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345: Should You Consider Buying Franchises in this Economy?

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Buck: Welcome back to the show everyone today. My guest on Wealth Formula Podcast is no stranger to wealth formula nation. She’s been on the show a few times before. Her name is Kim Daly and she spent 20 years helping people achieve financial freedom through various franchise opportunities. She has a tremendous skill set matching clients, backgrounds, interests, skills and finances and life goals. The ideal opportunity. And that’s made her one of the top franchise consultants in the country. Welcome back, Kim.

Kim: Thank you so much. It’s such a pleasure to be here.

Buck: Thank you. Thank you. That’s very nice. So I do I do want to kind of start off a little bit. You know, people already know you, so we won’t spend a lot of time talking about your background. But what I’m really curious about is what do you make of this economy and how it’s affecting businesses. What’s going on? It’s been crazy, right?

Kim: Yeah. I like, makes people crazy, but what about this? To help us? Yeah. Yeah. This is what I say to people. Look, there’s a couple of things. Number one, when you consider a franchise investment, the whole idea is that you’re going into business for yourself, but not by yourself. So you don’t have to figure out the answers to all the problems on your own. There are people who maybe in your company who’ve lived through a recession before in this very business. Right. The franchise or maybe other franchisees. So there’s that there could be a track record. There might be experience if the business has been around long enough to gone through like 28, 29. But the other thing is, and this may be more important to sort of the ownership in a business.

Look, if you’re coming to the idea of owning a business, you can’t control the economy. Yeah. So if you’re going to worry about what the economy is doing before you even begin, you’re never going to do anything. If you’re going to get into a business, let’s see. The economy’s booming eventually. It’s not going to be booming. So you’re going to have to learn how to get through it. So again, it falls back on finding people, not widgets. When you invest in a franchise, you’re buying people, not widgets. You’re looking for people that have experience, track record money that you can lean into and say, Hey, what if? And they say, this is what we do or this is what we’ve done, or go talk to our franchisees.

Buck: I was talking to a friend of mine who’s a hotelier, and he he has started to notice, you know, some repercussions of of what’s going on in the economy, although, you know, in general, hotels have not been hit too hard yet. And what’s interesting to me about that is that the vast majority of people going to these hotels, they work for somebody else. And so they have not really seen the changes and balance sheets, profitability and that kind of thing. And sometimes they because of that, they have a false sense of security where a business owner, for better or worse, you’ve got reality in your face every single day. Right.

Kim: Yeah. But you know what? But for those people that are super, super worried about it, because, look, not everybody who comes to the idea of owning a business is even worried about it. Right. If you’re a seasoned investor, you owned a business before. Those people are a little bit hardier. If it’s your first time, I think you’re right to like be like, Oh, what do I do? But there are plenty of franchised businesses in essential services. Like, look, if my roof leaks. Recession or not, I got to fix it. Right. If it’s another business, laundry. Like, you know, a couple of the people that I’ve met through wealth formula over the years are now laundromat franchises. There’s a Laundromat as a franchise. Yes. Right. Like people are going to do laundry.

There are all kinds of home services franchises that you definitely could say in the franchise or it can make a case. These are asset recession resistant. So if you’re super worried about it, we can just go right to those businesses that feel essential. Yeah. You know, the same it was this kind of the same conversation during the pandemic. I mean, a little bit different, but sort of because we didn’t really know when that was going to end. Right. So in 2020, the most interesting fact I can share with you about 2020 is the number one business that I helped people get into was a yoga studio. Like a lot of people got into the Yoga six brand, so people think caught in it in the pandemic and like people couldn’t even go out and go to the gym.

Why were they investing in a yoga studio? Well, because when you’re investing in a business, especially like that, it’s not for that moment we were in. Right. It’s a process. It’s 6 to 12 months from signing to opening. Right. So there is a lag. And you are working with this particular franchise or is the largest fitness franchise or boutique fitness franchise or in the world. And they had no they had really, really solid validation during the pandemic because they were working so hard on behalf of their 2000 clubs. They have no permanent closures due to the pandemic. They have no failures ever in the history of their brand. So the proof was in the pudding. If I could get people to the table and say, Just stay open. If you like fitness, be willing to explore. It doesn’t have to be right. Just stay open and I can serve them up to this franchise or and then eventually they could get the candidate to the point where they could go meet their franchisees. The franchisees are the ones that tell the story. They they don’t have it. They don’t have a dog in this fight.

