Buying a $200m Franchisor (Not Units, the Whole System)

Summary

Acquiring Minds: Buying a $200M Franchisor (Not Units, the Whole System)
Hosted by Will Smith | Release Date: July 31, 2025

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Introduction

In the July 31, 2025 episode of Acquiring Minds, host Will Smith delves into the intricate journey of Tyler and Zach Gordon, brothers with substantial private equity experience, who transitioned from aspiring franchisees to acquiring a $200 million franchisor system of thrift stores. This episode provides invaluable insights into acquisition entrepreneurship, specifically focusing on buying an entire franchise system rather than individual units.

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Guest Backgrounds

Will Smith [00:00]:
"Today's guests... developed a thesis."

Zach Gordon [00:07]:
"Both with private equity backgrounds, brothers Tyler."

Tyler Gordon [04:21]:
"Zach and I both grew up in New York City... Harvard undergrad, then HBS."

Chelsea Sloan [04:47]:
"Spent a couple of years working at Restaurant Brands International... parent company of Burger King and Popeyes."

Tyler and Zach Gordon bring a combined two decades of private equity experience, while Chelsea Sloan adds her expertise from a multinational franchisor background.

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Developing the Acquisition Thesis

Tyler Gordon [05:50]:
"If it was one word that we kept coming back to, it was fulfillment... build value over a long term period of time and value, not just in a financial sense, but hopefully also in terms of impact."

Chelsea Sloan [06:29]:
"Private equity's approach to holding assets indefinitely if there were enough growth opportunities made a lot of sense."

The Gordons emphasized the importance of a long-term horizon in acquisitions, diverging from the typical 5-7 year private equity model to aim for decades of value creation.

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Challenges in Traditional Acquisition Approaches

Zach Gordon [10:47]:
"The more you can have conviction in a given industry... helps you not just uncover opportunities and build credibility with potential sellers."

Tyler Gordon [10:59]:
"Franchising as a general matter can add a lot of value... alignment that long-term horizon was really important."

The Gordons critiqued the traditional top-down industry evaluation, finding it crowded and unfruitful due to intense competition from established private equity firms.

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Discovering the Thrift Franchisor Opportunity

Chelsea Sloan [19:06]:
"Thrift at this point is something like a $50 billion industry... very fragmented."

Tyler Gordon [19:17]:
"An overlooked industry... dynamics have fundamentally shifted."

The brothers identified the thrift industry as a large yet fragmented market ripe for consolidation, particularly focusing on franchising opportunities that were previously under the radar.

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Evaluating Unit Economics

Tyler Gordon [23:39]:
"How much does it cost... return on investment for a franchisee."

Chelsea Sloan [23:45]:
"Unlevered payback of five years or better... 20% unlevered yield or higher."

Central to their acquisition thesis was the evaluation of unit economics. They sought franchisors offering strong cash-on-cash returns, identifying average EBITDA yields well above industry standards.

Tyler Gordon [25:36]:
"What you can realistically expect to earn as a franchisee... House your own store's EBITDA."

By scrutinizing franchisor disclosures, they ensured that the business model was financially robust for franchisees, which in turn, supported the scalability of the entire system.

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Transitioning from Franchisees to Franchisors

Chelsea Sloan [32:45]:
"Basecamp is a family-founded company... sold 60% of the company."

Zach Gordon [43:37]:
"The family retained 40%... dynamic with significant family involvement."

Initially considering becoming franchisees, the Gordons discovered a unique opportunity to acquire a controlling stake in the franchisor itself, fostering a symbiotic relationship with the founding family and aligning long-term interests.

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Operational Improvements and Growth Strategy

Tyler Gordon [35:36]:
"Focus on quality... unit count will follow."

Chelsea Sloan [36:17]:
"Invest in technology, operations, marketing... setting us up to grow rapidly."

Emphasizing operational excellence, the Gordons invested in backend systems and franchisee support before aggressively expanding unit count, ensuring sustainable growth.

Tyler Gordon [49:14]:
"Have a long-term vision... scale successfully without overextending."

Their strategy prioritized the profitability of existing franchisees, believing that successful units would naturally drive further expansion.

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Macro Trends in the Thrift Industry

Chelsea Sloan [94:23]:
"Supply side has always been there... sustainability and secondhand becoming cool."

Tyler Gordon [95:26]:
"Systematize complexity... create a moat through data-driven operations."

The episode highlights macro trends such as increasing consumer acceptance of secondhand goods driven by sustainability concerns, positioning thrift franchising as both environmentally and economically viable.

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Conclusion

The Gordons' acquisition of a $200 million franchisor in the thrift industry underscores the potential of system-wide acquisitions in fragmented markets. By focusing on strong unit economics, long-term value creation, and operational excellence, they transformed an underappreciated industry into a scalable and profitable business model. Their journey offers a blueprint for acquisition entrepreneurs seeking opportunities beyond traditional unit acquisitions, emphasizing strategic depth and holistic system growth.

Notable Quotes:

• Tyler Gordon [05:50]:
  "If it was one word that we kept coming back to, it was fulfillment."

• Chelsea Sloan [23:45]:
  "You would want to see an unlevered payback of five years or better. So this means you would want to have a 20% unlevered yield or higher."

• Zach Gordon [43:37]:
  "...the family retained 40%. That's, that's quite a bit, that's not too far from 50."

• Tyler Gordon [35:36]:
  "It's much more about quality than quantity."

• Chelsea Sloan [76:50]:
  "We offer cash and I'm walking out with the stuff that I perceived as no longer having value for me."

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For those interested in acquisition entrepreneurship and franchising insights, subscribing to the Acquiring Minds newsletter at acquiringminds.co is highly recommended. Additionally, accompanying resources and webinar recordings are available to further explore the nuances of buying and scaling business systems.

