchisees at this point so like they need big whole territory whole you know regions or whole states to be bought out now at this point because just of how big they are and how fast they're trying to get these open and grow.

2:08So why is it 70 and not 50 or 100? Like how do you end up with 70? It's like, it's a very oddly precise number that it's like, well, what? That's a good question. I don't know if it's how they've market mapped and they've found that the average metro can support, I don't know, that many. Could you fit Charlotte and the surrounding two-hour drive time 70. My guess is it has to do with drive time because they typically want multi-unit operators like that to have local GMs and district managers that can get to their locations within less than an hour or two. So my guess is it has something to do with the ability to get GMs and district managers into each store on a recurring regular basis without driving more than 90 minutes.

2:52Does that create a really active secondary and resale market? I mean, if you were an early entrant, And you just bought like one or two or three. And then you've got these big consolidators. I feel like that's the path I've seen before is that they're like, great, we're going to gobble you up and, you know, you're just get out of our way. That's exactly what happens in franchising. So, you know, you've heard some like Hermosi said this before and others have said, you know, why would you franchise? And a lot of the reasons people franchise is, you know, if the four of us start a coffee shop or a gym or whatever it is, and we have this cult-like following or this amazing brand.

3:24to scale it nationally because there's physical infrastructure we either need 20 years or hundreds of millions of dollars in capital to actually go pull that off i mean look at chick-fil-a i mean they're just now everyone knows them now it's famous it's widely popular but chick-fil-a has been doing this since like 1940 something you know i mean it's been forever until they got to this point and so people start franchising to accelerate that you bring other people's capital in you can start scaling much more rapidly national. And so if you think about the evolution of a franchise business as a franchisor, you have initial success independently, you start franchising to accelerate growth, you eventually grow and tap out the whole country.

4:06And so how do you grow from there? You start buying them all back from your franchisees, or you see consolidation happening with private equity family offices and you try to buy them back, or the PE, the family office, tries to buy the franchisor at that point. So consolidation is always going to happen in most successful franchise systems and chains. I think there's an open question as to whether it's possible to do what Chick-fil-A, Panda Express, and all those guys did in today's age because they all came of age when capital was relatively scarce. So you weren't dealing with people blitzscaling into all these markets like Seven Brew and Dutch Brothers are.

4:47I mean, Dutch Brothers is like, they raise so much money via SPAC. Seven Brew has all this private equity money. They're deploying, throwing capital around like crazy. I think there's an argument to be made. You either have to go big or you can. And the two ways to go big are either raise a ton of money from private equity and spread it out like Seven Brew has and Dutch Brothers have, or you go hard in franchising like Scooters has and use other people's money. But I don't think it's possible to do what Panda Express and Chick-fil-A did in today's age. like there's too much capital fighting you yeah even look at raising canes i mean they started out you know franchising and even then todd graves was very meticulous about how he scaled and you're maintaining and protecting quality kind of like an in and out and then recently in the last five years bought all those franchises back early in the maturation cycle of a franchise and it's mostly corporate owned and he's now at a size and has access to capital to your point where he can do the whole thing on his own for the most part.

5:45I mean, he's got capital partners, but a lot of it's still him. What's interesting to me is how the SBA program is so important to the finance, financing the growth of these brands. SBA does a lot of those individual franchisee development deals and even some of the, you know, retrades where they sell to somebody else. But it's a huge cornerstone of that financing vehicle and it all kind of comes back to financing. Like you said, you franchise so you can finance it, the growth faster. The SBA and banks love franchising. I didn't appreciate this as much before I got into the franchise world and ecosystem, but banks, one of their core jobs is risk mitigation and they look at a franchise system as, hey, hey, there's playbooks, hey, there's multiple data points that we can look at to see how well are these working across the country versus Mills and Alex's coffee shop, which is sometimes it's counterintuitive.

6:46It makes sense there's all this data, but each location is its own small business. And just because there's a system and playbooks doesn't mean it's guaranteed for success. But I think banks look at it like it's de-risked at least, and we're more willing to lend to these types of operators. It's de-risked that way, and it's de-risked if they can get an SBA guarantee. So with those two, suddenly a startup financing is not so scary. You come in without those two things, well, definitely without the SBA guarantee, you're not going to get startup bank financing. And, you know, it's actually even hard outside of a franchise system to get startup bank financing.

