382: Should You Consider Buying a Franchise?

Buck: Welcome back to the show, everyone. Today, my guest on Wealth Formula podcast, she’s been on before. Her name is Kim Daley. She is a franchise expert business coach and motivational speaker. She’s been doing this for 20 years, helping people realize their dreams of business ownership through franchising, helping thousands of people deliver their dreams of business ownership, including some people who are part of the wealth formula community. Kim, welcome back to Wealth Formula podcast.

Kim: Thank you, Buck. I’m always excited to be your guest.

Buck: Well, that’s very kind of you. You know, I wanted to like, get back to some basics here. You know, I think like one of the tricky things in the economy right now is that there’s, you know, for people who are particularly interested in real estate it or a number of other assets, it’s not necessarily been a great time to buy. So, you know, there’s money. People have got money sitting around and all that and trying to figure out what they want to do with it. So one of the thoughts that I had was, well, you know, certainly investing in yourself is always a possible route. And so I wanted to just kind of reach out and kind of go back through this whole concept of franchising. So where does franchising belong in the whole you know, in the whole sort of a hierarchy or not a hierarchy, but sort of the different choices of when somebody decides or thinks they may want to start a business?

Kim: Yeah. So I love where you started the conversation with the real estate market, where it is right now. So if you are a real estate investor where it belongs, if you’re looking for diversification, right, so a franchise business is going to build you a cash-only asset. It’s going to create tax advantages. Now, unlike a passive syndication, a business is going to require some amount of time, but there’s varying amounts of time depending on what kind of business you invest in.

So in a franchise, unlike entrepreneurship, in a franchise, you can kind of buy down that time factor by buying ready-made tools and by bringing in a general manager as sort of the day-to-day person in the business. And then you can come in as the CEO who works on the business. We call that semi-absentee ownership.

So there’s a class of franchise opportunities that would allow you to be that sort of semi-absentee investor. And then we have some extreme examples which a few wealth formula people are. An extreme example of a trade-off of money for time would be like a laundromat franchise, right where it’s going to be a bigger cash outlay, but a pretty minimal time commitment once it’s open. So that’s kind of a special class of, you know, where you that real big difference between higher investment of money, lower investment of time. So I think it fits in there. And then I also think it fits in to the high w two earners who want to create an exit. Maybe they worry about instability in their career or they just want to create an exit because they don’t want to do what they’re doing forever. But they make a lot of money and maybe you can build a business semi-absentee, create some tax advantage to shelter some of that W-2 income and then eventually be able to exit the W-2 and step into ownership. Although if it’s running through a manager now, you’ve got this going and now you could just scale it from there.

Buck: Yeah. And I think what I was getting back to a little bit was, you know, there’s different ways to get into entrepreneurship, meaning being a business owner. One of them is to start your own business. I’ve done that a few times and it’s not for everybody. They’ve had some failures and had some big wins. But I think there’s you know, there’s a certain level of risk and, you know, things like that that that that it’s hard, I think for some. But not everybody is wired for or maybe they don’t have the time for or whatever. And then there’s the opportunity to just straight out go to like, you know, business, buy whatever one of those brokers that just sells businesses. Right. And then there’s a possibility of starting a franchise. So maybe if you would, would why don’t you give your perspective on those essentially three ways of getting into business ownership?

Kim: Yeah, I love it. And I totally agree with you. Not everybody is cut out to be an entrepreneur. The biggest difference between what I’ll call a franchise-preneur and an entrepreneur. So an entrepreneur is going to have to have an idea and then a lot of money to flush out that idea and to try to get it to where it’s a positively cash-flowing business that’s replicable. And then you can scale. And sometimes that’s about maybe 1 to 3 years if you make it right. The failure rate over there, as you mentioned, is really high. So in a franchise partnership, we’re not figuring anything out. We don’t have to have an idea. We don’t have to spend one, two, three years recreating the wheel. We’re going to pay a franchise fee by instant access to readymade tools to hit the ground running.