Transcript

[Will Smith]

When today's guests set out to buy a business, they first systematically developed a thesis.

[Zach Gordon]

Both with private equity backgrounds, brothers Tyler.

[Will Smith]

And Zach Gordon combed through lists of industries, looking for ones with great fundamentals.

[Zach Gordon]

But not yet on private equity's radar.

[Will Smith]

The process led them to a franchise system of thrift stores. At first, Tyler and Zach thought they'd be franchisees, buying a platform of existing units and building from there.

[Zach Gordon]

But the subject of today's interview is.

[Will Smith]

How our heroes ended up buying not units in the system, but the system itself. So this is a story, our first of buying a franchisor, a system with about 200 thrift stores that collectively generated about 200 million in sales when Tyler.

[Zach Gordon]

And Zach bought it.

[Will Smith]

In Acquiring Minds, interviews with entrepreneurs who've acquired franchises, we've talked about how to evaluate the franchise system. And of course the franchisor is a key consideration. What is its value proposition? What are you getting in exchange for those licensing fees? What is the franchisor's relationship to its franchisees? Well, today you'll learn to think about these questions from the perspective of the franchisor and this should help if you're interested in buying franchise resales or after hearing Tyler and Zach's story, maybe the whole dang system. You're also going to learn a lot about the thrift industry. It will probably surprise you as it.

[Zach Gordon]

Did the Gordon brothers. And here they are, Tyler Gordon and.

[Will Smith]

Zach Gordon, Co CEOs of Basecamp Franchising. If you haven't checked out Smith List for a while, there are some great opportunities listed there right now. These are leadership positions within entrepreneurial small businesses and including from a small manufacturer.

[Zach Gordon]

Of an iconic American product, a 45.

[Will Smith]

Person design and build firm and an ABA center for Children looking to expand to multiple sites. Head to smithlist.com to check out these new roles for entrepreneurial operators and GMs and CEOs. And while you're there, sign up for the alerts so that you're notified as we post yet more opportunities for from the SMB and ETA ecosystem. Smithlist.com Smithlist.com welcome to acquiring Minds, a podcast about buying businesses.

[Zach Gordon]

My name is Will Smith.

[Will Smith]

Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people that who do it. The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to Download it is in the show notes. Aspen is a professional employer organization or peo, run by a searcher for searchers. Search fund veteran Mark Sinatra runs the company which provides HR compliance, flawless payroll, Fortune 500 caliber benefits and HR due diligence support for your acquisition, all for.

[Zach Gordon]

A fraction of the cost.

[Will Smith]

Go to aspenhr.com or contact Mark [e-mail].

[Zach Gordon]

Tyler Gordon, Zach Gordon, welcome to Acquiring Minds.

[Tyler Gordon]

Thanks so much. Will appreciate your having us. We've been a big fan of the Acquiring Minds podcast for honestly, as long as I can remember.

[Chelsea Sloan]

Awesome to be here.

[Zach Gordon]

Amazing. Thank you for that guys. Well, quite a journey you two are on.

[Will Smith]

Brothers who bought a franchisor of thrift stores.

[Zach Gordon]

A lot to unpack there. Let's get right into it, starting with brief backgrounds on you both. Tyler, you first, please.

[Tyler Gordon]

Great. Yeah. So Zach and I both grew up in New York City and then spent most of our, I would say academic and professional careers in the tri state area. So both of us went to Harvard undergrad, then hbs. I spent most of my career in finance, so initially in investment banking and then on to private equity for about a decade, most of which at a firm called Apollo.

[Zach Gordon]

Thank you.

[Chelsea Sloan]

And just building on what Tyler shared, like Tyler said, I spent most of my career in finance and investing, although made my way to the corporate side as well, and spent a couple of years working at a company called Restaurant Brands International, which is the parent company of Burger King and Popeyes, a couple other fast food brands in Miami.

[Zach Gordon]

So you have a lot of franchise knowledge which will play a role later in, at least in qsr.

[Chelsea Sloan]

Indeed, indeed. And I would say that I got a lot of direct experience just by virtue of the fact that I worked at a large multinational franchisor with multiple brands. But one of the main things that I did at RBI was look at new brands to acquire. So name your independent franchised food concept. I've probably looked at it as a potential acquisition target for rbi.

[Zach Gordon]

Great. Well, certainly good, good practice for what you were. You were about to embark on. All right, guys, so what was it then that led you to want to search to buy your own business and partner to do so?

[Tyler Gordon]

Yeah, I would say that if it was one word that we kept coming back to, it was fulfillment. Just fulfillment in our personal and professional lives. I would say both Zach and I really enjoyed our careers up until the point when we started to work together. But we always had this vision of one working together. It was always in this three to five years out on the horizon. But Then two really have an opportunity to dive headfirst into a business and hopefully build value over a long term period of time and value, not just in a financial sense, but hopefully also in terms of impact.

[Chelsea Sloan]

And I would say that that term that Tyler used, long term, is really important to both of us. Having worked at Restaurant Brands International, which is controlled by this private equity fund called 3G Capital, I always philosophically thought that their approach to holding assets indefinitely if there were enough growth opportunities to justify that kind of long term orientation made a lot of sense. And so striking out together, I'd say that a big part of our thesis was that if you can find the right opportunity and you can look at hold it for 10, 20 plus years, that that can end up being a differentiated source of value creation.

[Zach Gordon]

And, and so what, what is it? Is what you like about long term holds, Zach, the joys of compounding? Is there more to it than that? Say a little bit more about that?

