Why Franchises Might Be the Best Kept Wealth Building Secret with Alex Smereczniak

23:47And so lenders love it. And the SBA is perfectly designed and built for financing and buying a franchise business. but this is also true on the private equity side when you go to sell buyers typically are paying a half a turn to one and a half x of ebitda greater than an independent business for the same reason because they're easier to roll up it's easier to go buy 20 jimmy johns from three or four different operators than it is 15 sandwich shops that are all independent now i'm trying to put cobble systems together and supply chain and and so private equity also pays a premium or other multi-unit operators pay a premium to buy up a portfolio of franchise businesses versus independent businesses for that reason.

24:25And so some of the ways to finance this is SBA 7A and 504, which is great because 504, I believe, covers your franchise fee as well. So you're not coming out of pocket there. But then there's this really interesting program that I like called a ROBS program. It's a rollover of, or is it rollover as a business startup, I think is what ROBS stands for. But you can effectively take 401k and retirement assets and invest in yourself, tax-free, penalty free before you're 65. Not many people realize you can do this. A lot of people think it's tied up from this last job I had. I can't touch it until I'm 65.

25:02Well, I think the government got this one right. And they said, hey, if we're going to allow you to invest in risky businesses that aren't yours and in stocks and equities, why don't we let you invest in yourself if that's what you decide to do with that retirement money? So Rob's rollovers are good for franchising, SBA, conventional lending. And then of course, raising friends and family and private equity, whether that's institutional private equity or smaller private equity that wants to back a good operator. So in reality, you know, since there is a proven business model already locations in place, it is, you know, probably easier than just, you know, a business startup, you know, I've tried to get business lending before in the past, and I know how difficult it can be in terms of kind of getting some of those structures in place, especially when you're not a proven business.

25:44But in the franchise model, it seems like it is something since there's this proven business model, the franchises probably can help you, you know, kind of get some of that financing as well, it can be, you know, a much easier path and process, as long as you have, obviously, all the credentials in place that you need in order to get approved for that financing. So I think that's wonderful. And I think that's a huge pro when it comes to franchising is looking at, OK, well, how easy would this be to start if I don't have, you know, a massive amount of capital? Then maybe this is something where I could finance a portion of this and have the ability to open this up, allow the business to pay down that financing.

26:16and I have this asset in place that is now producing, you know, cash at some point in time, if I'm operating this correctly. So I think that's wonderful and a great thing to look into for a lot of folks listening as well. So let's say we, you know, someone sold, they want, they have, you know, let's say they have a few hundred thousand dollars liquid. They want to get into franchising and they're, they're interested in kind of doing something like this, but their, their bigger question is, okay, well, how involved do I have to be? And I'm sure it depends on based on the franchise again. But are there franchises that you've seen out there where it's like you've mentioned, you know, the one where you put the signs in the yard and things like that?

26:50Are there franchises like that where you can be a little more hands off? And then are there franchises where you really have to be in the nitty gritty? Absolutely. This is where we at Franzy really get into fit. And it's in four buckets. It's what are you good at operationally? Are you good at sales? Are you good at managing a team of people? Are you ex-military? Okay, what's your fit there? What's your risk tolerance? Are you wanting to work at Chick-fil-A where it's essentially you're buying a job or do you want to be at an early stage franchise or we have way more say and input on the systems they build third is you know what is your goals and what are your interests and hobbies and so does this align with those and then the last one is what can you financially afford and so when you ask about are there more passive ones first we look at fit and then two if it is hey i'm going to try to keep my full-time job we typically strongly advise against that because every business for the most part at least in the first 12 months is going to be work you are an entrepreneur, a business owner at this point.

27:41But if I had to pick a few that are more passive or more semi-absentee, things like golf simulators, very popular right now. It's more of a real estate play in many ways, but you open these 24-7 simulators. They're key fob access, kind of like an anytime fitness, no employees, and they can produce 120 to 180K in cashflow per year, per location. And that's pretty good. If you get three, four, five of those especially open, not a bad gig and same thing with some of these services-based businesses where you don't have to open a restaurant with 30 to 50 part-time employees and multiple millions of dollars into it you can go do garage renovations that the average unit volume in garage kings as a brand is over a million in revenue two or three technicians and it's mostly sales so can you do sales you know part of the day while you're doing your day job and then manage a crew of one or two people that are putting epoxy on garage floors and hanging custom shelving and you know you can do a million dollars in revenue and pretty high margin business so there are things that are more passive out there i just can't stress enough that the first six to 12 months you really need to learn the business and follow kind of this playbook that we talk about which is i do it you know you as the operator at first for a number of you know of months then it's we do it or i'm doing it with a manager or a gm and they're starting to get familiar in how i do it and then it's they do it i have enough units open now that i can hire you know management layer to run this business for me while I'm at the beach, but I'm still printing cash.