And so in those first 1 to 3 years, you not only can move toward profitability, but you can scale to multiple units if that’s your goal, right? So it can drastically reduce the time to get to the wealth creation model and scale to the multiple units. So there’s that. And then if you know, there is the class of like buying an established business for sale. Look, I coach all of my candidates to build a business to sell it. So a franchise is your business to sell at the end. So I want you to think like that. Right? You’re not going to want to do this forever. And if you’re part of a brand that has equity, right? If you’re part of the planet Fitness or you’re part of a massage envy brands that have equity, that’s money, right? So you could put a for multiple five multiple. I mean, I’ve had some friends who’ve cashed over eight multiples, a big franchise brands because of that brand equity. So that’s what we’re building collectively as franchisees in a system. So if you were to go and just purchase a private business for sale, that can be great if it’s a great cash-lying business, but you’re probably going to be paying that multiple. And if it’s a nonfranchise, you could be missing out on a great or multiple that, you know, when you take it and build it to the next level. Not to mention back that when you invest in a franchise, this is all about being in business for yourself, but not by yourself. So entrepreneurship, super lonely like you. You don’t have anybody to go to to vet ideas off of, right? You’re making it up as you go. I’ve done it. You’ve done it. It’s not easy. The easiest people to convince of the value of a franchise are former entrepreneurs. In a franchise, you’re not figuring it all out on your own. You don’t have to worry about making your business relevant or keeping it relevant or changing to a challenging economy. You’re not the one guiding all of that on your own. You’re partnered with people and collectively you’re working together to solve the now problems and the future problems of the business, which I think prevents a lot of people from moving forward in business ownership just because they feel totally inadequate without an MBA or prior business experience to to be able to adapt and be nimble. But in a franchise, all that goes away because you’re buying down that learning curve by partnering yourself with people.

Buck: Mean, I think it’s a reasonable consideration especially, I think, you know, people who start businesses from scratch, from ideas. I think there sometimes I mean, we’re wired differently. I mean, talk to my friend George Newbury about this, you know, is you know, is well known for his HP business and he built multiple businesses from scratch. And it’s funny, if you look back, if you go to Argentina, the airport is the Jorge Newbery Airport. And it’s not him that it’s named after. It’s named after his grandfather, who was like apparently some crazy, you know, was flying like planes and was doing all sorts of things that were highly risky. So it’s like one of these things where, like, you’re just wired to be a renegade a little bit and, you know, you’re, you know.

Kim: The listeners out there. But if they have a spouse, okay, let’s say you’re the man and you’re like, honey, I’m going to go start a business. You know, she’s probably going to be feel a little bit better and a little more apt to say yes if, like if she knows that those startup risks are mitigated by her proven franchise, you know, maybe that doesn’t have any failures or it depends on where.

Buck: You are in your life, too. When I started my first business without franchising, I didn’t really have any responsibilities. So made a difference. Right. So. So now there is some downside. I mean, there is some calculated, you know, upsides and downsides that you look and part of it is that you’re paying for risk mitigation.

Kim: Yep. Right. Yes. You’re paying a franchise fee. Franchise fee royalty, ongoing basis. Yes.

Buck: And so those things will effectively what when you look at those, they’re designed because, you know, you have certain types of operating. You know, you’ve got ways that you operate, you’ve got handbooks, you’ve got support, all those kinds of things. So in your experience or maybe national or both, what is the rate of failure of franchisees?

Kim: Okay. That’s a really good question. So first of all, franchising is regulated by the Federal Trade Commission. So every franchise that you would look at has to disclose their failure rate in what’s called a franchise disclosure document. So these documents are filed annually with the Federal Trade Commission. And then in certain states like California, the states have their own filing process with the state examiners.