[Chelsea Sloan]

I would say so. But then also in just sort of a simpler sense, if you think about a shorter term hold. So in public equity, I worked in public equity for a while, that might be measured in months. In private equity that would be typically measured, you know, over let's say a 5 or 7 year D amount of operational improvement that you can actually implement if you're in control. So that would be more in a private equity context, isn't it's just not that Great. Take a 5 year hold period for instance. In the first year you're going to be figuring out what's actually going on at the company. Probably that's going to bleed into the second year as well. And you're trying to, you know, orient yourself around what actually should be the strategic priorities. Of course you had strategic priorities in mind during the underwriting phase. But then you actually get into the business and you figure out what's, what's really going on. So maybe it's in year three that you're actually know with your feet underneath you operating the business. In year four you're preparing to sell the business. In year five you're selling the business. So it feels like a long period of time, maybe five years, especially relative to maybe a public equity duration, but it's just not that long. And so it really limits your ability to make significant investments that then kick into that compounding that, that you mentioned.

[Tyler Gordon]

Yeah, and I'm sure we'll get into this later, but in the context of franchising in particular, if you think about a franchisee who's coming in I think definitionally with a long term horizon in mind, I mean the base franchise agreement that most people would be signing is for a decade and then you hope you're renewing afterwards for another decade or two decades. We think it's really important then to have that long term horizon as a franchisor so that you can make investments that you think will pay off not just in the context of a 3, 5, 7 year hold, but will really pay dividends for you, for your franchise partners, hopefully over a much longer term horizon. And so we felt both in terms of fulfillment, in terms of value creation, in this case in franchising, in terms of alignment, that that long term horizon was really important.

[Zach Gordon]

Great. Tell us about how the search took shape. There was, this was really a rigorous process that you went through. Shouldn't be surprised both of you with I guess a combined 20 years of private equity experience at this point. Right.

[Tyler Gordon]

Something in that neighborhood.

[Zach Gordon]

So tell us what, how you, when you sat down, decided you were going to search. What, how you attack the problem.

[Tyler Gordon]

Yeah, so we, I would say did just about everything under the sun for some period of time. I'd say the only I would say angle that we probably didn't orient around was the, a massive list building, send out a thousand emails a week or a month. So we were more targeted in a lot of cases, but we looked at a pretty diverse set of industries, geographies, you name it. If, if somebody in ETA has thought about a certain angle, we probably lifted up that rock and sprinted down to, for, for some period of time. I would say one thing that we ultimately really decided was that the more you can have conviction in a given industry or in the case of franchising business model, it can help you not just uncover opportunities and build credibility with potential sellers, but it also gives you a lot of conviction as you underwrite the business. And so what we started to do is find ourselves naturally focusing on franchise opportunities both on the franchisee standpoint and then ultimately in the context of basecamp, on the franchisor standpoint. But, but yeah, it was a pretty, it was a pretty exhaustive process. Took us about two years. And so certainly know all the, the trials and tribulations associated with.

[Zach Gordon]

I will say Tyler, that you guys were basically looking to develop a thesis first and then go out around a thesis which is of course that's classic private equity, big boy private equity style, right? Yeah, but I don't actually think most searchers do it that way. Some do and probably some with a private private equity background or Private equity orientation do it that way. But many searchers are more reactive to the industry and they look at the sims that come across, the deals that come across and then they, then they look at the industry. So just double click a little bit on your industry analysis process. Again, to people who have private equity backgrounds, this will probably feel like, yeah, that's what every private equity shops does. To those who don't have PE backgrounds, it might be illuminating.

[Chelsea Sloan]

I actually think that being reactive is totally fine. There are pluses and minuses to both approaches. The first, uh, let's say in the first three months that Tyler and I were in business together, we did this top down exercise where we evaluated something like 150 industries looking for ones that had really strong fundamentals. So, you know, an already sizable industry with an interesting growth rate, defensible characteristics, hey, this industry isn't going anywhere. All the kind of, yeah, private equity style attributes that you would look for in industries. And whittled down that list of industries from call it 150 to 10, I think it was. And we had seven that were gold medal and three that were silver medals. So we got, you know, really creative with the jargon and it turned out that all 10 of them were uninvestable, to use that word. Why was that? It's because that exercise is what every single private equity fund basically, to your point, is already doing. And so pick one of those 10, you'd probably have five private equity platform companies already active in that, that space, just gobbling up everything in sight. Anything with, you know, 200,000 bucks of SDE or EBITDA or greater, you're going to be competing against a private equity portfolio company that can, you know, reduce the cost basis of that asset by 50% on day two. So just not actually a fruitful exercise. I would say that like pure top down industry evaluation, I would say there.

[Tyler Gordon]

Though it did provide a helpful lens which I think that the standard set of criteria that we or anybody would evaluate in industry or an opportunity are all extraordinarily relevant. I think what the exercise did showcase though is you need to focus on areas that are maybe not as obvious and so maybe even decidedly unsexy. If you find again, whether it's industries or avenues where there is less competition or less of a spotlight being shown on it, you can end up having a much greater ability to find true value. And so in the businesses like the gold medalist fire suppression, elevator repair and maintenance, medical waste management, all phenomenal industries, just when you're focused on finding a Business where you can again have an attractive entry multiple, really have conviction, your ability to grow organically or through M and A. There's just a lot of competition and.

[Chelsea Sloan]

We looked at, we looked at a lot of sims from business brokers and actually that ends up being, I would say a really interesting forum for ideation because even if a particular company whose sim you're looking at isn't compelling for whatever number of reasons it might spark, then an idea about an industry, about a supplier community, let's say, and then you can double click on that and maybe you come up oddly with an industry thesis out of what is just sort of a random shot sim.

[Will Smith]

Running payroll, paying your bills, closing your.

[Zach Gordon]

Books and producing financials.

[Will Smith]

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[Zach Gordon]

So what is it that what criteria do you then relax to? Start looking under or away from the silvers and golds?