29:07But there's an evolution. That makes sense. And I think that's where a lot of people got to figure out. That's where the value with you all come in because people have to figure out how much time they have available and how much time they want to be spending on this. And again, for the first 12 months, like Alex is saying, you're going to have to spend some time in here. You're going to have to spend some time in the weeds. And it may be even longer than that. You may have to have a little cushion. Maybe it's 18 months. Maybe it's 24 months. But if you want to be a little more hands-off or you want this to be something where it's mailbox money, it's probably not that.

29:34But it is something that can produce a tremendous amount of wealth, which we'll talk about as time goes on, if you operate this correctly and if you choose the right franchise and kind of go through this process, which is why I think this is such an important conversation. So a lot of people that I know, this is the misconception maybe that I've had for a long time, is a lot of people that I know that do really well with franchises, they own multiple locations of those franchises. Like when they are really making millions of dollars every single year, the ones that I have talked to own just tons of different locations.

30:02I remember thinking back the first time I kind of, you know, came across this. I think it was Peyton Manning owned like 21 locations of Papa John's. I've seen like athletes. So like Shaq, I've seen owns, you know, just all these different locations of different things that are available to them. But how important is that to own multiple locations if you really want to scale this or really want to produce a high amount of income? Or does it depend on the industry? Is that more so for something like a brick and mortar location? Whereas, like you're saying, if you want to own, you know, a specific area of a location that, you know, renovates garages, then maybe you can just have one or two territories and you'd be a-okay there.

30:37How important is that to scale and have multiple locations? Yeah, if you're an empire builder, you have to do it through multiple locations and honestly, multiple brands as well. Whether it's the same category or not, a lot of the most successful from a financial perspective, people that I know, wealthiest, it's because they're mumbos. multi-unit, multi-brand operators. And they own 70 units. But you do the math on this, that's$200 million to$300 million a year in revenue that that portfolio does. Where else can you go and do that in a seven-year period? One of the guys that I know very well, and there's a number of stories just like his, started franchising or getting into franchising as a franchisee seven years ago.

31:18He was an investment banker prior. So he's good at putting deals together and he's good at raising capital and he used that skill to go buy up to orange theories to start did really well then he bought a few more then he got into food and now he's up to about 90 to 110 units across dave's hot chicken pop-up bagels marco's pizza restore hyper wellness so not just food and his portfolio you know three to four hundred million dollars a year in revenue in a seven-year period and so if that's your goal franchising provides this i don't want to say easy but again, kind of straightforward de-risk path again of can I go raise capital, allocate it to the right brands?

31:55And then it's really putting an operating layer in place. I mean, he has 3 ,000 employees at that scale and that's what he's good at. He's good at operating. And so for him, yeah, he had to do multiple, but then you have the folks that are, I'm not fulfilled working for the man. I'm not motivated in what I do in my day to day. And I just, I want to just replace my income. And that might be half a million dollars a year. That might be 300K a year. That might be 100K a year. And there's answers and franchising to every single one of those. To get to 500K, it could be one really good concept. Pop-up bagels, 25 % margins on a$3 million average unit volume store, you're already there.

32:29Same with a McDonald's, same with a Chick-fil-A. You could do it with one location. Those are higher investments. And so if it was a services business, you'd need two or three territories to your point. And then if it's the 100K income that you're trying to replace, there's tons of businesses that kick off 100 to 200K in cash a year that at least it's yours now. And yeah, you might be working more, especially in the first year or two, but it's yours and it's your family's and it's an asset versus a job that you're renting cashflow from essentially. And I just can't put money on that, at least for me.

33:02I know everyone's a little bit different, but you've tasted it and you felt it and you live it. It's just doing something for yourself that's yours with your work behind it. The success and the failure tying back to you is just one of the most rewarding, fulfilling feelings that I've ever felt. There's nothing better than that. And I think that's why this is such a powerful methodology for people. Because if you have no background in doing something like this, then you can look into franchises. And this gives you that opportunity. It gives you the opportunity to be able to be a business owner with a system behind you so that you can do this.