So I’m not going to make any like big claim about failure. I’ll say that the companies that I work with have very strong success rates because I don’t work, which is everybody. Like, that’s the whole point of using a consultant is that we I have relationships. I as you said, I have 20 years of experience in franchise consulting and these are I’m extending my knowledge of the industry to my candidates. But then also my relationships. So I don’t play with everybody. I play with the best of the best people. But inside that disclosure document, they would disclose to you their success and or failure rate. But here’s the thing. Like I work with some companies that over a 30-year track record say we have zero failures right here, like zero failures in business ownership. Like, how is that even possible? Well, they’re not allowing franchisees to fail. Okay. So, look, if you’re in a partnership ship, in a franchise and they’re not going to allow you to fail, meaning when they’ve there, your red flags are going to operate like we need help. We need help. And they’re sending the right the lifeboats to you.

Kim: But for whatever reason, you’re not jumping on and turning that boat around. They’re going to ask you to put a for sale sign on your business. They’re going to come to Kim daily and say, we have a resale in Santa Barbara, California. Can you bring us someone, Kim? So they’re going to help bring somebody in to buy you out and help you go away. So, okay, that’s another advantage really to franchising if you’re in if you’re in a culture where the franchisor does manage the sales like that because they want to keep that failure rate very low. Look, the franchise owner knows high failure is going to end, is going to make it really, really hard for people to say yes, right. If they are in the business of growing their brand, using your time and your money, they want to create the optimum environment. But let’s be real business ownership isn’t right for everybody, no matter how carefully vetted franchisees are. Right? Once people show up, it’s how they show up to their dream. Every day like that matters, right? Like when I was a personal trainer in the gym, right? Like I could work in the best gym with the best equipment, had the most up to date science to deliver to you. But I couldn’t make your show up. I couldn’t make you go through the workout really with intensity and putting your heart in your mind and do it right. I couldn’t control what you were eating when I you know, when I wasn’t around. So and it’s those things that ultimate we would influence the outcome of the effectiveness of the workout. Well the same thing is going to be true in owning a franchise. The franchisor is like the personal trainer providing the environment, providing the tools, but they can make you show up to your dreams. They can’t make you have a dream, right? They can’t make you be a boss that people want to work for. They can’t make you deliver exceptional customer service. Believe me, they hope you do. And that’s why it’s a mutual evaluation.

Buck: So it is a question, though, is that you know, we did use a statistic, you know, one in three, though, for startups, right? Or two in three. What’d you say for failures?

Kim: So I’ve heard the statistic in the pure entrepreneurial environment that 90% of businesses will fail before their fifth anniversary.

Buck: I’m just bringing it. Listen, I’m just playing devil’s advocate like, so do you have a comparable statistic for franchises that.

Kim: I mean, I’m going to say mine is the opposite of that. I see franchises that are like 90% or greater, but I don’t I don’t want to mean that as an earnings claim. It’s definitely never my job, not point.

Buck: I’m but I think that if you’re in this business if you’re going down this route, you want to know that those types of statistics. So do you.

Kim: Oh, they’re out there. Yeah.

Buck: Yeah. Okay. Yeah.

Kim: So when you come to me and you’re like, I’m all right, I want to explore franchises, I’m first going to match opportunity to you based on financially what you qualify for, what kind of skills you have, what kind of goals you have. Are you an empire builder? Are you just looking to, like, be, you know, or work with your spouse and have a small team? So all of these characteristics come into play and then I match opportunity to you and then I’m going to let you date the franchise and I’m going to coach your dating process. So it’s in that dating process that the franchisors would disclose to you all this information about their track record and their history and all the finer details that you need to say yes to a business. The specific information comes from the franchise franchisors, not from Kim Dailey. I’m just going to teach you where to find that information.

Buck:

Got it. Got it. Okay. So let’s switch gears a little bit and say, well, gosh, I’m you know, I’m interested. I want to find out about, you know, this kind of thing. You mentioned that you could do this semi-passively versus, you know, I mean, we a lot of people are our group is largely high-paid professionals, you know, who are the reason they’re investing in real estate syndications. And, you know, other things that we do in our investment community is because we don’t have time, because we don’t, you know, we’re not trying to buy jobs. And so for those people is their place in franchising and to what degree?

