How Non-Food Franchises Build Wealth with Jon Ostenson

0:00But I do believe in my experience that for most people franchising is a better path to business ownership because you are stepping into a business that already has product market fit. It's been established. You get a lot of information before you ever sign the franchise agreement and decide to move forward. But within the franchise system you're getting a playbook. You're getting, you know, here's how you run the business. You're getting support from that franchisor on the sideline and their team. So you have a built-in business coach. You're tuned in to the Investing for Beginners podcast. The show for the long-term investor.

0:36We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome to the Investing for Beginners podcast. I have a special guest for you today. We're going going to talk about the topic that is familiar for stock market investors, but there's a little bit of a twist. So we'll get into that. I have our guest, John Ostenson. He is a top franchise consultant, owner, investor, two-time Inc. 5000 founder, author, and speaker specializing in the area of non-food franchising.

1:16So John, thanks for joining us today. I'm excited for this conversation. Hey, Andrew. Excited to be here. awesome well um maybe start off non-food non-food franchising like that sounds counterintuitive what is that yeah you know whenever i would hear the f word franchise in the past you know i always thought of fast food and what i found is so many out there you know would be in that same bucket but after many years in the corporate world i really stumbled into franchising about a decade ago and had the opportunity to lead a large national franchise system and then eventually invested in franchises myself and started the consulting practice.

1:53And, you know, but I still found that people oftentimes associated food with franchising, not all these other industries that oftentimes people overlook. And we've got nothing against the food guys. We need them. We support them. But my humble belief is there are easier ways to make money. There are a lot of opportunities out there in other industries that may require fewer employees, less operating hours, maybe less susceptible to consumer whims higher margins you know less capex there's a number of different reasons uh why we see so many of our clients gravitating towards uh opportunities in the industries outside of food very interesting is that a newer thing or has this been around as long as food franchising has it's been along even before it'd been around even before food franchising so certainly mcdonald's you know and you watch the founder you know that that kind of put food franchising on the map but prior to that i mean if you go back to the 1800s there were franchise models and very esoteric type industries, even sewing machines back in the day.

2:51But no, you know, you think of different companies out there like a Sur Pro or you think of different gyms. You know, there are some that are household names, Club Pilates, Pure Bar. But so many of these businesses will never be household names. You know, I think about insulation as an example. That's a$52 billion industry every year in the U.S. Most people cannot name a brand of installation. Yeah, there are several franchises that operate in that space. So it really is so much more than the brand name, you know, hotels, it's all about the brand name, right? And those are franchises. We like all these other industries where, you know, it's all about the support, all about, you know, oftentimes more fragmented competitive markets, you know, maybe more mom and pops that you're up against, less sophisticated, and you're able to come in with a, say, a white collar approach to a blue collar industry and bring the power of the franchise system.

3:39As a local owner. There's just a lot of benefits to it. That feels like a little bit of hidden value. So let's, let's pull on this. Maybe what are the advantages just from a business perspective? You know, we talk about stocks like Domino's pizza and I've written about them in the past and some of the ways that their restaurant level unit can be more efficient than like you're saying, a mom and pop. So is there a lot of similarities there? Like help us break down what's what some of those advantages are for franchising. Yeah. And first off, franchising is not right for everyone, right? And some some people are too entrepreneurial, they want to put their thumb prints all over it.

4:25But I do believe in my experience that for most people, franchising is a better path to business ownership, because you are stepping into a business that already has product market fit, it's been established, you get a lot of information before you ever sign the franchise agreement and decide to move forward. But within the franchise system, you're getting a playbook. You're getting, you know, here's how you run the business. You're getting support from that franchise or on the sideline and their team. So you have a built-in business coach. You obviously get synergies around paying for goods or services because you've got that bulk buying power.

5:00And this oftentimes gets overlooked, but you've also got, you know, a technology stack day one. You've got marketing that's been, you know, at least somewhat optimized, you know, for you to step into, but you also have a community of other franchisees. It's like a built-in mastermind. So you're learning from each other, exchanging best practices. It really shortcuts that success curve for you. And, you know, Andrew, it's important to note franchising is like every other industry. You've got great players out there in the case of franchising, ones that provide great support, but you also have some that don't.