33:35Now, what I love about your example of the guy who kind of scaled this up with multiple brands over the last seven years is this is just like an investment portfolio. A lot of our listeners understand an investment portfolio, but you're kind of diversifying those assets and you have the ability like, hey, if one, you know, industry is struggling, let's say, for example, there's a recession and people just start to spend less at Orange Theory or they just start to cut back on some of those things that then maybe are not pure necessities, but you own something else like, I don't know, a grocery store chain or something else that is, you know, it makes a lot of sense in terms of, you know, it's a recession proof business.

34:08Well, then all of a sudden you've got this, you know, diversified portfolio that's not going to sink you based on some of that stuff as well. So there's some cool stuff that I think even a lot of folks out there when you diversify helps you when it comes to some of these industries. So I think that's awesome. And where does real estate come in? Like where does real estate come into play when it comes to, you know, how you find these locations, you know, how do the leases work? And then if you do like I know some some locations, for example, like I know McDonald's is famous for owning the real estate for a lot of their locations that they they are in currently.

34:37And they're like, I think one of the largest real estate owners in the entire world now. How does that come into play when it comes to finding these locations? And do they help you when it comes to getting those leases? Do you put personal guarantees on those leases? How does that stuff work? Yep. So I think similar to whether it was an independent business or a franchise, if you have enough capital or you can raise it from investors that like real estate, many franchises are phenomenal tenants, right? Because of all the reasons we mentioned, they're de-risked. It's not like it's Andrew and Alex is taking a first crack at a coffee shop.

35:09It's like, no, it's Dunkin' Donuts. So they're probably not going anywhere. They have a brand, Starbucks, same thing. And so if you can own the real estate while being the tenant yourself, and you're getting to kind of double dip, it is a fantastic strategy to scale your wealth, diversify your wealth. And I know a number of franchisees who, when they were in their younger years, they loved the operating and managing employees and scaling and empire building. But then they got to a stage in life where they're like, I just want to collect checks and not deal with any labor at all, really. And so they sold the operating, you know, the franchise rights that they had and the franchise businesses that they owned.

35:44The example I have is this guy who owned 30 Burger Kings. He's as of last year, and he's in his 60s, late 60s now. He's done with all the operating businesses, but he owned like 30 or 40 of the underlying pieces of land in the building. and so now he just i mean he makes a ton of money just collecting checks from the old operating businesses that he used to own and that's a strategy i see a number of people do where early on they're making money both ways the value of the real estate's appreciating and the business is healthy and the brand that they picked was right and then they sell you know that portfolio make some money there and then continue to make cash flow on it on a monthly basis in the form of rent and so that's one of you know many strategies i see other people um you know they'll pay higher than normal rent.

36:30Some of this you have to be careful on because the franchisor is maybe not thrilled about this because they have financials that they have to disclose publicly in that FDD again. But they could pay themselves higher than normal rent so that when they go to the bank, they can say, look at this tenant that pays this amazing rent. And then they can borrow more money against that asset to go buy more buildings. And I've seen some people do that where they're the tenant and the landlord. Franchising, there's a little bit more oversight and rules there than if you were doing that independently as just a solo operator or independent business owner.

37:03Now you're firing me up with the guy with the Burger Kings because thinking, okay, you have this business and this real estate portfolio and all of a sudden you could sell that underlying business and then still collect off the real estate portfolio. It just sounds like an amazing move, an amazing career over that timeframe. So I love these examples. These are so fun. And I think this is showing what the opportunity is when it comes to franchising is figuring out a plan and kind of, you know, coming up with what's going to work best for you, which is what you guys help with as well, which I think is really cool.

37:28And this is something that I think is a powerful thing that people should be at least considering or thinking about when they are looking into, you know, starting a business or getting into entrepreneurship. And what categories are you most excited about right now? You mentioned, you know, one thing that you just mentioned recently was, you know, talking through, you know, the indoor golf simulators, for example. I know we've talk about indoor golf simulators. We do this series on the show called Side Hustles that can turn into full-time businesses. And it's one of those things that we're trying to say, hey, if you're going to start a side hustle, we want you to start something that can turn into a full-time business.