Kim: Yes, there’s definitely a place. So the vast majority of franchises out there are going to need full-time operators. Right. And even sometimes in a semi-absentee environment, when somebody gets in and really starts doing the due diligence, they’re like, wow, But the top people are the ones that are in it. And sometimes you just feel like you’re leaving too much money on the table because you see the potential of how big you are, how fast you can scale with your leadership driving it. But if you are, you know, a full-time W2 CEO, doctor, dentist, you know, follower about job re I know the kind I’ve met many of you then yeah we have to stay with this select group of businesses that have those characteristic takes typically where they are very small to no teams of people because it’s the human part of it that makes it time-consuming.

So the fewer amount of people you have in the business, the easier it may be. It may also be something like on my podcast, I just released an episode with a franchise owner. He and his wife both have very big full-time jobs and they invested in this mental health clinic. I don’t know if you’ve heard of this, but one of the fastest-growing franchises for 2022 is the first-ever franchise for mental health. Really changing the story and reducing the stigma around, hey, I need help. You know, mental health is a thing and they’re both very full-time W2 employees and they have a clinic clinician who runs their first clinic, and they were when I interviewed them, they were getting ready to open their second one. So you in that case, you have this highly paid professional person who you couldn’t do the job anyway because you’re not a medical you know, you don’t have the medical degree, but so the clinician does and they run the day to day as well as like managing the other therapists who are running your patient base.

And then that frees up you to be more focused on, you know, the strategy. Multi-units, the financials, maybe the marketing and maybe just managing that one manager or maybe a couple of managers. As you scale out. So that could also be a scenario that could work for someone who’s super busy where you just have to have the right key person. And I know people like I don’t know, but now I got to find this person. Well, you don’t have to do it on your own. You’re doing it inside a franchise where there are, you know, there ZipRecruiter or there are specific recruiting tactics that these franchise owners have. If they want you to be semi-absent, I guarantee you they have support to help you find the right team because it’s in their best interest that you have that good GM because that’s the person they’re going to be interacting with on a daily basis, right? So this is where it’s this mutual evaluation and everybody has to feel like it will it’s a win-win for you and for them and them and for you, you know?

Buck: Yeah. Yeah. Do you find that most people end up with franchise businesses within their own town? So, for example, I am in Santa Barbara, California, which is not a huge market. Right? We’re pretty small fact Montecito. So The New York Times article recently, we’re very small is where I live. It’s, you know, like 5000 people here. So when you look at opportunities, when people are looking at opportunities, are they usually looking at opportunities that are really completely local to them?

Kim: It depends. So if you’re a first-time business owner and you have a very busy wife and you’re looking for quality of life, I don’t know that starting a business in another state is like the easiest, fastest way to do that. But if you could do it in your backyard proved proof of concept. And then you want to expand to a market that you like to vacation into and go there as a write off, or if you’ve lived in another market and you have family or friends and again, people that your center of influence that you could hire to be these key people in that market, or if you have the mobility, maybe you’re in like, you know, a farm, a farm, a, you know, rep kind of a business where you have a lot of flexibility, it might not be that important. It really comes down to you like, right now I’m working where I think of this cardiologist I’m working with. And you know, he told me that, you know, he’s in the hospital from 6 a.m. to 10 p.m.. I’m like, I go, No wonder, like, you probably only can marry a nurse because you’re not around anybody else. So he’s like, I’m 40 years old. I’d like to get married. He’s like, I got to create a way out of this, you know? But he makes a lot of money, and so it’s hard to walk away from that.

But so we’re using his early morning hours to figure your path out of that. And so he’s looking at a Salon suite model, which is a shared office space model worth no employees. It’s a fairly big cash outlay business, but it’s, you know, very minimal time commitment once it’s built and has amazing cash on cash returns. So with some nice financing on the construction part of it, you open with tenants. They’re all business owners, so no employees. It’s a beautiful model. I’m one of the top consultants in the country placing people onto that particular franchise. I think, Buck, you and I even talked about it at times in the past, so that would be like a really great option for him. And he’s a big sports guy though. So I do have this little bite size, no brick and mortar.

