Hey folks,

Hope you’re having a great holiday.

I did a webinar with Michael Girdley a few weeks back on franchising vs. startups vs. buying a business. The Q&A section was packed.

So today I'm clearing out the mailbag with some of my favorite questions.

Let's dig in.

I’ve written before that 90% of franchises are hot garbage. Here’s the short version of how to find that 10%:

Economics. Does the investment cost make sense relative to the cash flow it produces? This is subjective based on your risk tolerance and how involved you'll be. If I'm running it full-time, I have much higher expectations than if it's semi-absentee.

Leadership. Are they stewarding collective resources (marketing funds, R&D, support personnel, etc) in a way that benefits all franchisees? A strong franchisor makes the whole system better than any individual operator could be on their own.

Network. Do franchisees actually help each other? In strong systems, the network helps you grow, troubleshoot, and acquire other locations. Over 10-20 years, the network alone might be worth more than what you paid in royalties.

Partners need to bring at least one of: skills, sweat equity, or capital. Ideally all three.

And everyone needs to be aligned on what they're contributing.

Here's where I see people mess up: they give away equity too early because they're nervous about going it alone. But if you're the one doing the work full-time, you might be undervaluing yourself.

My advice: Delay bringing on partners until you have a track record.

Once you've proven you can run the business, you're in a much better position to negotiate terms. 

It's easier to say "I want to do more of what I'm already good at" than "Give me money to buy something I've never done."

If it's a strong franchise system, you'll usually see a higher valuation (as a multiple of EBITDA) than a comparable independent business.

This happens when institutional money enters the system. 

For example, private equity drove up Orange Theory multiples to the point where you could sell a franchise location for 50%+ more than a mom-and-pop gym.

That's not the case everywhere. But in strong systems, expect to pay a premium.

You're buying the brand, the support, and the network. Not just the P&L.

I don't have a hard take here, because I've seen both extremes.

I've been in a small, family-owned franchise that was woefully unsophisticated. No greed, but no scale either. That wasn't fun.

I've also seen PE-backed franchises that, despite being more heavy-handed, brought real value through sophistication and scale.

One thing I do prefer: PE firms that specialize in franchising over pure financial buyers. Specialists bring talent and operational know-how, not just short-term profit extraction.

I won't invest in food until I have tens of millions to work with.

The biggest advantage in QSR is scale. When you're subscale, the cons crush you:

The best food businesses are the ones where the P&L looks nothing like a food business. Small footprint, lean labor, high margins, etc.

That's it for this round.

If you've got questions about franchising, I'm happy to help. No cost, no strings, just a conversation about whether it's the right move for you.

Book a free call here.

Thanks for reading,
Connor