38:01Well, we mentioned starting something similar to that where it was an indoor golf simulator. And I've never gotten more emails in my entire life about a business than that one specifically. I think it's a lot of people were pretty interested in that. But what are some of the franchises or I guess the categories that you think are high opportunities these right now? Not that I'm looking for trends, but I'm looking for macro things that are going to exist for at least a five to 10 year period. Because when you sign a franchise agreement, you're signing up for a 10 year commitment. And so I'm always like, all right, a lot of things are cyclical in life.

38:30Things that were not popular 10 years ago became popular now, but they were popular 30 years ago and they go through these cycles. And so one for me right now is the aging, you know, baby boomer population. There are 10 ,000 people a day turning 65, you know, or older. And And so there's just such a huge supply of people wanting in-home care or better quality assisted living care. And there's just not enough supply for it. There's demand coming online every day. And there's just not enough supply for it. We've done a few kind of field cases where we call acting as a child of an aging parent saying that, hey, we're looking for X, Y, and Z.

39:09And all of them have wait lists beyond 10, 11, 12 months. And so there's clearly demand. There's not enough supply. and there's tons of home care franchise opportunities to get into one of them is first day home care it's 143 to 250k to get started and the top franchisee there is doing 12 million dollars a year in revenue and so it's very low cost to start you're now you know a staffing agency essentially is the underlying business model because you're training you know care providers but i wouldn't have necessarily thought of getting into that and you know serving that demographic and then same with some of these other kind of unsexy things like auto you know repair and transmission there's one called mr transmission it's like a you know a mine a kia mako it's less than 341k to get into but the average location is doing just under a million in revenue with with pretty high margins about 47 and so again these kind of unsexy things that you might not think of ever i would never think about owning an auto body shop but again i don't need to be the one in there changing oil and rotating tires.

40:13I need to be the business mind behind it, putting the deal together, building a management layer, staffing it, and then acquiring customers. But the day-to-day itself is, and in any of these businesses, you know, is up to the team that you build, not you as necessarily the business owner or the operator. I can tell you what I, my first, when I worked in the corporate world, I worked for the largest in-home healthcare company in the country or one of them. And I can tell you how profitable those are. That is a great I didn't know they had franchises for those. I think that's absolutely fantastic is having the ability to kind of look at some of that stuff like you're talking about here and seeing, hey, even some of these these businesses that are out there that are, you know, just serving people and they're going to be recession proof.

40:53People always need health care. They are always going to need their car fixed. They're always going to need these things that are in place, I think, is a really, really important metric to look at long term. And one big thing I know a lot of people talk about now is home services. And that's a big thing that, you know, it's trendy for people to talk about, like, you know, starting up a home services business, but things like HVAC or plumbing or roofing, you know, garage doors, anything like that, I think is, is some of those boring based businesses. Are there a lot of those out there when you, when it comes to franchising that you can look into?

41:20Cause I know we get those questions all the time on those types of businesses. There are tons, and this is what shocked me again. So like Benjamin Franklin plumbing is a well-known, you know, plumbing brand. It's a franchise, same with Roto-Rooter and Mr. Sparky and a lot of these brands that we actually might have used or have seen regionally or nationally you think oh that's like a local regional business or that's a you know mom and pop and the reality is is it is a mom and pop but they're a franchisee of a larger system and brand and when we talk about again purchasing power imagine how much these franchisors and these larger chains the advantage they get at buying all the parts and materials at nationwide bulk versus again you and i buying you know pipes and different things that we're up to use.

42:06So like doing this alone, you can get beat up on price by some of these, but you're still as a franchisee, even though you're paying a royalty, you're, you should be more than making up for that royalty in the form of cost savings everywhere else that makes you more profitable in the long run. That's a great metric to look at too. I didn't even think of that was, is looking at, you know, you know, how much can you save on, on some of the supplies that you have to utilize? I think that's a really, really good metric to look at. When you start to think about that, how important is recession resistance?

42:32You know, I kind of mentioned that would be one of my big worries as a franchise. If I'm looking into something like a location, for example, like a giant location that's like my kids go to trampoline parks all the time. So if I'm looking at a trampoline park, my worry would be, hey, there's a recession and people are like 2008, 2009, and people are cutting back on some of the excess that they have in place. Would that be something they would cut out? And or, you know, I'm just trying to think of other things that that could be, you know, something that that could cause to be cut out during recession.

43:02Is that something that you look into when you are evaluating franchises? Yeah, absolutely. And whether, again, franchise or independent, you're doing you're listening to this episode, you're doing ETA or entrepreneurship through acquisition. You've got to look at macro trends. Again, franchising is just a business model that serves many, many industries and many, many different types of businesses. And so I challenge people as you're thinking about the next five to 10 years, is this going away? What happens if there's a recession? What happens if oil and some of the friction in the Middle East continues?