You need to hire like maybe a post-collegiate for this particular business. It’s in basketball, you know, like someone who played maybe D1 sports or who loves kids, maybe who ran a summer camp, even who loves kids. And then you basically run camps, clinics and academies. And this particular business is in basketball and you rent the spaces so you don’t have any brick-and-mortar. So he loves that because it’s like a really, really small investment. But he, you know, he what he’s kind of like, can I find that key person? And I’m like, you know, stay with the process and understand how the franchiser will help you to find that key person, because it can be a great option and something he would be kind of passionate and super fun to do can be highly scalable, work his way out of so many surgeries right?

Buck: Sure. Sure. What you mentioned capital outlay. Give us a range. Like, you know, when people are coming in the door and typically is there a risk-reward associated with that? In other words, if you’re paying higher amounts of number, a higher amount of capital outlay, is it often the case that there’s a higher potential return or mitigated risk?

Kim: So that’s a great question. So the level of investment going into a franchise box does not correlate to the potential to earn. What it correlates to is the owner’s time commitment from day one. So when you see these lower investments, right, they don’t have the brick-and-mortar location, they don’t have the leverage of staff. What that’s typically implying is that somebody is driving activity, driving a sales process into a market to find customers.

So that’s going to be more time-consuming than plopping down that big laundromat right in the center of town and then letting people come to you. That’s a very minimal time commitment. So money and time are inversely related. The level of investment is not correlated to the potential to earn. Now, in terms of investments, we have investments that are 60, 70, 80,000 all in.

We have franchise investments that are three, four or $5 million all in and millions of shades of gray in between. So when you work with me, one of the first things we do is I explain to you exactly what your money buys in a franchise. So before you ever tell me, well, this is how much I want to put in, I’m going to explain to you what every franchise business costs and why and correlate it to the owner scale time commitment where the business operates from. And I can’t make earnings claims, but I can help people see how some businesses have more of an unlimited feeling of growth in some feel more capped in the return. So once I’ve set it all up, then I’m going to ask you. All right. So now with the facts, you tell me what level of investment are you comfortable with? Because now when you say the number, you know exactly what I hear. So we’ve clearly communicated it. We’ll know visually what it looks like, the time commitment you’re willing to put in the owner that you want to be, and then all of that wrapped in a financial bow. That’s like the first half of one of our most in-depth conversations that I have with people.

Buck: Sure. You talked about tax benefits. Give us some examples of tax benefits people get from from some of the franchises that you’ve been involved with.

Kim: Okay. Well, the same is like in real estate depreciable assets. So if you like, do you know the business pods, the portable on-demand storage? Yeah. So that that particular brand is not. But I do work with the franchised version of pods called units. And so when you look at the storage business, like each of these units, these containers, that’s a depreciable asset.

So this is a great business for someone that has a lot of cash that they want to sink into something wants tax advantage but doesn’t really need cash flow right away. Like you’ve got to get a lot of containers in circulation for this thing to really become the cash cow that it can be. But if you have a lot of cash and you don’t need a lot of income and you need tax break, it’s a great business and then it’s reoccurring revenue because once you get these containers in circulation, you know, the game is just re-renting them and re-renting them and preventing them. So it’s an easier way to enter into the self-storage market without plopping, you know, ten or $12 million into a climate controlled building. It allows you to start a little bit cash less than that. And and you kind of tiptoe in buying like a certain number of containers at a time, getting them in circulation and then buying more.

So that would be one example. An easier example I think would be, you know, something that’s more logistical, like a one 800 got junk or maybe even a pet grooming. I know it seems really simple, but look, a lot of dogs were born in 2020, right? There’s a lot of doodles out there that need grooming and the convenience of having the mobile groomer come in that sprinter van.