5:29And that's where we come in to try to help our clients identify the ones that are worth the value in the market. Interesting. So you've cited research before about the exits for franchise businesses versus non-franchised. Can you go over some of that and what are some of the reasons for that discrepancy? Yeah, there's been a lot of research done that has shown that franchises and like-kind industries to non-franchises actually traded a slightly higher multiple. And I think there's value in that resale buyer they see in the franchise, because again, you're, you get into a business, there's going to be some unknowns, but you're not all by yourself.

6:05You've got a team on the sideline. You've got other franchisees all kind of helping each other. A lot of people will come to us and say, hey, we'd love to buy an existing franchise, you know, resale opportunity. And we'll do some of those. I just did one in Denver a couple of weeks ago, pool cleaning franchise. Most of the time, though, the good ones never hit the open market because another franchisee in the system will buy the business before it ever goes to market. So, you know, we have a lot of case studies of clients of ours that have started out with one or two locations in a franchise and then over time acquired other franchisees in the system it's what i call internal m &a and they build up these empires and do a roll-up of franchises or they may come back and buy additional franchise brands or start other companies so always encourage people what's right for the next season what's going to allow you to get in the game a lot of people that have been looking for an existing business have been looking for two years three years four years i see it every day that's time they could have spent getting in the game building a platform, moving the ball down the field.

7:02And then, you know, obviously you can do a lot from that. I'd love to maybe get into some of your early story of like, did you stall to get into the game? What was your first franchise like? And do you remember any of the hurdles you had as a, as a beginner in that space? Yeah, absolutely. So I'm in my mid forties now. And it was when I was in my mid thirties, I really, you know, had the golden handcuffs, corporate America, you know, I was very thankful for that experience, but I was tired of building someone else's empire. I wanted to build my own, so I started looking around, having conversations, and a door opened to step into franchising on the franchisor side.

7:40So my first foray was supporting other franchisees across the board. Since then, I've invested in franchises myself and owned several different brands, largely with partners that have been more operating, people that are more talented than I am in in a lot of ways, running businesses. Like I've got one that does asphalt paving and line striping. Another one that provides temporary walls like containment walls around renovation projects and construction sites. Another one that provides 3D printed orthotics. But when you go back kind of to your question, in the earlier days, we got into some home services businesses like pool cleaning was one that we invested in, home cleaning, carpet cleaning.

8:21Those were some of my first ones. I'd say of those three, the one I liked the least was the home cleaning. And that's one that I never show our clients now, because I feel like it's been a commoditized business, just like mosquito spray. You know, we like businesses that are more niche driven, have less competition, not things that have already gone mainstream. So maybe this is a dumb question, but when evaluating what type of franchise business to get into, is it similar to the process of looking at the stock market and trying to figure out what stocks or industry to invest in? I think so, except that, you know, with a, you know, when you pick stocks, you can always sell the stock the next day, right?

9:01There's a, it's very liquid. And so I'd say that's probably the biggest difference is you really want to be thorough in your exploration process. It's almost like a marriage, right? Who are you partnering with or a business partnership? So it's, it usually takes about two months. What we'll do is we'll share with clients, Hey, if we were in your shoes based on what you've shared with us based on what we're seeing out there. Here are the top 10 or 12 opportunities that are looking to expand in your market. We usually hit on a lot of different industries. What we find is clients usually get into something that was never on their radar.

9:3180 or 90 % of the time, it's an industry that was never on their radar. So they go in open-minded and there's a whole discovery process where they'll talk to other franchisees in the system. They'll get tons of information, different presentations. I'm coaching them on the sidelines. So I'd say the biggest difference there, Andrew, is that it's just a longer term commitment. It's a more involved commitment. In a lot of cases, it's a higher investment. And so you really want to do your due diligence on the front end. Can you give us a flavor for what some of that looks like? Yeah, so every franchise system has what's called an FDD, a franchise disclosure document.

10:05There's 23 sections within there. Your item seven, as they call it, it's your all-in investment range. Your item 19 is your financial projections based on their historical results. And then you've got all the history of the franchisor and such in the other sections. So every year franchises come out with a new FDD, usually in the March, April time period. So that's going to provide you as you're building your pro forma, for instance, one data set. But you also get a chance to talk to other franchisees and ask them about their experience and their questions. And they can be an open book. So franchises are asked to kind of stick to what's said in the item 19, almost like a public company would, you know, their disclosures.