7:21So it's really those two, you know, ways of mitigating the bank's risk that make it all work.

7:54Mm-hmm. space and kind of rolled them out. But it was a different kind of maturity decision for them where they were like, we just don't want to operate this as much anymore. We would rather, you know, kind of sit in a perch and just oversee. They don't want 5 ,000 employees, you know, they'd rather collect six to 8 % of revenue across the system and not deal with the headache. Something else you just said too reminded me of some franchisors are getting, I don't know if you'd call this aggressive or not, but they will pre-negotiate in the franchise agreement, their first right of refusal to buy your store back, which might be 10 years from now.

8:29And in some cases, they'll even set the multiple at which they're going to buy it at or directly an effective price, which I think is kind of crazy. You don't know what the market's going to be like in five to 10 years. And the fact that you're setting a multiple is wild, but they're doing that proactively because they know 10 years from now for the only way we're going to grow is to start buying everyone back. And guess who does not pay attention to that? is a first-time unadvised franchisee buyer. And they're like, oh, that doesn't matter. Yeah, we've seen deals where it's under LOI. They even got a broker.

9:05They listed it, got under LOI. That person's trying to get an SBA loan to buy it and finds out, oh, the franchisor is not going to let this one go. They have right of first refusal, and they're taking it. So something for buyers to be aware of, if a franchise is listed, an existing going concern franchise, you should probably ask about right of first refusal and whether they've already cleared that with the franchisor because we've seen it. Even a sophisticated buyer might not catch that. I mean, because it's just, it's not something that was common previously, but I'm starting to see it more and more.

9:38It's almost one of those things where you just, you wouldn't think that that would be allowed or that that would be expected. And so sometimes it gets overlooked and you got to read your documents. Even the owner of the franchise has forgotten it in the cases that we've seen because they haven't gone to clear it first. So I am now going to suddenly give you guys a hint that we should talk about the deal that Alex brought by putting it up on the screen. So yay me. Would you like a passive aggressive host for your podcast? Yeah. I know a guy. You just put it up on the screen and go, excuse me, guys.

10:13That's very interesting. But we're here to talk about this deal. You need a DJ. like you need one of those things uh cool all right well let me uh i've never seen this before but i think it'd be fun alex i will read it uh and then you add color as you see fit so i think last time we tried you brought a whole fdd and after they're 210 pages totally interesting if you're into that but you brought thankfully a certain a summary this time so let me give you give me this give you this one so this is filta environmental kitchen solutions um and the industry is actually commercial kitchen services so the basic tam information there's a million restaurants in the u.s either every single one has a deep fryer that could be a potential filta customer restaurants spend three to five thousand dollars per year on cooking oil per fryer and most just dump and replace it filta extends oil life through on-site micro filtration saving customers 50 % or more on oil costs.

11:13Most restaurant operators still manage to fry oil themselves, and there's a developing market with massive room to educate and convert. So let's just pause there. So I've seen where there's like cooking oil, recycling boxes at some of these big restaurants, especially like the big kind of fast food chains. So how does this kind of fit into that world, Alex? Or does anybody know? Yeah. So I guess a lot of these restaurants even some of the larger chains you know there's not mandates yet around how long restaurant operators are keeping the same oil you know and so some of them will yeah it's pretty i mean i don't unsanitary and not you know knowing some of these dirty kind of behind the scenes you know facts or information so filter came in and said hey we can you know recycle and refilter for you we have this proprietary piece of hardware that we have outfit into a van so they pull up they connect to your oil and they refilter it at fried temperature which I think is fascinating.

12:14My guess is it has to do with the ability to clean it while it's I guess hot and the particles and things are loose and separated from each other etc. So they've developed this proprietary technology this MFU, this mobile filtration unit is something that Filta has patents on and is part of the reason you wouldn't even consider a franchise doing. did you say mfu yeah mfu mobile filtration unit it sounded bad for a second but so they're proprietary machines that are transported in outfit vans that filter cooking oil on site at the frying temperature from that core service they stack up to five additional recurring service lines on the same customer so i guess they just like drive up run a hose into the into the fryer and like suck out the oil filter it and put it back in um and they've been franchising for 22 years in the U.S.

