[00:00:06] Speaker A: Hello everybody, and welcome to another episode of All Things considered. Franchising powered by Scott Milasfranchisecoach.com. I am your host, Scotty Milas. All things considered franchising is a podcast dedicated to the franchising industry, working with existing franchisees, diverse people who are looking to diverse their portfolio, providing education insight into the industry. We also focus on a few independent type opportunities as well and scottmylusfranchisecoach.com is a organization consulting organization formed many years ago that helps people research and explore business ownership, primarily in the franchising space, helping you build a business model roadmap and then introducing you to the brands that actually may fit and then helping you through the process to make a validated decision one way or another. So today I'm deeply humbled and honored to have somebody with us that I've had a lot of respect for over the years and someone who typically, I always say that people sometimes are a big blimp on the radar or a little blimp on the radar. What I've always respected about my guest Alicia Miller is that she is really kind of under the radar, but provides a lot of wealth of information in the franchising industry. She is co founding managing director of Emergent Growth Advisors. She is an active franchise investor herself and advises franchise brands and multi unit operating groups on growth and transformation initiatives, as well as private capital firms and family offices. Active in the franchising sector, she's a leader in the industry. She has published more than 80 articles on franchise Torbe, franchise Times, Forbes and Entrepreneur. She also has a brand new book coming out in 2024. Big money in franchising. Scaling your enterprise in the era of private equity.
Alicia, welcome to the show.
[00:02:12] Speaker B: Thank you. It's nice to be know.
[00:02:15] Speaker A: You and I have chatted off and on all the years that we've known each other and like many people in the industry, you started out as a franchisee, went into a franchise or got into development, really kind of educated yourself on all the different components and it's now led you into the private equity category. So you've seen a lot of transformation within the industry.
Is there anything you need to share or would like to share with the listening audience about your history and experience in franchising before we kind of take a deep dive into private equity and how it plays into franchising?
[00:02:55] Speaker B: Sure. I think because I started as a multi unit franchisee, you bring that perspective with you everywhere you go and it's very helpful in my consulting work because I can speak as a franchisee, how they impact franchisees and also communication strategies to build support in the franchisee community when you need to make changes in order to move the business forward. So it is, I think, very helpful. But I've also invested quite a lot of myself in becoming a student of franchising and really researching what is going on and why the market moves the way it does, which I have the luxury of being able to do. That where many people who come into franchising looking for a franchise opportunity don't have the time to do that kind of broad research. And that's why they depend so much on working with somebody like yourself to help them navigate these waters and figure out how they can possibly narrow this list of 5000 active brands into something that's worth their time to even consider.
[00:04:03] Speaker A: Much less you mentioned something before we get into some of your work history here and the things that you're doing now, but you mentioned something that is a common question with a lot of the people that I initially starting work with. Should I start off with one unit, one territory, or do I take a deeper dive and buy a bigger territory and multiple units? And you being an experienced multi unit franchisee, having gone that route and kind of built your legacy starting that way and understanding franchises, can you share any thoughts on that? When somebody is initially looking to start a franchise business ownership, is it better to take that bigger step or is it better, do you think, in your eyes, to take that smaller step or does it really have to do with the brand itself?
[00:04:52] Speaker B: Well, you should start with your own objectives of what you're trying to accomplish, and that includes what kind of lifestyle you want, how much money you want to make, how much time you want, driving around to your outlets or working with customers and your team. And that'll help you figure out are you really wanting to be a multi unit owner or do you want to be an owner operator of a smaller number of units? So that's really kind of like the first hurdle you need to get over is figure that out.
I think though that there's this trend now of selling multi unit packages to first time business owners that worries me a little bit because you don't have the cash flow yet to build. Then buy or buy them. Build is a common strategy that people use to you. Start with one unit, use the cash flow from that unit to buy another unit, to buy another unit, and you can kind of grow your empire that way. When you're biting off buying three or five territories or more at once without having a cash flow unit already operating. It's a bigger lift. And so you're building this empire, but you've got to build your team, you've got to build their capabilities, you're still learning the business.