So those Mercedes sprinter vans are great taxable, you know, tax deductions. And what I love about a business like that, again, is you’re not plopping down $1,000,000 into the build out and then hoping and praying people come. You’re entering the market with one van and a marketing plan. You get that thing, you know, and a groomer who, you know, loves their job as is not being micromanaged gets to work with the cutest little clients in town and can can literally make good money like groomers. If you’re a good groomer, you can make like six figures. I’ve heard groomers making six figures, so but you can literally scale out of territory where you have ten or 15 vans going out all across and you can really look at the revenue per truck, right? So you’re entering, you know, not exposing yourself with a lot a lot of cash outlay and then you’re just measuring, you know, revenue per truck and you’ve got the tax advantage all along the way. So there’s a whole bunch of different businesses like that. So that gives you some examples of it.

Buck: So see somebody who’s interested now, Kim, what’s the process when they when they contact you? So they listen this podcast, they go to the daily coach dotcom DHL y coach dot com, the daily coach dot com and they say hey Kim Kim at the daily coach dot com. How I heard you on I heard you on well formula with Buck what’s how do I and I contact you and what’s the next step.

Kim: So first of all it’s a free service I don’t work for free. It’s just free for you. It’s free because I get paid like a recruiter by the franchise wars, right? So I’m doing all the lead gen, if you will. If you reverses. I have a business-to-business. Mrs. Right doing all the legend for these lazy franchise whores I’m just getting who don’t want to like, pile through organically. No I mean they pay me to get people, you know, fine financially qualified, motivated people. Make sure your get your expectations in line so you understand the process. Serve them to them, because now you’re a much more qualified candidate for their opportunity. So for you, what I’m doing for you is all of that. I’m getting you financially qualified.

I’m getting your expectations in the right place. We’re going to go through a couple of upfront calls. I’m going to gather some data over a questionnaire. We’re going to get your spouse, if you’re married, engaged, if he or she wants to be a part of this decision-making process because a business, the business doesn’t just impact you. It can impact your whole family. You have teenagers, man. We can we can employ those kids, right? You can also consider the legacy effect of building a business that you leave for your kids. So and then I present companies to you. I always tell my candidates it’s about 1 to 2 months for me to get you comfortable and confident to say yes. That’s financing.

Going through legal review, selecting the right franchise, that’s everything. 1 to 2 months. It’s about 1 to 2 weeks to get you to a no. So you won’t spend a long time here. It’s because I frontload the process. I’ve been doing this for 20 years. I am one of the top consultants in the country. I am blessed to help a lot of people, so I know how to sort of front-load what you need to learn and kind of that learning curve. You need to get up over. So you sort of had this aha moment and go, okay, I get what I’m doing. And if you if it’s not the right timing or it’s not the right investment for you, you’ll take yourself out of the process pretty quickly.

Buck: Got it. And you also have a podcast. Tell us a little bit about that.

Kim: I have a growing YouTube channel which has emerged into a podcast as well. My podcast is called Create Wealth through Franchising, and you can find all of the videos I make at Kim Daily Dot TV, which is on YouTube.

Buck: Create wealth through franchising. I wonder what that’s about anyway.

Kim: Yeah, it’s a pretty basic name, right? It’s very smart. We have the word wealth in there. We wanted franchise exam like, Well, we’re not going to call it what it is creating wealth in franchising.

Buck: All right. Well, Kim, this has been fantastic. And again, in order to get the ball rolling, at least to see if this is a good fit for people

Kim: Yeah. Go and you can go to our website, go to YouTube. All my contact information is everywhere. I do have a contact form on my website which will allow you to tell me a little bit more about yourself. But however you want to find me, if it’s [email protected], do it. I would love to meet you. Everybody I’ve ever met through the Wealth Formula Network has blessed my life. You have some amazing followers and you’re always there. People are always fun to work with.

Buck: Fantastic. Thanks so much for being on Wealth Formula podcast again. Kim.

Kim: Thank you.

Buck: Hey, take care. We’ll see you next time.