43:33What kind of downstream impacts are going to happen to you? Because those are things that you can control in the decision-making and diligence process as you're thinking through it. But once you're in it, you're not changing the price of oil. You're not changing some of these macro things. And so you need to be thoughtful up front because that part you can control if you decide to invest in this or build this business or buy this business or franchise this business or not, you really need to be thinking five to 10 years out. And in your models, if you're building sensitivity or your different scenario analysis, what happens if there's a recession?

44:05Are bagels going to stay around and people are going to buy them? Are they going to make them at home or not eat them anymore? Are they going to go to trampoline parks or not? What are these things that stay versus not? And if you're going to bet on something that's a little bit riskier, you better be sure the good years are really good so that you can weather the storm through the bad, you know, one or two years. And that over the 10 year period, it kind of averages out to where you wanted to be on that investment and that use of your time and capital. I love that. And I think that's, that's where a lot of people just need to make sure that they're, you know, evaluating that and evaluating that long-term, like you're saying, you know, the next five to 10 years, where is this going to be?

44:41And what is this going to look like in all different market cycles? How would that, how would this kind of weather those storms? If you had, let's say, for example, let's play a game. Let's say you had$250 ,000 ready to go and you had$250 ,000 liquid. Maybe you grab some financing if you wanted to. What franchises would you be the most bullish on? What would be the ones that you would kind of look at or start to target currently? Because you have all these, this data that you look at, all these different franchises out there. Are there any that you absolutely love? Yeah. So there's a few categories and even brands within those categories.

45:10So I, and again, some of this is biased because I'm actually doing these, but like the golf simulators I really like because the investment was, you know, it's 300K to 450K to build one, but I can, I know I can go get financing. So I can get a couple of these open, but they're very hands-off compared to other options. And I running a startup and tech, tech startup cannot be in the day-to-day as much as I would need to be in a different type of business, but they kick off a hundred to 160 K in cash. And so we have the rights to five of those in Minnesota and the Midwest area. And I have a partner there as well.

45:41So that helps. I couldn't do this alone. I need an operating partner and someone that can be more hands-on. So I love golf simulators um i love there's a brand right now called pop-up bagels um it is a very hot brand they have very high average unit volumes and revenue and very high margins as well um whereas most food you're spending two three million to get open and they have 10 to 15 margins whereas this one the build outs 400k to 650k same type of revenue as a large format qsr but a fraction of the fixed costs and margins that are two to three times higher than your typical Kiosar. So I really like that brand.

46:20And then some of the home services brands that I mentioned, they're way less to get into. You can service a huge territory. So the garage renovation business I looked at personally, Garage Kings, over a million in revenue, high margin, 45 to 55 % margin, but a couple hundred K all in to get started because it's a little bit of equipment and a little bit of materials, but the rest is up to you. And I like businesses that I'm in control of and it's not, oh, build a retail location and I hope that I pick the right site. I like businesses I can be very flexible and mobile on. And a lot of these home services brands give you that kind of lateral movement and leeway to do so.

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50:13I like that, your thought process on that. Because even like some of the biggest brands out there that you think would never fail. For example, there is a Chick-fil-A that just opened right next to where I live. And I was talking to the owner the other day. I was in there kind of just having a conversation with him. And he said, you know, it had the smallest line I've ever seen in a Chick-fil-A. Like usually when you drive by a Chick-fil-A, you can see the line, you know, going out the door and onto the road even sometimes. But this one, like never had anybody in the drive-thru. And I was talking to him.

50:39I was like, how are you guys doing? He goes, I don't know if we're going to make it. I think we just chose the wrong location and we're in the wrong spot right now. And he seriously was concerned about not making it at a Chick-fil-A, which I just could blows my mind. I never thought that would ever happen. But it was one of those things where like, hey, it reminded me, OK, well, if you have a site or a location, you got to make sure that you are careful about that. And so I love that, that you mentioned that because, you know, some of these service based businesses, you don't have to worry about that as much, you got to worry more about the equipment and managing the employees and the staff and all that kind of stuff.