And if it's an emerging brand, then you could argue that the emerging brand itself is still learning about the model.
[00:06:17] Speaker A: Right.
[00:06:18] Speaker B: So I would say multi unit ownership, I think is a terrific way to build something truly with scale and heft that will certainly trade for a higher multiple if it does well. But you've got to be really thoughtful about how you get there and also whether that franchise system is set up to support multi unit owners who all look just as different as can be. So there's no one size fits all, but some systems are just better at supporting multi unit owners and expect that there's going to be those folks in their system.
[00:06:54] Speaker A: Yeah, I've always been a believer.
Start off maybe with that one or two and stop when you're done. Build it as big as you want, but keep it as less complicated as you possibly can.
For people who are in tune to the industry, it's widely known, unless of course you've been kind of hiding under the blanket, so to speak, that private equity has been playing a major part in the growth of franchise brands. You yourself serve on the board of a PE backed company, Elevated Ventures Group, which is the largest franchisee of urban air adventure parks, and of course recently been appointed to the board of one of my favorite brands, forever Young.
And that FSO that's working with that brand, one of my favorite opportunities.
How did private equity become a.
I don't know if I'd use the word dominant just yet, but it's pretty close to a dominant player in the franchising space in the US.
Is this the new norm in franchising, that start a franchise, become a franchise or start it and then set it off to a private equity group?
[00:08:11] Speaker B: Yeah, so let's unpack that. In my opinion, they are very dominant, but they're only dominant in the sliver that's got the biggest impact. Right. So the 700 brands have worked with private equity on some level or another, either at the franchise or level or the franchisee level or both. More than 350 firms have been involved. But when you think about the top 500 or so, 400 to 500 brands, there's a tremendous amount of overlap with the 700 that have gotten private equity support. So if there are 5000 active brands, that means only a small sliver is really getting private equity support. So they are dominant in that they have been very selective in who they work with and why, and in what they do to help grow those brands. And now that they're such a dominant player, what that means is all the other brands that don't have private equity backing face a much more competitive environment.
This goes hand in glove with the explosion of platforming that we're seeing in franchising as well, which is often pushed forward by private equity.
Cobbling Together, consolidating a sector around a platform of shared services is a tried and true private equity method in or out of franchising. Right. But it happens to work really well in franchising for two reasons. One, the back office is very often the same. So there's no real benefit in having four tax departments when you can have one tax department across four brands, and because of the cross pollinization of marketing and sales, for they're serving the same customers and they're serving the same franchisees often if you're in, say, a home services platform. Right. So there's a lot of benefits to being part of a platform. Well, this has made it really tough for all the emerging brands that aren't part of a platform. How do you get attention in that world? How do you attract franchisees to your brand and you're going to spend all your money sort of scaling up the infrastructure while you're facing competitors who already have that infrastructure in place in spades, that can just work on selling and marketing and tweaking the model to make it better. So it's made it a lot harder for small brands to break know.
[00:10:36] Speaker A: Speaking of that, we're talking to Alicia Miller here, who's co founder and managing director of emergent Growth Advisors. We're talking about private equity. I'm your host, Scotty Milas, of all things considered.
Know, one of the questions that I like to ask my clients, and this kind of ties into what you were just saying, is their tolerance for risk as an investor. Because let's face it, when you're investing into a franchise, you are an investor. You're trying to build a legacy of business scaling. So it is an investment.
And I ask my clients, do you have a low, medium or high risk for tolerance and investment? And I asked them that because if they have a very low tolerance, they really shouldn't be looking at emerging brands, because emerging brands are in their early, infamous stages, a little bit more risk as far as survival. So what other risks? Or how should people evaluate a non private equity ownership brand versus a brand that may have 50, 60 units but isn't tied into private equity. Is it inevitable that they're going to be part of private equity, those 50, 60 unit territory brands? I mean, is it inevitable that they're going to be part of private equity at some point?
[00:12:00] Speaker B: If they're a high quality brand with good economics, it's inevitable they'll get offers.