So they’re not trying to sell you anything. Right. They’re just telling you their real world experience. So if you’re out there and you’re worried about a franchise, you’re looking at, get to the point where you can validate with owners because they’re going to tell you how it really is. And on that note, though, not all owners are created equal, right? Some people are looking for a franchise owner to do it for them and they’re going to struggle no matter what. Good economy or bad economy. You got to really be directed by the franchise or to the owners that are taking full ownership of their moment. And that can tell you explained to you, help you see what you know, tell you what you need to do, give you that solid advice. There’s the I in franchising is that there’s so many resources available so whether it’s investing in an essential business but even then it’s following the franchise source lead and asking for help when you need it and, and, you know, not being afraid to like, say, hey, this isn’t really working for me or, hey, this is how I’m feeling about what’s happening, right? A lot of times as investors and business owners, you know, we we have egos. We feel like we have to know everything, like know we’re kind of ashamed to be like, I don’t really know if I can if I can really ask that question. Is there a repercussion to be asking that question, especially if you’ve worked in big corporate America, right.

Like some questions you just can’t ask. Well, like all of that has to disappear. We check egos out the door in franchising and say, Hey, please calm humility, welcome and sociability. Very, very welcome and and we can help you learn to be successful. You know, the other thing I thought of, Buck, is, you know what an industry that surprises people, that really is recession resistant is the beauty industry. Right. Like like women, we don’t really stop spending money. Right. So, like, if you have, like, Botox or like an anti-aging clinic, I mean, come on. In a stressful time, we need that more. Yeah.

Buck: Well, it’s it’s mixed. I mean, I will tell you, you know, I’m a former cosmetic surgeon, so this is I would say that there is some there’s a point at which things slow down. Let’s it now. I mean, certainly COVID was COVID was COVID was a good time actually for cosmetics. And it was because there was plenty of cash. I mean, there was helicopter money out there right. And we had one of the best years in cosmetic surgery. And I don’t do it anymore, but I had a cosmetic surgery business, Chicago, and we had one of the best years ever during COVID. And why? Because people don’t have anything else to do besides to get a facelift. So on and.

Kim: Go anywhere anyway. Yeah.

Buck: But, you know, I mean.

Kim: I’m talking about like it doesn’t even have to be the expensive things. It could be like nails. It could be hair. Like, I’m not going to stop coloring my hair because there’s a recession. Yeah, that’s.

Buck: True. Although you probably hear because because I’m sort of inculcated this into my listeners. You you’re probably hearing all of the masks for boring businesses, right? Yeah, that’s right. Yeah. So we always talk about and, you know, boring businesses are the generally the ones that we I think we in any economy it’s it’s too often the prize because it’s not glamorous and especially for the types of investors that are in this group, they don’t really want to be their hands on, you know. Right. So talk a little bit about the different levels of, you know, being hands on and not being hands on in franchises can you, to a certain degree be, you know, a true passive owner.

Kim: Okay. So business will never truly be passive. No such thing, right? Somebody has to be there. It doesn’t necessarily have to be the person whose money, isn’t it? Sure. But in my experience, the person whose money is in it, their mouth is in it to sell. Right. It’s your money. And you kind of want to make sure that like it’s going to go the way it’s going to go. So the first thing I’m going to say is if you’re looking for an investment and you want it to be truly passive, Kim Daly’s not your girl. Right. If you’re like, Hey, I have a few hours a week, maybe somewhere between ten and 20, I have leadership skills. There’s a lot of franchise businesses that are defined as what we call semi absentee.

They are designed for executive investors or executive career people who have a full time job, have other investments and other businesses. They can put a little bit of time and attention into the business and really like it’s the startup phase. It’s making sure that that manager you’ve hired is the right one and the team is in place, and then it’s kind of stepping back from there. So yeah, that’s called semi absentee ownership, but when, when I get a candidate who comes to me saying, I think I’m looking to invest in a business, I want to know, I want to learn your goals. Like people always kind of start with, I think I’m interested in fitness or and I’m like, okay, okay, wait, I’m less interested in what you think you’re interested in and I’m more interested in why you want to do this.

So the business is creating an outcome in your life personally, professionally, and financially. It creates an outcome. So if I can get you clear on what you want out of the business, taking your focus off of the widget, then I can cast a much wider net and allow you to become a business owner, not a hobby master. And I love that you close your people to boring business. I say in my you know, in my industry, like dirty jobs people, big businesses, not all the boring businesses are dirty, but their dirty jobs can mean big, big money. Like I have a drain cleaning business. You know, it’s all about calls, texts and trucks. Nobody wants to call you. They have to call you. Nobody shopping for drain cleaning. You answer the phone and you’re friendly, you’re available. Guess what? You’re booking a job. This particular franchisor does all of the online search engine optimization. They answer your call through the National Call Center. So they’re trained by the franchisor to be polite to book that call. They’re putting that call right into your schedule.

