Jeff Levy, The Entrepreneur's Source
NuWire: Can you tell us a little bit about your background in working with franchises?
Levy: I have been a franchise coach for the last five years. I have worked with about 400 to 500 people. I’ve actually placed about 70 people...in franchises since I’ve begun this. I am a franchise owner myself, as well.
NuWire: Can you talk about some of the main benefits of franchising, perhaps from an investor’s perspective?
Levy: I look at any investment in a franchise as truly an investment, an opportunity to deploy somebody’s capital or certain objectives—financial objectives that they may have. When people evaluate a franchise, I think it’s important to make sure that the business makes sense on paper, as well as meets some lifestyle goals—values, goals. The benefit of franchising is somewhat easy to determine in terms of—a person considering a franchise, if they take the time and they put in the effort, can get an excellent picture of what a typical experience is for an owner for that kind of business. They will be receiving the names and phone numbers of anyone that is doing that kind of business. So, if they know what they’re looking for in terms of their own financial goals as an investor, they should be able to determine by speaking to other people...whether their goals are attainable.
NuWire: Would you say franchises are more geared for investor ownership or for an investor-operator, where the franchisee is essentially buying themselves a job when they buy a franchise?
Levy: That’s a difficult question to answer. But I am convinced and positive that there are many franchise options for people who are looking for an investment...and for people that are looking to be more active and work in their business. So I think there are many options in the franchise world for investment. Now, it’s not a passive investment. That’s important to understand. Anyone who owns a franchise has some responsibility to work strategically or directly with the business. But clients who come to me are often looking for investment-type franchises, where there is no direct role for them on a day-to-day basis within the business.
NuWire: So most of your clients that come to you are looking for an investment-type of franchise purchase, not a managed franchise.
Levy: That is true, but it takes quite a bit of discussion with a client to get on the same page. That when they say investment and I say investment, we’re talking about the same [thing]. Although I’m not necessarily against someone buying the job, per se, if they are still running the show. However, I do have a lot of clients that come to me who have other activities, other jobs, other investments, and are looking for franchise models that are more of an investment than a business that they would run directly.
NuWire: If you’re working with an investor who wanted to buy a franchise solely for the purpose of an investment, what kind of things do you advise them to look for in the particular franchise that they’re wanting to purchase?
Levy: There’s more detail that I’d like to understand from the client. But if someone is saying that they have some income they’d like to invest in a franchise, but they don’t want to have it be a full-time effort, then there are certain types of franchises like hair salons or tanning salons or dry cleaning pick up and delivery-type services, and even some regional type of franchise opportunities that I would probably explore with those clients.
NuWire: And what do you hear most commonly as far as what people are looking for as far as their end goal goes?
Levy: I actually don’t find that people come to the table...with very specific goals. I need to question them and usually we develop those goals.
The franchise investors are typically not people who are investing like in venture capital or high-risk or biotech-type things. They tend to have a lower risk tolerance, and...in my world, the difference between an investor and a business owner will be how involved they want to be in the business. But the true risk investor is probably not going to be looking at franchises.
The thing that’s important to understand in the franchise world, is that when people consider a franchise, they are receiving the names and phone numbers of everybody that’s in that franchise system. That’s just part of the validation process required by law...so if they have certain financial goals or return on investment goals, those are the kind of things they need to be asking the franchisees for in terms of what has their actual experience been.
But it is important to really keep in context that no one in the franchise world will provide someone a vision of the future. They’ll give them the fact and history, and even in the case of that, franchisors, as a general rule, will only put future earnings claims in their document, in a small percentage of the cases. So a franchise investor has to really be talking to owners to get a picture of what the opportunity is.
NuWire: What kinds of things would you advise them to look for in actual franchisors?
Levy: Certainly, number of units. In other words, how many franchisees that are existing. What is the quality of the training that the franchise has provided? What’s the turnover that the franchise has experienced? Has there been any litigation in the documentation? And even though you’ve asked me this question, it is very important when I coach a client to understand what’s important to them. We spend a good bit of time trying to develop what are the kind of questions that they need to answer. Because I’m not going to own the franchise at the end of the day. They are. So it’s important to really dig deep into what their own questions might be.
NuWire: Now, for these investor clients that are asking you these kinds of questions, would you recommend that they look at new franchise locations or taking over existing franchises?
Levy: It depends on the client. I will recommend one or the other, or sometimes both, depending on the client. If the client has a significant need for short-term cash flow, then looking at existing resale franchises may be the best route for that. If they don’t have an immediate need for cash flow and they want to build something, then starting from scratch might be a better route.
NuWire: Can you talk a little bit more about that—what perhaps the main differences might be between buying a new franchise or purchasing an existing one?
Levy: If you purchase an existing franchise, a lot of the unknowns are taken out. So, for example: If there’s a location, it is already there; if there’s employees, it’s already there; if there’s customers or clients, they’re already there; there’s cash flow; there’s inventory; local brand recognition. So those are all the positives. The downside is that they may not have as many choices of businesses if they’re going to buy a resale. And they will be taking over somebody else’s business momentum and culture....And, of course, they will be paying typically a multiple of earnings for the business. So there’s a goodwill element that...a buyer of an existing franchise will have to pay.
If you contrast that to a startup, the startup—you really are just paying the direct costs for beginning the business. But you do have to find location. You do have to hire the people. You do have to implement the systems. You do have to go out and develop the customers. So it may be awhile before you start looking at positive cash flow.
But if you look at both situations, five years down the road, one might be better starting one from scratch. It really depends.
NuWire: When you think of investor-minded franchise models, what are some of the franchise names that come mind for you?
Levy: Sport Clips, Planet Beach...Martinizing, Dry Cleaning Station—those would be some examples. Any businesses where you really don’t necessarily have to have a job—you don’t have a job working in. Like in a hair salon: You would never cut hair and you’d never be the receptionist. So your role really is to just manage the project of locating, staffing, hopefully going on and putting up multiple locations.
NuWire: I read an article not too long ago that talked about Curves as one of the fastest-growing franchises in the last couple of years. What are your thoughts on Curves as a franchise?
Levy: Its success speaks for itself. I think that it has identified a niche, met that niche very successfully, and they’re sold out in many areas. My guess, and I’m not very familiar with it, [is] that it’s a solid business model and that in that case there are some people that probably work in it. They own the Curves and they are the receptionist. You know, some that might have a bigger vision and look at it more of an investment of three or four, where they have a local manager run the business.
NuWire: Now, about the companies you were talking about earlier, Sport Clips, etc., what is it in particular about those companies that make you feel they’re investor-friendly?
Levy: They typically will look for someone that has another source of capital of income. They’re not looking for this initially as their main source of income. At least in the case of Sport Clips, they require people to do three locations, which again accentuates the point they don’t want you to work in the business. They don’t want you to be buying a job in it. And in the case of at least that franchise, they do have an earnings claim document.
NuWire: Is there anything else that you think we should talk about in relation to investors and franchising that we haven’t covered?
Levy: Only that I would encourage people to take the time to sit down with a franchise coach—someone who understands the breadth of the industry—and just keep an open mind while they are considering different kinds of franchises. Most people have a very narrow view of [the] franchise arena [and] have a lot of preconceived notions that may or may not be true about flexibility and opportunity.
