381: Building Success Through Franchising with The Nation’s #1 Franchise Broker, Jon Ostenson

Show Notes

Like many people, Jon was a wanna be entrepreneur for many years. he spent many years in the corporate world, but had the itch to do something a little more entrepreneurial. He stumbled into franchising.  He was working for a large Fortune 1000 company and had the golden handcuffs, stock options, all that, but decided to step away and take a lower salary to step in with Shelf Genie.

They became an Inc 500 franchise. It was an eye-opening experience to the power of franchising. Jon saw how people from all different walks of life and backgrounds could step into business ownership with a great support system. And he saw their successes.  He ended up partnering with the founder. Then invested in franchises himself.   Four years ago, he started on the consulting side and that has grown tremendously.

What are the reasons that it makes sense to go with a franchise versus doing something yourself or building a business outside of a franchise?

Franchising's not right for everyone. For the vast majority, it makes sense to step into a proven system with support to help you succeed.

With franchising, on day one, you're starting on third base. You've got a playbook that you know, it's been proven out in other markets. It's all about executing against that.

You are given the best practices to follow from day one and don’t have to figure them out.  That is huge benefit vs. building it all from scratch.

You also get the economies of scale of being a franchise owner with other owners to take advantage of buying power, etc.

Franchises also trade a multiple about one and a half times to non-franchise s. So there's a lot of value when you go to resell it assuming, you know you've been part of the good franchise system and

Like any industry, not every franchise system is created equal, and that's where Jon comes in to help clients navigate things.

How does someone evaluate a franchise? How can they know that they found the right one for them?

It can certainly be daunting.

There are roughly 4,000 franchise brands in the US alone.

Jon focuses on “non-food » franchising.

You want to look at the financial models and the competitive advantages of the business.

You want to look at what current owners in their system are saying about their experience.

You also want to take a strong look at the leadership team and you want to see a good blend of both, industry experience plus franchise experience represented with their track records.

What are some of the areas that people need to make sure they evaluate thoroughly in the Franchise agreements?

From a legal standpoint, there can be landmines those things, right?

Every franchise system is regulated by the Federal Trade Commission. They're required to have an FDD or franchise disclosure document. It's a document that contains about 23 different categories.

In the FDD, you want to look at Item 7 and item 19. Both of those probably get the most focus.

Item 7 is you're all in investment. They break everything out so you know the full all in cost.

Item 19 is financial representation that they make based on historical results.

The FDD can be intimidating, but it covers all the legal ground to ensure the franchisor is representing correctly and the franchisee has all the details.

Are there any red flag areas to look out for?

Jon works with a number of franchise attorneys that they always refer to our clients.

You want legal to go through everything thoroughly, especially the FDD to compare it to all the others they refer.

Make sure you thoroughly understand your royalty.

Royalties can be six to eight percent of revenue range that you pay back to the franchise and that should be built into the financials.

You also want to understand post royalty margins.

You talk a lot about non-food franchising.  Why are you such a big proponent of them?

Jon has found there are easier ways to make money and better margins.

The general theme with non-food that they are businesses that will do well regardless of the economy.

People always spend on their kids,  pets, aging parents, to some degree their home, their health and so on.

Jon likes home and property services. It’s a huge category, everything from insulation to dumpsters, to gutters, to floor coating.

There are a lot of great niches in non-food.

Talk about what people should look for in the training from a franchise…

Throughout the exploration process, you get exposed to what the training entails.

There should be no surprises.

You're able to visit the home office before you make that purchase.

You're able to talk to other owners to hear about their experience. You can ask them about their training and were there any support gaps and they can talk about their financial ramp up and what that looked like.

During the evaluation process your goal is to get you as much information as possible, so you are eyes wide open when you step in because that's definitely part of the value add.

Is absentee ownership actually possible? And if so, can you give some examples of franchises?

Part-time is probably more realistic.

There are really three different ownership styles. One would be the owner operator where they step in and they run the business and that's their job. About a third of franchisees go down that path. Typically their goal is to replace themselves in the future and then move on to the next thing.

The second would be the semi-passive or semi-absentee.  About 80% of the franchises Jon works with allow for this model. And that's where you put a manager in place day one

Third would be the third style would be the investor model or passive model.  This is very rare in franchising. Jon can think of five or six companies today that do it.

If somebody works with you, then how does it work?

Jon’s clients never pay him anything.

It's a beautiful model. It's very much like a real estate model where the franchises pay Jon when a franchise is bought.

John works with over 600 of the top opportunities out there

Jon talks about why real estate investors are a great fit for franchising….

You mentioned earlier, one of the franchises that you own in that orthopedic space. What are the other ones that you own and that you have today?

Jon owns multi-location driveway company in Atlanta.

He has an interest in a pool cleaning business in Atlanta.

He has one in Minneapolis that he’s an investor in that does parking lot paving.

What would you say are two to three of the best lessons that you've learned on how to succeed as an entrepreneur?

It's having a plan, being okay with going outside the plan, but trying to stick to it as long as you can and make iterations.

Jon believes in surrounding yourself with people that are smarter than you are.

Activity breeds activity. Get off the couch, get going in one direction, don't overanalyze, do enough analysis, but get moving - that's when good things happen.

Jon talks about some mistakes made and lessons learned.

Are there any other things surrounding franchising or you know buying even selling franchises that people should understand or know?

The funding side.  Most franchises cost int the $150k to 400k range

Quite a few clients use maybe 50,000 in cash plus an SBA loan, that's very, very common.

Some use a retirement plan, rolling it over through what's called the Rob's program.

And some are using other means like a HELOC or a margin loan.