Buck: Want to if you want to like fix drains, that’s an opportunity for you.

Kim: Fact. Exactly, but not for you or the people that work for you.

Buck: Got it. So you would hire drain people for that?

Kim: Of course. Yeah. You would hire people who would actually go drive the truck and answer the call, you know, go in the rescue and clear the air out of my dream. Okay.

Buck: Got it. All right. Let me ask you this, okay? Just putting this in perspective now. I live here in Santa Barbara, California. Not a great business environment necessarily, to live in Southern California and, you know, operate a business here. How challenging is it to own and operate franchises out of state? From a distance, that kind of thing.

Kim: So I think it depends on what you’ve done in the past. Some franchise owners will not award you a franchise, your first one anyway if you’re not doing it right in your backyard. So there’s that. But there are definitely franchise owners that are like, you can do it three states away. We don’t care if you think you can do it, you can do it. But I think it just all again, it comes back to the skill set that the owner has. Do you have leadership skills and comfort level managing from afar? So saying it and doing it can be two different things. But if you’ve been a global leader in your corporate past, right, or you’ve, you know, you own properties and you manage them through people all across the country, then chances are you might feel comfortable doing it.

And going back to your question you asked me before about, you know, semi absentee ownership, when I’m setting up the conversation after we talk about what people are trying to get to in their business, Buck We we then are going to I’m going to explain to every single investor you’ve gone through my process. You might remember this, but I explained to people what their money buys. So we’re always trading time for money, money for time. So there’s an extreme case. Our set of franchises that are big and capital investments, but very minimal time commitments like my laundromat. So they’re like, Have you ever seen a rework, right? Shared office space. Okay. So there are franchises in that kind of a shared space as well that are big capital investments to build, but very, very minimal time commitment all the way down to maybe as little as 5 hours a week.

So and even then you could hire somebody to do that if you had the money to do it. So again, there’s something for everybody. There are small investments that are home based where people die, then roll up their sleeves, want to start figuring it all out, learning it and then scale. And then there are bigger businesses that you’re investing in infrastructure, location, people, technology, brands and all of that. Infrastructure is what buys you back your time. Typically. Got it makes sense.

Buck: Yeah. What what are you seeing right now in terms of, you know, again, going back to the fact that the economy’s a little weird, is there any sort of buying opportunity right now in franchises? Because I presume people are probably slowing down a little bit in terms of getting into them, in part because of the financing. Right. I mean, it money’s not cheap anymore. It used to be really cheap and now it’s like two or three times as expensive. Are you finding that or is not that really not changed?

Kim: I that you’re right. Interest rates have gone up, but I have not slowed down in my business. Again, I think it depends on like how you prospect and the kind of like the consultant in terms of like the kind of candidates that I’m working with are not candidates that are going to be steered away by things like that. So I that my answer is I am not seeing that in my business. So no.

Buck: Better.

Kim: Definitely.

Buck: No better deals though, for potential franchise owners.

Kim:. No better deals.

Buck: Yeah, for them for for people like me.

Kim: Now, not financing. Financing is great right now, but the people that have the dream, it’s like, you know, anything else. If you, if you want to do this, it’s it’s go to if you wait for everything to be perfect, you’re never going to do it. So if people make that the reason they don’t move forward, they were probably going to make an excuse for not moving forward anyway. Well, potentially, yeah.

Buck: So when you look at, like, expectations in terms of, you know, profits and stuff like that, like what do you tell people when it obviously depends on the type of yes. That type of franchise. But, you know, I mean, is it really like, okay, you’re going to put in more hours, you’re going to get a higher return? Is it that kind of thing or or what?

Kim: I love that math. Okay. So, no, the level of investment going in does not correlate to the potential to earn the level of investment going in correlates to the owner’s time commitment in the business, as I just explained. So lower investment of money, bigger investment of owner time commitment, bigger investment, typically lower investment of owner time commitment from go. So the amount of money that you can make is not correlated, but in terms of earnings claim. So as the consultant, I can’t make any claim to how much money anybody is ever going to make. But most of the franchisors that I work with in their franchise disclosure documents. So our industry is regulated by the Federal Trade Commission.