13:07market. They're originally from the U.K., where they started the name as FilterFry. So the franchise data sheet here has franchise fee is about$40 ,000, costs about$75 ,000 for the MFU, parts, filters, van prep, and uniforms. So it costs you about$130 ,000 to$150 ,000 to open one up. You pay six and a half percent of base revenue royalty, and that decreases as you break$10 million. There's a marketing fund, 1 % of revenue, minimum royalty,$650 a month. And then you pay 7.5 % of ongoing fees. And then the first three months, there's no royalty. So Alex, do I sum these together? Am I paying 15 % of revenue and fees and stuff?

13:52Or is it 6.5 plus one? Yeah, 6.5 plus one is the base royalty. And it sounds like that will decrease on a sliding scale as you get closer to, and we can look in the FTD at some point if we want, but as you get to 2 million, it might go down to 6 % or 5.5%. And then as you get to 4 or 5 million, it will go down to 4.5%. And then as you get past 10, 4%. So that royalty decreases as you find more and more success. And what I noticed when I was looking at this FTD, filter prioritizes growth and incentivizes it pretty strategically in a way that I haven't seen a lot of other brands do, the sliding royalty scale.

14:31I don't see a lot of brands do that. So they're encouraging you to say, hey, I want to go buy another truck. I want to go buy another territory. And my guess is a goal to consolidate and incentivize consolidation because we talked about it earlier with Golden Corral. Even if you are the franchisor, you don't want to deal with thousands of individual franchisees. You'd rather have 400 that own multiple locations. It's just easier to manage and less complexity as the franchisor. So it looks like there's six service lines per you sell six products in into this so there's filter fry that's a micro filtration filter bio that's vegetable oil collection that they resell filter gold that's cooking they they will sell you cooking oil if you want proprietary walk-in filters so they'll do filter changes in your walk-in cooler that filter drain you they clean drainage pipes and treat them and then a filter clean which is a deep cleaning steam for um for individual customers so once you have the hood cleanings that's what i would think too those are like uh you know hood cleanings which are regulated and mandated you can't just let your hood get it's fire hazard so that's fun yeah and then here so they sell in on the oil as the base your core recurring product and then you're there you know every few weeks and you can sell you know upsell all these other things is the is the thought um so financially in 2024 they had 78 multi-territory operators and then they have 39 single territory franchisees so is this one truck one franchise one territory is that kind of how it breaks down no you can have so the average vans operated in a single territory is it's 2.6 on the high end seven on the the low end one um so territory is typically defined by the number of households um that's more i guess for a retail one uh for filter i'd have to look in the ftd but it's either miles you know a radius based or zip code based sometimes brands will draw polygons and do it do it that way but they'll typically do it based on you know households even if it's a commercial-based business my guess is they do it based on population and households.

16:45Look at the dispersion between average gross revenue for multi-operators and single operators. It's like a multiple of three. Well, is that because the average multi-territory operator has 5.6 vans and the average single territory operator has 2.6? I assume that's an aggregate. I think there's an outlier here though, because the average vans operated the biggest multi-territory operator has 34 you see that high low median so like it this may be skewing the average a good bit yeah look the median i think is more you know representative but even then the median is a multiple of three to your point while the trucks are only two times delta so like if we look at this atomically as a single territory operator there's 39 franchisees they're doing 429 ,000 average gross revenue.

17:44The median is 300 ,000. And they're doing that across two and a half trucks on average. So that means the average revenue per truck, is my math right, it's like$150 ,000? They have a note down there below, average revenue per van, 232 for multi-territory operators. So yeah, probably for the single territory, it is in the 150-ish range. Yep. it's a wild thing about franchises they talk about revenue a lot they don't talk about profit that often well and part of it i think too is and it's because these fdds so the item 19 is where the financials are they have to do audited financials and a lot of the times you have all this goofy stuff happening where an owner might have a ton of seller discretionary earnings and they're paying themselves a bunch and so the profit just gets i don't want to say useless but it's harder for them to pin down and give accurate representation and brands are so worried about you know earnings claims and you know misrepresenting where an individual is and how much you could profit so a lot of the times i you know i tell people go talk to franchisees in the system and just ask them how much are you paying yourself how much are you making because it's the best way to get the real data without the brand worrying about future lawsuits and making earnings claims.