[Tyler Gordon]

Yeah, so I think for us, and I think franchising ended up being a good example of how we put this shift in mentality into practice. If you look at the franchise landscape in the US there are a few thousand franchisors in operations. If you then eliminate a few of the more well trafficked industry verticals. So let's call it restaurants, including QSR concepts like Burger King and Tim Hortons that Zach knows very well, but then gyms, home services, a few others, that's full on about 75% of the pie. And if you look at a lot of those areas, it's not to suggest that there aren't great concepts and great business models within each of them, but there are just a lot of eyeballs focusing on those opportunities. And so what we set out to do is say, okay, well we love the framework of franchising. We think franchising as a General matter can add a lot of value. But what's in this tale, this tale of potentially forgotten opportunities that people aren't really focused on. And then we would apply the same set of criteria and lenses that we would to any other industry. So again, what are the fundamentals of the industry? What are the gross prospects? What's the recession resilience? How much room is there really to grow and chart a chapter for kind of a 10 or 20 year horizon? And so it's the same set of criteria, but focusing on a set of, of opportunities that maybe didn't have as much focus from, from other investors.

[Zach Gordon]

Yeah, it is always counterintuitive maybe that, that undiscovered opportunities exist at all because you would think that all the other private equity funds and shops doing the analysis that you guys just described would come to the same conclusion. Okay, we, here are our top 10. These top 10 are already crowded. So we're going to have to look. You were going to have to start turning over unlikely rocks and you know that everybody would. There's just so much, so many brains looking for opportunities off the beaten path that there just wouldn't be any left. But I guess not.

[Chelsea Sloan]

Is the, yeah, I would say a hallmark of maybe some of these industries that are more off the beaten path and we're calling them industries, but they could be pretty small. Right. It could be a sort of sub industry within qsr. Let's say maybe you're a company that provides Internet connectivity solutions to restaurants or grease trap cleaning or things like this. They're kind of industries unto themselves, but they're really barnacled onto either one or a small number of other industries. I would say a hallmark of these off the beaten path opportunities is that they're very disorganized. And so it's difficult to find information, frankly, even about the industry or about individual companies. And so the exercise ends up being trying to unearth an industry that is just really hard to research and then figuring out a way to research it. And I would say that that very, very well describes thrift, the industry that, that, you know, we started pulling on this thread. What is this industry like? This is, I've heard of thrift, but what, what, what's going on here? And we've been pulling on that thread ever since. And disorganized I would say is definitely a word I would describe it.

[Zach Gordon]

And so, and so Zach, is that, is it disorganized but also small. So an industry, but not, I guess, because what you're going to about to tell Us is how Thrift is way bigger than any of us thought, not necessarily small.

[Chelsea Sloan]

Yeah, Thrift at this point is something like a $50 billion industry, which is way bigger than I would have predicted at the beginning of our search process. It's huge. It's very fragmented. So there are bigger players like Goodwill, Salvation army, there are some private companies for profit companies as well that have some degree of scale, but nobody's got market share outside of, you know, a couple percentage points. I would say, especially if you exclude Goodwill, and even Goodwill, frankly, is a federated model. So individual stores kind of operate somewhat independently of one another. So even that example, the fragmentation exists even within the biggest player. So it's a much bigger industry than you would realize. An overlooked industry, though. So maybe this is another angle where there could be a big industry that nobody spends time on. Oh, because, you know, it doesn't make sense to. Not worth our time. That assessment needs to be. Needs to be redone, I would say, on a. On a rolling basis every five years. I think that every industry needs somebody to come in and take another look because it could be that the dynamics have fundamentally shifted in a way that actually does make the industry really interesting, which I actually think also describes thrift.

[Zach Gordon]

That's a great point. Every five years, industries can go through transformations and shifts. And so the list of 10,000 industries that we all look at, you just need to be constantly recycling through it every five years because stuff changes so so often. Great point. You guys were doing this in what year? This exercise.

[Tyler Gordon]

So we left both of our respective jobs in 2020. So heart of COVID which actually, at the end of the day, ended up being a really good catalyst because it, it forced us to take a step back and just say, hey, if we don't do this now, when are we going to do it? Are we ever going to work together? And so I would say that ended up being a really good catalyst for us just to take the plunge.

[Zach Gordon]

And so just to return now to the criteria, basically, where when you needed to look further afield, what you landed on was franchising. And then within franchising, the longer tail of categories and sectors that were not already getting a lot of attention, namely QSR gyms. I think you named something else.

[Tyler Gordon]

Home services.

[Zach Gordon]

Yeah, homes, of course, Home services. Thank you. Okay, so tell us about your discovery then of thrift, and let's hear more than you've already shared about the industry.

[Tyler Gordon]

Yeah, so I would say, thankfully, in the context of franchising, every franchise system, and I know this has been discussed at length on other podcasts that you've hosted. There is a document called an fdd, and that FDD will lay out a fairly wide range of very helpful financial information and other information. But two particular items. Item seven, which would give you information on the cost to develop, in our case, a store, but a territory otherwise. And then item 19, which will give you some insights into the financial performance of individual locations across the system. Now, different franchise concepts will provide more or less information in each of those items and in their FDD more broadly. And our view generally was, hey, if somebody is not providing the information, it's probably not a great sign, and so probably not a great area to focus. But then for the ones who do provide a lot of information, really the lens that we focused on principally was just unit economics. So how much does it cost, again, in our context, to develop and open a store? And then how much can you reasonably expect to return on a cash on cash yield basis? And so that was the initial, I would say filter. And so just look at every single industry, every concept that we could come up with and get our hands on and do this evaluation. And I would say as a function of that evaluation, what filtered to the top was our concepts just in terms of the pure return on investment for a franchisee. And in our mind, in franchising, if you get that right, if your franchisees are happy, they're satisfied, and they're making a really attractive return on investment, everything else solves itself. And so that was the lens initially. And then we went from there and did a much more robust and exhaustive analysis on our concepts on the industry and more broadly.