It’s one of the thing that sets franchising apart from besides and licenses and distributor ships is just the amount of regulation. So earnings claims are not mandatory. But if a franchise owner is going to make an earnings claim, they have to put it in writing in their franchise disclosure document. So the franchise owners that I work with, by the time they’re ready to hire consultants to help them grow their brand, they pretty much all have some representation of earnings.

But where where I’m going to coach my people to kind of use that data to kind of get their bearings, but not to make an investment decision based on an earnings claim. You’ve got to go out and do your own due diligence and mostly box by going and talking to the existing franchise owner. Again, the people who don’t have a dog in the by the people who are just going to tell you their real world experience about what it’s like and how they’re doing and what their and, you know, how much they can how much the franchise or is helping them in terms of driving the revenue because that’s really a good franchise is focused on driving that average unit volume up because that’s where they make their money off of the royalty from the average unit volume. How an owner is going to net out their business is really going to be on them. You could I know in certain industries you could have franchisees in the same company who are 5 to 10 points away from each other just based on whether they financed or didn’t finance, based on paying a manager or not paying a manager, based on just being an efficient operator, keeping teams of people. I mean, training and you know, hiring new people is costly. So in like in the residential cleaning industry, sometimes, you know, you look at the earnings and you see like in the younger years where people haven’t really figured out the right person to hire and how to keep them. You there’s a lot of turn around and in the cleaners maybe like you’ll see like a 17 or 18% net margin.

But then you go to people who are in three, four or five years and they’ve sort of mastered who to hire. These people are then bringing their friends in. So you have a very stable work or labor force which then creates a stable client, right? Because I want the same people cleaning my house because that creates consistency. You might see that net margin go up to 20, 22% right in the in the same franchise. So I’m not making any earnings things. We’re just talking topic. Yeah, yeah, talking hypothetically. But yeah. So it’s like I saw this happen in my business. So I became, you know, the, I built the largest franchise consulting business in the history of franchise consulting back in 2012. And then I shared what I did with other consultants and a few years later, somebody doubled what I did and I hated him for it and I loved him for it all at the same time. It was really inspiring, you know, he was like, You set the record, Kevin, you know, you did it first. I’m like, Yeah, okay. But here’s the thing. When we were comparing notes, I actually still brought home more money that year than he did, so that it was sort of an aha moment for me. So at that point in my business, I had stopped, quote, buying leads.

I became 100% referred the driven. I started, you know, prospecting for people differently. He was buying all of his needs, which is very, very costly. And where he was working way more hours than I was working, by the way. So yeah, like his top line revenue was higher than mine, but my take home was way higher than his. So was it worth doubling it? I don’t know. Right? Yeah. So we’re in the same business, but we had two very different bottom lines. And when when that happened to me again, I had this aha moment like, oh, so like when I’m coaching people about net margin wins and validating EBIDTA, you got to be very careful because it’s all just going to be based on how that particular owner is running their business.

You really only can look at the things that are consistent in each business. You know, if you have rent or you have a gross profit margin on a product that you’re buying that the franchise or is controlling, you know, the distributor cost. And then the rest of it is really just up to you what you feel you can create through your leadership, in your, you know, your mentorship of that business and the team of people that you have in place.

Buck: So, you know, you always hear about the high percentage of startup business is failing. Do you have any statistics in terms of franchises compared to your usual startup?

Kim: So the statistic out there that you’re referring to, I guess I’m guessing, is that like 90% of startup businesses fail before their fifth anniversary. Yeah. So that statistic is not owned in franchising on the franchisee side. You know what I will say? I do think that that statistic is owned in the startup franchisor side. So if a franchise or let’s say that somebody starts a business and then their family and friends like franchises, so they turn it into a franchise, they have no background in developing a franchise, building infrastructure to support a franchise. They’re not properly capitalized. Then guess what? Their business is nothing more than a startup statistic before they get to 100 units. So 100 units is about the stabilizing point of a franchise. So I just said a lot of things in there. When you’re looking for a good franchise or partner, you need a franchise or that has really solid background in developing franchises, selling franchises, supporting franchisees, running a franchise operation.

And guess what? All of that takes money. So they’ve got to be backed by private equity. Like they’ve got to have some amount of money to really lift this brand to get to 100 units. And a really good franchise is probably going to get to 100 units. I mean, for me, that’s like 30 owners who all buy three territories or three units and that can happen in one year.

Buck: Yeah.