19:04And that is a downside, I'd say, to franchising. It's almost over-regulated in certain areas and then not enough in others. And it scares brands from like, I don't know, I want to talk to you like a partner and give you the answers. But if I say the wrong thing and I get sued five years from now, it's just not worth it. So go talk to Mills or go talk to the other franchisee and let them tell you what they're making. 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.

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20:24Basically, Capital Pad 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. Would we want to take a stab at what we think the net margins are or they should be in a business like this? I have some info from a few operators I've talked to.

20:59They're doing about 40 % gross margin. Again, full disclaimer, this is not in the FDD. This is purely from conversations with other franchisees. Roughly ballpark, let's say 40 % gross margin and then a 15 % net worth. margin, but that's inclusive of the owner paying themselves a salary and other personal expenses that they're treating as seller discretionary earnings. So if they took a normalized salary, this might be a 20, 25 % margin business. Yeah, I think that's fair to say. Guessing, you know? Yeah. Yeah, I think that's fair. SDE. Is that what you're talking about? SDE. Right. SDE margin.

21:38What's their dispersion across kind of mom and pop versus like large chain? Do you have any sense of that? I didn't see any information on that other than this feels like, even though they've been franchising for 20 years, there's still a ton of education happening where restaurant owners, and more regulation is coming to require owners to be more

22:02cleanly about making sure that the oil is being filtered or replaced on a more frequent basis. and also just the education around how much this can save them on costs by having it filtered versus fully replaced. This kind of feels like, yeah, I was going to go to Mills. I think this kind of feels like smash my trash to me. I think we've done that a couple times on the pod. And as I think about the model of vitamins versus medicine, this feels very much like a vitamin thing that you're selling. I just wonder how hard, I wonder how easy the sell is from this, right? It's just, it's like, hey, your cooking oil is slightly too dirty, Mr.

22:42You know, barely hanging on restaurant, you know, customer. And then you're trying to sell them a bunch of other stuff that it's nice to have, right? Whereas, you know, with these restaurateurs, I just feel like, I just worry this can be hard, hard to sell this. I don't, I don't know. I think there's more revenue. I think there's more viable revenue new lines here than there is in Smash My Trash. Like Smash, okay, they're kind of pivoting and saying maybe we'll own cans also, but that's a different truck that has to move them and haul them and take them to the dump and bring them back and all those kind of things.

23:16To me, I think that if your foot in the door is something that there's relatively low or no competition on, people aren't recycling oil, they're just saying, hey, get rid of my old oil and bring me new, then it seems like a relatively good way to get your foot in the door and then you're trying to upsell over time and saying hey while we're here it looks like you're running low on oil you know and i don't know maybe you have to compete on price to maybe that's a highly competitive thing um but i would think i would think i like these other additional revenue lines better it may be though that to me, the national accounts thing would be the biggest play here.

23:56And you would have it hopefully an accumulating advantage as the brand gets bigger, because then as the franchisor goes to pitch Burger King or something like that, you know, you're saying, well, we can cover, you know, 30 % of your stores. That doesn't really help us. If you can cover a much higher percentage of our installed base, then it just helps you as you grow. It reminds me a little bit of pool services you know you've got a van you've got a technician chemicals yeah yeah yeah and you and once you're there working on somebody's pool you you notice all the other stuff that they may need to do or need to buy is it feel like it's very similar but you're you know you're selling to the restaurant industry and it's mostly about their fryer but and mills brings up a good i don't know if that's mills i don't know if that's a good parallel to making this attractive like we have a pool guy sometimes his truck doesn't work when he tries to drive to our our house right like and and you know we've i think we've seen in this podcast that pool construction is a great business to be in pool pool cleaning and pool service is a terrible business to be in so is this the pool service of restaurants i guess that's what i'm asking it feels like it i like it better it's got better margins probably and it's b2b which is always i I don't know.

25:13Higher ticket. Yeah. I would be worried about the phenomenon, though, where a large brand dictates certain things. It could help you. It could severely hurt you. But, like, you can't go sell foam cups to your local Chick-fil-A. They control the supply chain. And they own the company that makes the foam cups. So, if you could use this as an advantage, I think it's a huge advantage. But if you are boxed out by the large brands, then you're SOL and you'll never break your way into it. Yeah, I think that's a good point that you bring up two mils on the national account piece. Like one of the few reasons that you would franchise versus doing something independently is, you know, if you and I run one of these locally in Charlotte, but nowhere else, you know, we're never going to go get the Burger Kings and the large systems of the world, at least at that national or franchisor level.