[Zach Gordon]

And Tyler or Zach, what do good unit economics look like? What are some rules of thumb here?

[Chelsea Sloan]

It's a funny question. I would say that, um, in franchising, unfortunately, even for those brands that do provide relevant financial disclosures, like Tyler was saying, because a very large percentage, I would say probably comfortably half of franchisors don't really provide you with enough information off the bat to even do this analysis. But of the ones then that do provide you with financial information, most of the time, the return profile is pretty uncompelling, I would say, from our perspective, from the perspective of any franchisee, in my opinion, you would want to see an unlevered payback of five years or better. So this means you would want to have a 20% unlevered yield or higher. Again, it's not many franchise concepts that provide even that. But then as you can get that payback down to four years, to three years, to something less than three years. That's when, at least in my view, you're looking at a special opportunity. And that certainly is descriptive of the restaurant space. Restaurants, generally speaking, require quite a bit of capital. So a million bucks plus, I would say. And so you need to generate actually a pretty significant amount of cash flow every year in order to get to that 20% plus yield that I referenced earlier. So really I'd say that's where we orient and that's where I would recommend any franchisee orient.

[Zach Gordon]

Great. And okay, so again, just what it is, is what it costs to stand up a new. So as you're evaluating this as a potential franchisee, what it costs to stand up a new business, if it's, you know, QSR or something, there's going to be some capex. If it's maybe a B2B service, there's going to be not a lot of capex. But then, and then assuming you take no loan to do this, say it costs half a million bucks to do this out of your pocket. You want to make sure that you can be cash flowing 100 or more year one.

[Tyler Gordon]

Yeah, exactly. And I would say some of the difficulty ends up being somebody can open up an FDD and you go to this item 19, which will lay out what you should expect to earn as a franchisee. I would just say that part of the difficulty is what you really want to get a sense of in terms of earning potential is what you can realistically expect to earn as a franchisee. And so if you turn to item 19 and let's say a given concept has, hey, we have 200 stores open and what we're providing you is sales level information for 50. So okay, well, sales doesn't give me a great insight into earnings. And 50 is only a quarter of 200. So how much confidence do, do I really have that this is something that I can underwrite from the outside looking in. What we have in our FDD and some other franchisors do as well, is going all the way down to ebitda, showing every single store. And so the lens that I would recommend people look at is, hey, let's say I'm middle of the road. I'm just a middle of the road franchisee. I'm not great, but I'm not terrible. What can I reasonably expect to earn? Okay, you know what, actually this is a business model they have a lot of confidence in. This is something I think I can do a really good job in. Hey, maybe there's not that much sophistication in the system today. And I can bring some real insights. Okay, what happens if I'm second quartile? What happens if I'm first quartile? What does that return profile look like? And the more information that's available to you, the more confidence you can get in terms of discerning what that potential looks like.

[Chelsea Sloan]

And I would say one really important point is that even for those brands that maybe don't have a very robust item 19, so they don't provide much in the way of guidance around sales or earnings potential, always what you want to do is speak to as many franchisees as possible. And so just get them on the phone and ask them, you know, some number of questions. One that I think you should always ask at the end is if you could go back in a time machine and tell yourself to do this or not again, or would you, would you do it again? And you want the answer to be yes, hopefully a hundred percent of the time, but at least I'd say 80% of the time. So you can get a lot, you can fill in a lot of these gaps just by speaking with franchisees as well and understanding not only what the earnings potential is of the business, but how difficult it is to run the business. Because if you can make a decent return but you've got to kill yourself doing it, that also might not be that interesting.

[Zach Gordon]

Return on investment and return on brain damage. Can you name specifically what you saw in the franchisees? So let's also just to be clear for the audience, audience, you guys actually have two franchisor concepts from a single owner. So it might be a little confusing if we don't lay that out. You find these two concepts, name them, and what did the unit economics look like?

[Chelsea Sloan]

So the two concepts are uptown cheapskate and Kid to Kid. They're fundamentally the same business. So we buy and sell used merchandise, mainly apparel, but then sort of ancillary items as well. And we target different demographics. So for uptown Cheapskate, we're buying and selling clothing, accessories and shoes for young adults. So these are people aged 15 to 35 plus. And at Kid to kid, we're buying and selling clothing, shoes, equipment, toys, books. If you have, if you're a parent, you need it. We buy and sell it at Kid to kid, all oriented towards kids aged 0 to 14 years old. So those are the two concepts. And in terms of that filter that I mentioned earlier, in terms of unit economics today, it's actually pretty much equivalent what it Costs to open in Uptown or a kid to kid. So it's on average about $500,000. And I'd encourage anybody who's interested in learning more to just look at our FDD and to understand in detail, we provide actually a very high degree of detail, kind of what the different costs are and how they might apply to your specific market. But let's say it's about a half million dollars to open one of these stores and on the uptown side the average EBITDA is just over $180,000 and for a kid to kid it's just over $90,000. So there's some bifurcation there between the two brands in terms of the at least trailing earnings that we see across our franchise systems. However, in our view, the earnings potential at steady state of both of them should be about equivalent. Um, and so that's something we can, we can dig into in a little bit more detail. But, but that certainly is as we think about our five year, ten year plan for the company that describes quite a bit of where we'll focus.

[Zach Gordon]

So that would, that kid to kid number of 90 of course doesn't quite meet the 20% threshold. But you're saying it should be closer to Uptown cheapskates, which was 180, which is a 36% unlevered return. You think it, it deserves and can get there. Deserves to be and can get there.

