Today's newsletter highlights advice from some successful folks in the franchise industry on "how to get started" with your first location.
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Good Morning Wolf Pack,
Today's newsletter highlights advice from some successful folks in the franchise industry on "how to get started" with your first location. The answers vary quite a bit, and some suggest loans vs raising capital, while others offer a bootstrapped path.
The new year is almost here, and it’s time to get back to the basics.
It’s been a great ride, and I can’t wait to come back with all the franchise fun, business, and insights as usual on January 2nd.
I'll state the obvious - franchise ownership not quite as easy as that pie chart indicates. But it does make a huge difference.
Before picking a brand, there's a lot of other factors that go into buying your first franchise.
I asked 3 folks how they'd recommend getting started today:
Greg Flynn (owner of 2,500+ franchises)
Jamie Weeks (owner of 200+ franchises and CEO of SweatHouz).
JT Singh (home services franchisee and franchisor investor)
Let's dive into their answers for "how to get started in franchise ownership".
Greg Flynn
"If you're really just starting out from scratch, think a good way to do it is to find a franchise that you like, and vet it. And by that I mean the best thing you talk to other franchisees. Franchisees who are in it, and have been in it for awhile. Franchisees are very collaborative. They'll help you out. They'll tell you the truth.
Unless you're somehow gonna compete with them and open a store right next door, then they may try to scare you off. But normally they're super collaborative and we'll tell you what's good and what's bad about it, what surprises they had. what are the biggest challenges, etc. You need to build the first one, operate it, and grow from there. If you can't afford it with your own capital, you have to find a loan. There are lots and lots of banks that lend in the franchise space and for whatever is the gap between the price and your loan.
If you need more, try to raise the money from friends and family and do it in small chunks. What I would suggest you do is say, okay, I'm going to take your money and I'm gonna pay you back when I can with a good return.
But at the end of the day, I want to own this. I don't want to give you ownership of what is gonna become the rest of my career, and I'll give you a good return, but after you get that return, it's mine."
Jamie Weeks
I would go out and raise capital because I'm assuming you don't have the funds (like most) to invest in a franchise yourself. I'd structure it as such:
Raise 500k and sell 25% at a $2mm valuation for maybe the first one. But that initial raise is correlated to 2 things 1) buildout 2) Year 2 revenue
So if you have an OTF and year 2 you have modeled at $1.3mm in revenue and your net income is $400k (30%). Then the investor is making 20% cash on cash. But you’d like to take the cash and start #2. That’s why that 25% works for everyone
Now if you grow to 4 of them, you’re doing $1mm in consolidated Net Income Sell that biz for $6mm and the $500k investor just got $1.5mm in a sale.
The key here is having an option to buy out the $500k investor for $1mm in 24 months.
If I were looking to buy my first franchise with the goal of scaling but had limited capital, I would focus on brands that require low upfront investment, strong unit economics, favorable industry tailwinds, and a proven ability to scale.
This eliminates most brick & mortar concepts because of where interest rates and construction costs are today. You need a brand that can ramp quickly to produce enough cash flow to pay yourself, service your debt (if any) and generate excess capital to reinvest. Then take that excess capital to buy additional licenses and begin expanding. This is how the snowball gets rolling for building wealth.
There are many options that allow you to do this but you will likely land on something in the services space. While brick & mortar concepts have historically been the largest multi-unit franchise empires, you can build yourself a sizeable business with enough cash flow to open many doors down the line.
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That’s it for this edition of The Wolf Report. Feel free to reply with any questions or feedback. Thanks and see you next week!
— The Wolf
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