10:39Whereas the franchisees can be very open about their performance and their ramp up and mistakes they made or learnings they've had. And so there's a little bit of science, a little bit of art to it. Obviously, when you're getting into this, it's much more than just the financials, right? That's one piece of it. You also want to get a feel for the culture. You want to think about the day-to-day. Are you going to be an owner-operator running the business, or are you going to be what's called an executive owner? Some call it semi-passive or semi-absentee. I like to call it semi-involved. You're still going to be involved.

11:08But the idea is that you put a manager in place day one to run the business. The franchisor is supporting the manager still. I never want to sugarcoat it. It still takes work and it comes down to having a good operator in place So are you Matchmaking the two or are people bringing their own? How does that look? I've done some beta testing around matchmaking the two But what I found is it's there's just too many moving parts It's better for someone to hire on their own Sometimes they'll come and say hey my brother-in-law is going to be our operator or and I'll be the capital partner Or, you know, sometimes it's family related or a friend.

11:45I've had several physicians in the past month that purchased franchises where it was an old colleague of theirs that was looking for a job. And they're like, hey, why don't I buy a business and let you run it? But other times they're hiring from the get-go in that executive model. Does the economic conditions or the stock market conditions affect the type of opportunities that you see on a day-to-day basis? Is it relatively the same? Like what happens in the stock market doesn't affect? What is that? I'm curious. Yeah, you know, it's interesting. It kind of goes both ways. You have to start markets been on a great run.

12:25People have more money and they say, hey, you know, maybe my retirement account I can tap into. There's what's called the ROBS program where you can use an old 401k to purchase the business. On the flip side, if the stock market's down, people are saying, hey, I'm not getting a great return on my investment dollars. maybe I'd be better off looking at alternative assets, including business ownership, which obviously comes with opening up the tax playbook. The government incentivizes business ownerships. There's just a lot of things you can do. One way to fund a franchise would be if you have a large brokerage account that's non-retirement, you can always do a margin loan against that.

13:01That's fairly common as well. But I'd say in most cases, people are using SBA loans to fund. They like the idea of leveraging. and that's somewhat independent of the stock market. So broader speaking though, to your question, I believe what we oftentimes see is, you know, people want businesses that are economically resilient, no matter what's going on in the economy. They want recession resistant, understandable cashflow in businesses. This day and age, they want businesses, the AI is not going to take the place of, right? A lot of people are coming to us because AI is taking jobs. They say, I want understandable things, home and property services, health and wellness, categories like seniors, kids, pets, things that people are always going to spend on regardless of the economy.

13:44And in some cases, they're non-sexy businesses. People love those niches. I joke that non-sexy is the new sexy when it comes to business ownership. If you could be the dumpster king and make a million dollars, you're fine going to the cocktail party or the porta potty king, let's say. People love that kind of stuff. Yeah, we love it here too. That's awesome. That long-term mindset is really important. And like you're saying, it's a big commitment. You don't have that liquidity. So I can see how that mindset's even more amplified. What would you say are some of the things that people don't think of when it comes to this type of deal, like either benefits or risks that just aren't immediately obvious to somebody who's not done this before?

14:33Yeah. You know, I think oftentimes people overlook the benefits of franchising that, you know, I rattled off a few earlier, but, you know, having a community of others, you know, business ownership can be lonely, but if you've got a community of other people running the same business, you know, that, that, that really is a neat, oftentimes overlooked area. You know, I mentioned the tax playbook. That's another one. You know, if you have a spouse that's a high wage W-2 and you're a W-2 as well, and it's like, you don't get any tax benefits outside of, you know, maybe your retirement plan. Whereas here, it just opens up so many different things that you can do if you have that business ownership component within your portfolio.

15:10You know, on the flip side, I'd say from a negative standpoint, you know, again, not every franchise is created equal. There are ones out there that don't provide great support. And that's where we come in to try to help. There's a little bit of science, a little bit of art to finding the right franchise. But also, some people will come in with the wrong expectations. They think because it's a franchise, it's going to run itself. end of the day it's a small business you still have to have a good operator in place even if you've got everything else day one you still have to have someone in control uh because your business your competition is not going to be part-time so you don't want to be part-time either you've got to have someone's focused on it yeah makes sense do you have any uh favorite types of franchises that you've seen either because they've done really well or they just have really fascinating business models?