[Chelsea Sloan]

That's where we would orient. And so another thing that we do in our FDD is that we provide quartile level information. So we'll give you the just true average across all of the stores in the consideration set. So these are stores that have been open for at least 12 months and we include every single store that meets that criterion. But then we'll also show the first, second, third and fourth quartiles for both brands. And so you can see if I'm a really, a really engaged operator because I would say that there's a, there's a spectrum in our, in our systems as to how engaged an individual owner might be. But if I'm a really engaged owner who's really following the systems, who's making the right investments in team and otherwise, you know, should, should I reasonably expect to be in the first or second quartile, which Tyler and I actually, before we got involved at the franchisor level, were considering becoming franchisees for fully a year of these two concepts. And so for us, if you can't see a path to becoming a first or second quartile franchisee, then Maybe the return on brain damage is something you want to spend a little bit more time digging into. But if you look in particular at our first and second quartile performance at Kit to Kit and then especially at Uptown, that's where these yields start to, you know, Forget about the 20. Yields start to get materially higher even than that.

[Zach Gordon]

And these yields, by the way, are EBITDA yields, not SDE yields. So these would be after paying yourself a proper market salary as an operator.

[Tyler Gordon]

No. So they're, they're equivalent to sde. One thing I would note though, is for multi unit, it does include any above store corporate infrastructure. And so, hey, if you own five stores, you're not the person who's the manager. Every single one of those five stores, typically speaking, you'll have a good manager in each one of those locations and you'll have a district manager sitting on top of it. And so the SDE or EBITDA numbers are fully burdened by that corporate level of infrastructure, minus owner's income.

[Zach Gordon]

You just said, Zach, that you guys were considering being franchisees. So let's get into the part of the story where you think you want to be franchisees. And then here you are, owners of the franchisor, the entire franchisor system.

[Chelsea Sloan]

Yeah, Yes, I would say fully for six plus months. The path we were charging down was just to be franchisees exclusively. And so we talked to Basecamp, which is the parent company of our two brands, kid, to get knocked down. Cheapskate. We also have a competitor, a public company called Winmark, which has two analogous brands, Plato's Closet and Once Upon a Child. So we actually spoke to their franchise development team as well. And what we wanted to do was identify within the systems that we were evaluating, hey, are there markets where we could get to five 10 plus stores? Because look, there's two of us at a minimum. It wouldn't have made sense for us to have one store, two stores. We wanted to build really an enterprise as you would see in QSR, right. There are actually not that many onesie2z franchisees in these scaled QSR brands anymore. We wanted to get, you know, to something, I would say more relevant in terms of unit count. And it turns out that for our two brands, and this is still true today, there are a lot of markets with a lot of white space where you could get to five to ten stores actually reasonably easily and quickly just within one individual dma. So we were looking at a couple in particular. I would highlight Houston, Denver was one that we, that we Considered we're from New York and we spent a lot of time, a lot of time out on Long Island. Long island is one that we looked at as well. So we were actually looking at territories. You know, how would we build this out? What roles would each of us play and how would we think about building a team? And so we did that for about six, six months.

[Tyler Gordon]

You know, I would just say like it ended up being, it's interesting if you fundamentally view that there's complete alignment between the franchisor and franchisee over a long term time horizon, which we completely do, the analysis around becoming a franchisee is, is actually more or less identical to the analysis that you would do. Or there's a large amount of overlap when you're looking at the franchisor. And so during that process, it's not just looking at DMAs, it's speaking to franchisees, it's really diving into the unit economics to say okay, what, what does it take to be a middle of the road franchisee? What does it take to be first or second quartile? And so we spent a lot of time just looking at those sets of criteria. And I say our view ended up being, okay, well if you love the unit economics for a single location, what happens if you multiply it by 10, if you multiply it by 20 and you can end up getting to a really attractive return profile just as a franchisee. And so I would say one thing that we might get into later is as we sit here today, while we're focused on the franchisor and building our team and our systems here, we absolutely will want to be opening stores in the not too distant future ourselves.

[Chelsea Sloan]

One detail I didn't touch on maybe as explicitly earlier is this notion of, hey, operators that are, let's say especially professionalized, who are focused on scaling their operations. This would describe most of our multi unit operators who then would tend to be higher in terms of their average performance, which then you could see in sort of the quartile level performance at Uptown. Our top quartile generates SDE of over $350,000. So the yields, again I said that 20% would be a reasonable floor. They go much higher in the case of our concepts when executed really well.

[Zach Gordon]

And as you thought about being franchisees and de novo or, or acquiring or de novoing up to 10, call it what was the structure of the entity going to be or the structure of the search? Were you raising capital from investors? Were you self funded searchers? Were you even putting yourself into a label on yourselves. How are you going to do that? Approach this from the, from the capstack perspective?

[Tyler Gordon]

Yeah, I would say that the best label would probably just be a self funded searcher. And I'd say a huge point of focus for us at that point. And I don't think that there's a right answer for everybody. It's very situationally specific. But being self funded in our mind allowed us a pretty diverse set of opportunities, or said another way, an ability to focus on a diverse set of opportunities. We didn't feel that we had to be particularly pigeonholed into, hey, just focus on X or focus on Y. And so even in the context of what we acquired, hey, we charged down the path of being a franchisee for, for six months and then pivoted to focusing on the franchisor. And so it was self funded over the course of the two years. And then when we ultimately found the opportunity, we ended up reaching out to a lot of people just in our network, people that we had worked with historically, friends of ours, as much as anything else, just to get their perspectives on the opportunity we had. And so to say, hey, if we're about to make the biggest personal, professional, financial decision of our lives, if there's something you see about this profile that gives you pause or you think that we need to spend more time on, please do us the huge favor of letting us know. And I would say through that process, thankfully those individuals, almost to a person, expressed a real desire to participate and invest alongside of us. And so while we were self funded initially, we ended up raising some capital when we ended up acquiring the business that we did.