51:08So really, really important to have that in place. And then having a sales process that helps you kind of get there to win. So I think that's a that's a really important thing just to note. So are there any trendy franchises out there right now that you think are overhyped or any industries that you feel as though or just, you know, overhyped for a lot of people out there or can you kind of do well with any of these businesses yeah i think not that you can do well with any of these businesses but i think the right person in the right franchise is a great outcome i think you could take the wrong person but the right the absolute right franchise the trendy thing the hot thing i think that's working and has staying power and it still be the wrong franchise because it was the wrong person in that business and so all that aside if i'm just looking at trends like the the you know the flavored drink trend right now like swig and some of these where it's you know these sugary drinks and you know it's the margins are great on these products because it's just syrup and water right and so like very profitable businesses but it feels like crumble cookies you know a little bit where crumbles did it had this meteoric rise and you know great economics people are making a ton of money but they're kind of falling off of a cliff now because people are getting healthier and they don't want to eat a cookie that has 1200 calories in one cookie and i think the same is going to be true for these like kind of energy drinks sweet drinks uh seven brew coffee same thing i've talked to you know some of their team and they only let people in as franchisees now if they're willing to develop 60 locations or more and so they're just at this scale where i'm like do you need thousands of these built everywhere and i know you know we have a big coffee coffee culture and um i just I don't know that the sweet drinks I question is like another trend and I don't know how long it can be here to stay.

52:53I think you're spot on that. There's been two swigs that have been opened close to me within like, uh, I would say they're like five miles apart. And, um, it's just interesting how fast that brand is growing. So yeah, the same thing with the crumble, people are getting healthier. And I think that's a, that's a great thing to, to, to think through as well. Cause some, some of those seem like they're great at the time, but then you got to think again, 10 years out, what, what does that look like? You know, in the next 10 years, that's really important. If someone's looking to start enfranchising and they want to build generational wealth, and maybe it's this is, you know, a lot of our listeners are planning long term, they're long term investors.

53:25And so they're interested in things like that and kind of thinking through what is my long term plan when it comes to this? If you were to to look at this or think about this to build out a franchise portfolio over the next 10, maybe 20 years, how would you do that? Let's say, you know, you start with one location in one industry, how would you kind of build that over the course of the next 10 to 20 years? Would it be kind of, hey, let's start to operate, you know, some of these franchises in the first couple of years in one industry and expand to other ones? Or how would you think about that?

53:55Yeah. So similar to the story I mentioned of the guy who went from zero to 90 in seven years, he started as an independent owner of a butcher shop. And then it was a, you know, Orange Theory, it was a fitness concept. And then it was food. And now he has Restore Hyper wellness as well and then he has uh it's a vr kind of gaming concept for like kids birthday parties and stuff like that so very different businesses right the core of what he does is food but the the theme there and what i want to draw on is he just got in the game and so what i really encourage people to do is the first one it's really about is it something that you're going to be good at fit wise so that you don't quit too early because once you're out of the game it's over right like you're not you're not getting back in or i mean you could but like you're out you've given up you need to stay in it um and i think you have a higher chance of staying if it's something that you're aligned with that you're good at that you're starting to make some money at but it doesn't need to be the 10 out of 10 perfect thing just get in because once you're in and this is the unlock you start seeing deals from other franchisees hey what if we bought this together you start meeting people and you become partners with them and maybe you don't own 100 percent of the second or the third one but you have a partner now and you're starting to own 60 50 40 percent of 10 locations 12 locations and those are kicking off cash and now you're buying more on your own again and you're starting to diversify your portfolio but the main thing i've noticed is it's kind of a good old boys club or a good old you know girls club and franchisees share deals and tips and tricks and things with each other and you just you need to be in the game i think to start building that you know generational wealth portfolio and so my advice is don't wait don't overthink find the right fit you know that's 80 of the way there get in operate for a few years, learn the hard way, and now start adding more from all those lessons you've learned.

55:39You might learn different segments are better for you, different brands, different type of financing structures are better for you. You find partners, you find operating partners, and that's all a result of you being in the arena. It's not going to happen behind a computer or sitting on the sideline or talking to your friend at the bar about maybe doing it someday. You have to get out and take action, even if it's not perfect action. When people structure this way with operating partners when it comes to franchises? Does the operating partner, is that one of those things where, hey, you got to go through this process as both of you are going through that process?

56:10And how do they kind of structure those deals? Does the operating partner have a certain percentage while the person who's putting up maybe the capital has another percentage? Or how do you think about those a lot of times? Yeah. So depending on the caliber of experience, if it's a person who's been a GM at a couple of restaurants and they've never had equity, it's ideal to keep that person under 10 % for a number of reasons. That's the threshold where lenders start to ask for a lot more from that other person, the franchisor asks for a lot more from that person. It just overcomplicates things administratively and otherwise.