Not every founder wants to sell to private equity. Look how big Jersey Mike's has gotten without involving private equity, at least so far. Look at subway. Right? They've gotten plenty big without private equity so far, and maybe transacting with Rourke here soon.
But I do think it's a good question to consider.
If private equity is not in a brand, you got to understand why.
Is it that the model is not attractive to private equity, or is it that they're too small and unproven? Or is it that the founders are kind of brushing off private equity interest? But it's worth kind of poking at a little bit to understand where that brand is. And if you can think about sort of the brand on its sort of lifecycle, if it's a really small brand, you're right.
PE doesn't have much tolerance for risk either. So something to keep in mind. They like a sure bet. They've got a mandate they've got to deliver on for their investors, and they don't like risk. They like a lot more certainty. And they are going to invest in tried true growth investments in the brand to grow it during their hold period, and then they're going to want to sell it at some point or take it public.
So that's what they're planning to do. So if you're evaluating a brand that doesn't have private equity backing and is not also not part of a platform, that's one that I would spend quite a lot of time understanding how franchisees are doing, because you are taking on more risk than a private equity firm would be willing to take on at that stage. And sometimes those are sold by folks who will say, well, you're getting in on the ground floor. Okay, ground floor of what? They haven't proven the model yet.
Let's wait until they have ten or 20 units open and see how franchisees are really ramping, see if they come back and want more territory.
This is a big country. There's plenty of room for units. And waiting till they're a little bit more settled is, I think, a better strategy.
[00:14:20] Speaker A: I know, and I think the key word that you just used is making sure that those brands, those units, territories are getting opened. And I know you and I have shared that conversation on several times, and that's another topic. But obviously, there's the financial part, the numbers on why private equity is interested in franchising. Is that the only reason? The financial part, the reward from them. I mean, obviously they're paying a lot to get that popular brand, that successful brand, a lot more than if it wasn't a solidified brand or outside of. I think you understand what I'm saying. So what are some of the other things that private equity is seeing about franchising that's attracting them to make this really big push into these types of investments?
[00:15:14] Speaker B: Sure. Well, they are willing to pay a higher multiple for a good quality franchise business. Compared to a similar sized corporate model business, a franchise is often worth more, trades at a higher multiple. So the market demonstrates that the value of franchising from that perspective.
They like it for several reasons. I mean, they like the model. It's a very cash capex efficient model, because you're leveraging the investment and the sweat equity of a bunch of entrepreneurs who are going to go out and help you scale the model. It's why franchising is such a brilliant growth machine, really. They like being tied to entrepreneurs. They like working with entrepreneurs. You know, they're. That sense of ownership and the energy that entrepreneurs bring to the business is very different than maybe coming into a corporate model where you've got employees.
Once you've learned franchise best practices, they are shared across all different verticals. So you may have nuances in one market versus another market. You may have nuances of one type of business and another, or different regulatory issues or licensing. But basically, once you've learned the franchise best practice model and growth model, you can leverage that across lots of investments.
[00:16:36] Speaker A: Right.
[00:16:37] Speaker B: That's why we've got these sort of serial investors who keep coming back over and over and over. Rourke's got 108 brands now, Riverside's got more than 50. LLCP's got almost 30 that they've invested in. And Midocean is, I think, almost there as well. So some of these private equity firms have just gotten really good at franchising, and it also means they can move very fast in the due diligence process because they've seen the movie, they know what they're looking for, they know what they're looking at.
And for any emerging brand founders out there who are thinking about talking to private equity at some point, my recommendation is you really need to get your ducks in a row before you start having those conversations, because they move very fast and you'll be surprised at how fast they move.
[00:17:21] Speaker A: Right.
One of the questions that is always on somebody's list when they get to Discovery day, and I'm talking about the individual researching a brand, is that question Mr. Owner or Mr. Owner?
What happens if you decide to sell the franchise? Not an individual union, but we're talking about the brand itself, the brand.
Look, if you have ten people at a discovery day, nine have that question on their pad of paper. So how concerning should someone who is researching and have narrowed down their validation to one or two brands about the franchise or selling the brand, whether it's privately or to private equity? I mean, what questions or directions should people or how should they be addressing this question?