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[Zach Gordon]

So tell us now about the evolution of franchisee to. Oh, wait a second, maybe let's buy the franchisor.

[Chelsea Sloan]

I would say. So we were engaged with. So Basecamp is a family founded company. So Brent and Shawna Sloan founded the company back in 1992, first with kid to kid and then about 15 years later, a couple of their kids, Scott and Chelsea Sloan, founded Uptown Cheapskate. Again, same business model, different skin, different target demographic, and so different kind of permutations of family members had been involved with the company over time. So very much a family enterprise. Turns out that Chelsea Sloan, Chelsea Sloan Carroll now and her husband Jeff Carroll were in the process of building a platform of stores themselves. So when we were speaking to them, I think they had about 15, call it 15 to 20 stores that they owned between Kids Kid and Uptown Cheapskate. So the first instance of evaluating become a franchisee was actually just Tyler and I, hey, what if we started opening stores in one of the markets that I mentioned earlier? The second phase then was I was introduced to Chelsea and we ended up speaking with them half a dozen times about what a partnership might look like at the level of their franchisee platform. And so we would come in as partners and by virtue of that acquire a piece of an existing business and then also intend to open new stores in again, one of those markets that I mentioned earlier. From there, it kind of just was this progression towards, okay, well now we're talking about a platform being involved with the family. I wonder if there's something to be done at the franchisor level, not just for arbitrary reasons, but because I and Tyler, we have a lot of experience scaling, helping to scale franchisors. There really was what from our perspective felt like a pretty good fit, just from a sort of skills and experiences perspective, but then also kind of this family angle as well we thought was really complimentary because something Tyler didn't mention, we had a luxury, which was that over the course of our search, our intention was to capitalize any acquisition that we made primarily with capital just from our family. And so actually I think that ended up being a really attractive component. Then as we met more members of the Sloan family for forming a partnership, not just because again, oh, it's great to work with another family, but because there's an Implication around the duration that we were talking about at the beginning of the conversation, if we had just raised capital, you know, from let's say, institutional investors, even friends and family, I think that there would naturally be an expectation for a return of that capital. And people are always going to gravitate towards the independent sponsor kind of expectation, five, seven, maybe 10 years. Because really what we were offering was permanent capital by virtue of just the fact that it was going to be predominantly family capital. I think we had real credibility and this is truly how we continue to feel to this day that this is something we'd love to be doing for 10, 20 plus years.

[Zach Gordon]

Hmm. It was also kind of a certainty to close thing if you, I mean, if you could stroke the check yourselves, they, they weren't worried, you know, you weren't going to be able to raise the money.

[Chelsea Sloan]

No question. And actually one of the biggest points of focus during the negotiation is then we shifted. Okay. There actually is potentially a fit at the franchisor level was the ability of the family to react roll equity into the new enterprise. So in fact, what ended up happening is that we acquired 60% of the company. And so day to day we, we run basecamp. Although we work very closely with the members of the family that I've mentioned, they continue to be among our largest franchisees. Not just Chelsea and Jeff, but then even Shawn at the mother owned stores. Scott, the son owns stores. So collectively they own something like 30 or 35 stores. The family does. They own also 40% of the franchisor.

[Zach Gordon]

Wow. Well, that's a dynamic we, we hear in search all the time about, you know, a family member staying in the business. This is that at a whole another level. We'll have to hear how it's going. Of course, probably some member, if not multiple are going to be listening of the family, are going to be listening to this, hopefully. So we'll, we'll see what we can get out of you about how that's going. But what, what an interesting dynamic. And so the family retained full or rolled fully 40%.

[Chelsea Sloan]

That's right.

[Zach Gordon]

So that's, that's, that's quite a bit. That's a, that's not too far from 50. 50.

[Tyler Gordon]

Yeah. And I think that that was to a point Zach was referencing before what was their mindset when this process was evolving. So in our context it was okay, we love the opportunity as a franchisee and we still do. But hey, there's this really compelling opportunity to hopefully add value at the front franchisor that'll Benefit us down the road as store owners, but then also able to help set the direction for the. The overarching brands. From their viewpoint, they love the business. As Zach pointed out, they're our biggest franchisees and they're continuing to open stores as we speak. And so they had no real fundamental desire to sell at their. I think this is what they would tell you. What they realize, though, is there's a very different skill set to take a system from 0 to 200 stores, from 200 to 2000 stores. And so if they have this real entrepreneurial gene, they have an ability to really take a white piece of paper and create something spectacular from it, which is not, I would say, a gene. I have in spades. What we can bring is really this focus on developing processes, managerial capabilities, ultimate execution. And so I would say in terms of a fit, we both had this really long term horizon in mind. But then from a capability standpoint, it really fit like a hand in a glove.

[Zach Gordon]

Yeah. And. Right. And also their investment in the future is not only that rolled 40%, but also all of these stores. So they're also still benefiting from the enterprise and the improvements that you're going to bring and the growth of the brand and so on. As franchisees. As end franchisees as well.

[Chelsea Sloan]

Exactly. I would say one other thing about this industry is that it's a lot of fun. Just from a personal perspective. I like to collect things. I like the treasure hunt kind of dynamic, which is very much, I'd say, a part of our value proposition to customers. So already that's activated something that I find kind of personally satisfying. But then on top of that, from an operational perspective, thrift is very complicated. And a lot of the decisions that are made in thrift stores are very subjective. So what is this pair of jeans worth versus that pair of jeans? Just as one example. But there are an endless number of subjective decisions that are being made in thrift stores all over the country. To the extent that you can kind of view this as a set of 100 or 200, even a thousand puzzles all over a store. And your ability to solve those puzzles in a differentiated way will result in you serving customers better and making more money, that's really the kind of the game that we're playing every day. And especially in as much as the industry has been so disorganized historically, um, a lot of these ideas aren't rocket science either. It's like, how about we start doing this? And it's like, yeah, why don't we do that? Like real retail 101 level stuff. And so it's just a lot of, it's a lot of fun also.