56:38You could do phantom equity or something else if you really want that person to have upside beyond the 10%. But in many cases, 10 % of the system is wildly valuable, especially if they're getting a salary on top of it. It's valuable to you as the capital partner because now you aren't in the day-to-day weeds as much. And that's kind of a shortcut to that step of I do it, we do it, they do it. You're getting we do it out of the gate versus I do it because you have capital that allows you to shortcut the I do it stage a little bit. But my advice is you should still learn kind of the core day-to-day of this business in the event that operating partner doesn't work out in the event you need to know which questions to ask and how to work with and coach and in some ways manage that partner a bit.

57:16And so I try not to shortcut the I do it too much because you really got to know the business from the ground up, I think, especially if you're in a scale portfolio of similar locations. But my advice is keep it under 10%. There's tons of amazing operators out there that would love the opportunity to have some equity because they've never had it before. And it doesn't, in the grand scheme of things, I don't think it costs you all that much. And for that peace of mind and freedom of time and choice, again, I can't put a price on it. That peace of mind is definitely worth 10%. I mean, that's just, for sure.

57:47I think that's a big thing. So I think that's wonderful to know. And then for people out there who want to build these up and they want to build out these businesses is maybe a portfolio, but they want to also have the ability to have the option to hand it down to their kids if their kids want to operate this or run this. How does that work? And do, you know, are some of the franchises weary of having, you know, kids kind of take over? Or is this something where you can kind of do what you want once you've been operating for a certain period of time? So this is where the things are a little ironic.

58:16So if you think about a franchisor and how they make money, you know, franchise fees up front one time, ongoing royalties, as long as that business is producing revenue every month and they're getting a royalty off of that revenue that's being produced. And ideally it's growing and not shrinking. Not that they don't care who the operator is, but they kind of don't care who the operator is. So actually whenever there's a transfer or someone going to sell, it's a bit of a headache because they're like, okay, Andrew's selling to Alex. I hope Alex is a good operator. What's his background? We have to kind of re-vet Alex, but they're not getting anything net new different.

58:48They're going to keep getting the royalties on the business that I'm buying from Andrew. And now they have to train me. And so they'll charge like a transfer fee. It's much less than the initial franchise fee. Let's say the initial franchise fee is 50 grand. They might have a 20K transfer fee that they basically break even on to train me and get me up to speed. And so it's kind of a headache sometimes, but now if Andrew's kids who have kind of been involved in running the business before, and they've been around the scene and they've maybe managed shifts before as a franchisor, like, okay, great.

59:16It's staying in the same family. That probably means Andrew's going to be a little bit involved in the background still. So we kind of get this like earn out for free a little bit where Andrew's staying involved because he wants his kids to be successful and his kids have been around it already they're still probably going to charge you technically the transfer fee um they might waive it in that case but the thing about people's incentives is what i usually challenge people on and the franchisor in a perfect world andrew just ran it you know for 50 years because they don't hear from you ever and that you other than the royalty that you're paying every month and makes their business more operationally is simple that makes sense and i think that's probably where you just plan for that.

59:51You kind of have that thought process there where it's going to be, you know, potentially have the fee, but it's partially just a break even on their end and it's just having that available. So I love that. I think that's great. And so this has been wonderful. I think this fires me up every time I start to think about this again. And I think this is one of those things where I think a lot of people are going to get some great nuggets out of this, Alex. So if people want to find out more about you or they want to find out more about Franzi or anything else that you're doing, where can they go and find out more about you?

1:00:17Yep. So on all socials, I'm Alex from Franzi. So Instagram, TikTok, X, threads, you name it. We have a podcast called The Exit Plan where we interview folks that have left corporate to go start businesses, franchise or not, as well as folks that have scaled large franchise systems and then exited and sold, whether it was to private equity or other operators and how they did it. So The Exit Plan is that. And then on LinkedIn, just my name, Alex Smurznak. We do a lot of content around educating people on business ownership, buying, how you finance it, and how you scale it. Awesome. Well, we will link all of those down below in the show notes for you guys to check out.

1:00:54Alex, thank you so much again. This has been wonderful. Thanks for having me. It was truly an amazing experience and appreciate the opportunity to come on and share all things franchising.