[00:18:19] Speaker B: Sure. So I think if they're not already private equity owned, it's important to understand why.
Just make sure there's no impediment, right. That is turning off an investor. But I think it's reasonable to expect that it will trade at some point. If your license is ten years, that's a long time, especially if they're already private equity backed. It is very likely that they're going to trade. In fact, something like a third of the trades now every year are retrades. It's been owned by one private equity firm for five, six, seven years. Now it's time to monetize that and it trades up the ladder to a bigger firm. So you can pretty much count that that's going to happen. You need to talk to franchisees who've been through it, if it's already traded once, and find out what changed. And are they still happy with the stewardship of the brand? Did they see it grow?
In theory. You're not investing in a franchise as a private equity firm if you're not going to try and grow it. So they should be seeing better support, more growth initiatives, incentives for growth, a lot more money put toward marketing, more support in the field. That sort of thing is what you would expect to see once private equity takes over. But you got to validate that.
And if you ever are in a brand that's not going in a direction you think it should go, no matter who the ownership is, you shouldn't be underwriting that. Right. At some level, you've got to always be prepared as a business owner to sell the business and move on if it's just not going in the direction you want it to go.
There's a point where you've made your challenges known and you don't feel like the home office is listening.
Don't stick around. There's plenty of other franchise concepts to work on that have management teams that sincerely care about you and your profitability and your satisfaction. So don't suffer in silence. There's plenty of other businesses that you can own and run.
[00:20:24] Speaker A: That's an interesting point, and I'm glad you mentioned that because I'm currently working with an individual who owns another brand, but is seeing that stalemate with the brand as far as its growth, and they're questioning whether do they continue to grow with that particular brand or go outside the box and start diversifying their portfolio?
[00:20:47] Speaker B: Yeah, diversifying your portfolio. There's a lot to be said for that. Going too far in a different direction where there's no staff synergies is a different problem. But some of these brands are tapped out in a particular market and can't get bigger than they already are.
That's definitely one issue, but that's a small sliver. That's like 5% of brands get to that have that problem. So if they're stalled out and they're of a small or medium size, they're stalled out because franchisees are not willing to underwrite more growth. So find out what's going on there, because there are plenty of brands that are growing and really want to work with franchisees on their growth strategy. And you can always pivot and pick up another brand or two if it's a better fit.
[00:21:36] Speaker A: Yeah. Look, I'm a firm believer that the franchise or franchisee business model is always about a relationship.
It starts as a relationship and should continue as a relationship, especially in that using the word trust. And I think once that trust factor starts to break, or the confidence of trust, that's when the back and forth starts.
We've been talking to Alicia Miller, who's co founder and managing director of emergent growth advisors.
Just somebody who I have, like I said in my opening statement, a lot of respect for, and kind of really understands not only the franchise model, but understands the numbers, so to speak, the validation to all. Know, as a kid growing up, my father taught me and kind of preached to me that numbers don't know. It's one in one is two. And no matter how you look at it, numbers don't lie. So, Alicia, I want to thank you for taking some time being with us today. You've shared a lot of information. I hope in the next six months we can get you back again and get an update to what's happening with private equity.
All the best on the upcoming book, and emergent growth advisors. I mean, you are a big influence in the industry, and I think that you will continue to be an asset to franchising and, of course, people who are looking to get in it for the first time.
[00:23:08] Speaker B: Thanks, Scotty. And thanks for all you do as well to help educate people on what a good franchise looks like.
[00:23:13] Speaker A: Thank you very much. I'm Scotty Milas. I'm the host of all things considered, franchising, powered by scottmylasfranchisecoach.com. You can reach
[email protected] my website or allthingsconideredfranchising.com. Look me up on LinkedIn. You can also look up Alicia Miller on LinkedIn. Connect with her. I'm sure if she has some time and you had a quick question for us, she would extend the courtesy and try to answer that question for you. So this is Scotty Milas signing off. Until next time, make it a great day.