Kim: Right. So it’s taking a franchise over ten years to get to 100 units like necessarily a brand like there’s no brand value there for so long. That’s not what you’re looking for. So it comes back to the people that you’re partnered with and their backgrounds and what they’re bringing to the table that determines the strength of this entire franchise.

Buck: All right. What are your three favorites right now?

Kim: Oh, I see. So out of my favorite franchises, I have favorite characteristics, so I will give you my favorite characteristics. They’re probably much similar to yours. I like low fixed cost. I like big fat healthy margins. So that’s kind of the same thing as dieting. I like essential service. I do. I am the queen of home Services, like always of all time.

Buck: Do you own other franchises besides that? You know, obviously you have the franchise for franchises, but do you have other franchises?

Kim: This is my very, very, very full time business.

Buck: Right, right.

Kim: It builds such an amazing business for me to be distracted. Yeah. Now, when my kids are bigger and my hope is that they’re going to be entrepreneurs, that I’m going to help make them franchisees. But no, at this moment, no, I am solely dedicated to helping other people and then coaching them to success.

Buck: All right.

Kim: So what else will fix big, fat, healthy margins, essential services, good. I like businesses that have more freedom and flexibility. Like, I don’t I don’t necessarily like locking people into like, oh, your business is open seven days a week. You know, like I like it where it’s more your schedule can be based around your own quality of life. But therein lies the, you know, potentially the more you put into it, the more you’re going to make depends if you’re semi absent or full time.

Buck: When you want to get out of these things. How hard is it to sell?

Kim: So franchise businesses that are absolutely built to be sold. I’m coaching all of my people. I believe a business should be built to be sold and it’s your business to put whatever price you think you can get on it. And depending on the brand value and the economy when you go to sell, I mean, sometimes franchisees cash out for millions of dollars. Like when you look at big brands like Planet Fitness, I have personal friends that were paid eight multiples of clubs that were doing $1,000,000. And one of my friends at 58 cashed over $80 million of ten clubs of Planet Fitness, you know, massage envy. We saw the same thing. There was a moment in time where the brand was sort of at its peak value before the rest of the world.

We woke up and all the competition was flooding the market. You know, massage envy created this membership for massage. And we saw massage envy owners cashing out for six multiples. So massage envy doesn’t hold on to that multiple. There was just a moment in time. So when I’m working with an investor, it’s all about your goals, are it? Do you want something that’s not necessarily going to have a peak like that, but not necessarily going to have about a valley? Something like laundry, whoring just is what it is, right? Or if you’re in for that kind of a ride, sometimes the biggest amount of return on your investment comes at exit. I interviewed the founder of Jan Pro, which is the largest commercial cleaning franchise in, I think, in the world.

And and Jack says all day long that his his franchisees are high level executives and they build massive multimillion dollar businesses. But he says almost always their greatest return is when they go to sell that multimillion dollar business because it’s cleaning commercial, cleaning them going anywhere disappoint. Yeah.

Buck: So Kim, well, first of all, if people are interested in franchises, how do they connect with you?

Kim: I’ll say my services are free, so you never have to pay any money. I’m paid by franchisors to offer this really, really valuable service, which really is just to guide you, educate you, teach you. There is no gation. I tell people saying yes to a franchise investment is the natural thing to. Right? So it’s a process. It’s about a one to a two month process that I work with people. But the first place, the first thing to do, I think is to go to my YouTube channel. So you mentioned during the pandemic that I think you mentioned about adapting? Well, during the pandemic, I had to adapt because prior to 2020, I used to travel and host live events.

That’s how I found people who wanted to work with me. And then I couldn’t get people together. And I was like, What am I going to do? It was adapt or Die. And I turned on the video and it was the greatest thing ever because now I’ll never have to travel again. So I am. I have nearly 500 videos now on my YouTube channel at KimDaly.TV on all subjects. Interviews with top franchisors and franchisees. No explanation of fees helping come your fear, helping you understand the process, helping you understand my role. So check out a few videos. Of course, all of my contact information is there. I’d love to hear from you with a question. A concern. I think I’m interested. Let’s go wherever you’re at. I’d love to hear from you.

Buck: Fantastic Kim, as always, it’s a pleasure to have you on the show and I’m sure will. We’d love to have you back in, you know, in the future, maybe when the economy is burning hot and you can tell us, you know, what’s going on.

Kim: Then the good thing about franchising Bok is that in good times and bad, the franchise industry grows right? Like people’s motivations change and what they invest in changes to the points we’ve made today, but they still invest.

Buck: Yeah, great. Thank you very much. We’ll be right back.