15:59No, it is eye-opening to people when I start rattling off the different types of businesses out there. I mean, I'm just thinking of ones that our clients have gotten into recently. I think of like B2B services, you know, business to business, things like cost mitigation, cost reduction analysts that work with small and medium-sized companies, freight brokerage, you know, in consulting, you know, advertising using screens like TV screens in your oil change lobby or your doctor's lobby, you know, advertising local businesses, things in the senior space, you know, senior, not just in-home senior care, but areas like fitness, you know, where they go around and work with different senior facilities every week on the stretching and the training.

16:44You know, we've had clients get involved with ones that provide wheelchair ramps and stair lifts and retrofitting bathrooms and mobility solutions, allowing people to age in place. I mean, 10 ,000 people turn 65 every day, and that's been happening for many years now. So there's just this huge need in the senior place. Health and wellness, Pilates is projected to grow exponentially over the next couple of years. It's just really on a nice growth curve. So different takes on Pilates, where they differentiate from a club Pilates, let's say. I've had multiple clients get involved in a health and wellness business that provides recovery modalities.

17:20So think sauna, cold plunge, red light, compression therapy, hyperbaric chambers, all under one roof as a membership business. I mentioned kids being an area. It's not just tutoring. It's not just youth sports, but it's things like teen driving school, which is mandated in 36 states. Music lessons. Again, highly fragmented space. You're able to come in with a better approach. And then I'd say there's been no area that's been bigger than home and property services. Everything from junk hauling to pool cleaning to insulation, the flooring, the cabinets, so many different little niches within that space.

18:03And we see a lot of smart money flowing in there. A lot of private equity involved in home services and property services, restoration, stuff like that. It's definitely top of the list. So there's just a ton of options. uh you wrote a book called non-food franchising um can you tell us a little bit about that and what's in the book yeah it came out about three years ago and uh you know packed a ton of content into 90 pages wanted to make it very readable but in the book we get into you know franchise industries i share different case studies of clients of ours uh franchise funding options There are different ways to get involved on that piece.

18:43I share, I've got a chapter on franchising versus startups. What are the trade-offs back and forth? Another chapter on franchising versus entrepreneurship through acquisition. You know, the idea of buying an existing business. What are the trade-offs there? We talk about the FDD and the franchise disclosure document and get into all sorts of detail, but within 90 pages. So we've sold thousands of copies, given away even more. And yeah, it's been fantastic. but we'd love to share a free downloadable copy with all of your listeners. If they come out to our website, FranbridgeConsulting.com, we'll reach out and share links to download the book.

19:18But no, most people will read it by the time we get on the phone. So it's been a great resource to help people fill in the gaps in understanding. That's awesome. And then the name of your firm? FranbridgeConsulting.com, F-R-A-N, bridgeconsulting.com. But yeah, come out to our website and we'll also send a link to my calendar. I'm happy to jump on a call. it's entirely free to work with us, Andrew. We simply get a referral fee from the brands on the back end. None of that's passed on to our clients. So very similar to a real estate model. If you're going to go buy a house, you're probably going to use a real estate agent.

19:50That's the role that we play on the franchise side. And I encourage people to get off the couch. You know, there's no downside to exploring franchises. I mean, there's never a perfect time to get into business ownership, but we've never seen so much interest in franchising just from all walks of life for a variety of reasons. people are saying, hey, I want to be a business owner. I don't have that million dollar idea. Maybe franchising is the right path, at least for this next season, right? Build that platform. It gives you a lot of options of what you can do down the road. So I know it's been encouraging, just we're seeing massive amounts of interest all across the country.

20:24And we've been able to help several hundred people step into business ownership, which we're really proud of. That's really cool. Well, thank you for the time, John, and for sharing all this knowledge. Again, the book is called Non-Food Franchising and the website, FranbridgeConsulting.com. That's going to wrap it up for today. Make sure you guys go out there, invest with a margin of safety, emphasis on the safety. Have a great week and we will talk to you next time.

21:00You've been listening to the Investing for Beginners podcast. All show notes can be found on our website at einvestingforbeginners.com. To master the basics of stocks in seven days, sign up for our free email series at einvestingforbeginners.com slash newsletter. Until next time, have a wonderful day. The information contained is for general information and educational purposes only. It is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional. The hosts may own positions in the securities discussed. Review our full disclaimer at einvestingforbeginners.com.

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