26:05but if Filta has locations all over the country and they can negotiate a huge account with hospitals and casinos and restaurant chains we benefit as that individual franchisee because the broader parent company has that access they also need to be helping us drive OPEX down over time to the tune of it being greater than the royalty that we're paying most people again franchise because the OPEX savings outweighs what I'm paying in royalties take McDonald's or any restaurant as an example if you and I have to go buy burger meat for $2 a pound but McDonald's is getting it for 40 cents but we have to pay them a 6 % royalty it's still very likely worth it for us to go and do that with all the other benefits we get of menu innovation and technology and brand marketing etc and I think a commercial services business like this isn't any different can you save enough on the vans the filtration system, the oil but also gain advantage through those national accounts But Mills, are you kind of saying if someone comes up with a better MFU?

27:07I like that word. Sorry. I had to use it again. It's like you're shortening mother F. And you're sort of stuck. Yeah. I don't know. I mean, so I hear what Michael's saying. Like this feels like it could be either competed away or kind of like Smash, you're basically asking somebody just pay for something that is going to reduce an alternative cost. But it's not in their budget right now anyway. So you're having to say, hey, you pay X amount of dollars for new oil, but we can reduce that interval by you paying us in the meantime. Very similar to Smash. If this had an installed base, it would be a much more durable, I think, and scalable business long term, like on-site propane tanks.

27:50We have an onsite propane tank that I honestly don't even, I don't even know the last time we priced it. We have not gone to competitors and said, hey, will you come give us a price for a new propane tank? And what is our cost per gallon of propane? It just is out of sight, out of mind. It never runs out. They come refill it all the time. It's a very, very small cost in the grand scheme of things for us. this does not have that, you know, it's not like the blue Rhino at the gas station where like there's a, there's a cabinet, there's something physical on premise or a tank at my shop. But I think it's, I think it's at least in between that's better than the pool service guy who, you know, nothing is proprietary or beholden to him.

28:32I think the other kind of thing we should talk about this is I think a lot of people are going to take out SBA loans to get something like this started or, you know, it's not a huge amount of money coming out to get it started. But it's also kind of, I don't mean to be insulting, but it's kind of small ball, right? Like this is not a lot of revenue for the type of life risk that people are going to be taking. And, you know, they have$118 million in revenue. Like there are, there are Chick-fil-A like owners that do better than that. Right. And that's an extreme, but I think you get what I'm saying.

29:07Like, like, do I want to be in this business or would I rather figure out how to get into something like, you know, McDonald's. And I know that's an extreme, you or I are not walking into McDonald's, but like, this is just a pretty small business in the grand scheme of things. And especially one for being around for two decades, it just, you know, kind of, I think about just the inherent opportunity cost with something that just kind of has this small of a TAM and it's this small of a size. So I'm happy to be arguing against here, but I'm like, man, this feels like hard work for not a big market.

29:37my response, I used to think similarly. I used to think franchising is just McDonald's and Subway and it's these multi$4,$5,$6 million plus year per unit businesses. What I've grown to appreciate is that there's all these different archetypes of people out in the world. Some people just want supplementary income and that's it. Some people want to replace their income. And we have to remember, you and I might think, I need to get to 400K, 500K, 600K a year. Others are like, I would be life-changed and thrilled if I could make$150 ,000,$200 ,000 a year and run my own thing and do my own thing. And so I've grown to appreciate there's different backgrounds, walks of life where it's supplementary income, replace my$100 ,000 to$200 ,000 a year salary, and I don't have to work for the man anymore.

30:21And then there's empire builders that are, my time is worth$2 ,000 an hour. Yeah, and I need to go build 30 of these. Girdly. Let's go. I get what you're saying, but I think there's so many flavors out there that, you know, for some other people, they'll look at this and be like, this would be the best thing that ever happened to me if I could do this and figure it out. I totally agree. I think owning a small business, especially because of SBA financing being available, has become aspirational, similar to owning your own home. You know, for some people, it's not about being huge. It's about being independent and having that control.