[Zach Gordon]

Well, I want to spend more time there, Zach, on the improvements that you're going to be making. Kind of the way this business works more on the industry and then of course, a picture of the businesses themselves. We haven't really gotten a good view of that. So we still got a lot to go there. But before we turn our attention to it, so. So I heard you say 200. Zero to 200 stores is what the family did. Exactly 200 stores. What, what was the footprint when you bought the franchisor?

[Tyler Gordon]

Yeah, so it was a little bit above 200 stores, but let's call it plus or minus around 200 when we first became involved. And sitting here today, we're just over 270. So we're opening, let's call it 30 plus this year and then probably 40 plus next year. And then the vision is definitely for, let's call it at least a thousand of each concept across the US and so there's a lot of, of Runway for growth. I would say importantly though, and maybe this gets into something that we kind of talk about later is this dynamic of how do you prioritize when you come in? I would say a lot of people, understandably, that are focused on acquiring or operating a franchisor are very focused on unit count and they view that as the most important indicator of success. In our mind, the most important indicator of success is how well your franchisees are doing. And if your franchisees are doing extraordinarily well, the unit count will solve itself. And so when we came in, we actually spent more or less no time over the first two years on franchise development and opening new stores or trying to again attract new franchisees and everything downstream. And those investments are the ones that I think are now setting us up to be able to grow unicount at a much more rapid pace on a prospective basis.

[Zach Gordon]

And so private equity or whomever trying to buy a franchisor using unit count as a key filter is all about, because that's an indication of success of, of, of the concept. And if there, if there isn't a certain critical mass of units, it must mean that the concept doesn't have legs. And to that you would answer, well, if it's a family founded business, maybe they just didn't have, they were focused on other things or they didn't raise capital to go from, you know, to, to build a larger footprint. There could be any number of Reasons which answer why there aren't more units that are not. Because the concept doesn't have legs. The concept does have legs. And the better, more, more kind of substantial KPI is how an individual, the individual franchisees are doing. And if you only got 100 of them, but they're all doing decently well, you have confidence that there could be a thousand more. Yeah, yeah.

[Chelsea Sloan]

And I would say, I would say that if you look out at the franchisor landscape, there just aren't that many. So Tyler mentioned earlier that there are a couple of thousand that are doing business in the US at any given time. It's probably about 3500. To put a finer point on it, most of them are not actionable. And so they're, you know, maybe scaled brands, some of them are public companies. And so the actionable universe of franchisors is that is a very small fraction of that already not gigantic number. And so what you've seen is private equity funds especially that have something of a specialty in franchising or multi unit. There are actually even some dedicated private equity funds that more or less exclusively focus on franchising is in a lot of cases now they're looking at really small brands. So maybe it's a company owned, you know, maybe five unit network of restaurants or you know, a gym or a stretching lab or something like this that exists in one market. If those five units are doing really, really well, that can be evidence enough that hey, maybe this can, can travel. And the unit count again to Tyler's point, will just follow. It'll grow organically out of what are really just fundamentally strong unit economics.

[Tyler Gordon]

Yeah. And I think that there's two elements to it. So there's the evaluation at the outset of okay, what is a really strong franchise system, which I think ultimately comes back to unit economics, irrespective of whether it's a smaller scale or larger scale franchise system. What I then find interesting is what the investor group does with the concept post acquisition and there it's really a question of sequencing or prioritization. I think in a lot of cases there's this viewpoint of hey, we just paid a big multiple for a business, we really need to invest in growth. And so it is grow first and support later. Hey, great, we're at 100 units now, let's get to 500, a thousand as quickly as we can. And along the way we'll figure out how to get those stores open and how to provide support to what is now a system multiples of the scale that we initially bought in our mind if you have that long term orientation and you think that your unit economics are not just going to hold up but expand over time, it really behooves you and certainly is is beneficial for the franchisee to invest first in the downstream infrastructure. So invest heavily in our new store support function. Invest heavily in our field operations, invest heavily in our technology which is a huge point of focus for us here and then start focusing on Fran Dev. And I'd say just as thrift and our concepts were off the beaten path when we started looking at it from a franchisor standpoint, that remains the case today. There are so many people out there who want to open up a dog concept or a restaurant less who immediately come to mind and say hey, I want to open my own thrift store. And so it's about just getting in front of those people and saying hey, this is an incredible opportunity, not just financially but personally and you can have a lot of fun in it. And so you have to put some effort in. And I say we're just getting to that point where we're going to allocate more time in that direction.

[Zach Gordon]

Yeah. Just to, to press on this and why a small system that has, that has a good model as demonstrated by a few dozen successful happy good unit economic franchisees. There is though this whole ecosystem of Fran Dev if you put it as you put it franchise consultants and stuff. So, so I would still think so now I'm, I'm pushing on you guys logic here. I would still think that there would be, there would be demand pulled out if it's a good concept that demand would pull out of let's say a founding family who's only has you know, 200 stores more units because franchise, you know, I'm sure franchise consultants are always looking for the, you know, the next concept that nobody's heard of and, or whomever. They're just that, that people opportunity would find them to open more stores. No.

[Tyler Gordon]

Yeah. I think that the, the interesting dynamic there because I completely agree with you and that's what we're actually starting to see now is even with these franchise consultants or brokers pick the terminology. They still want to develop relationships with the franchisor and so they still want to understand okay what actually is the nature of the system. I want to get to know the owners and what their vision is moving forward. At least the, the good consultants should want to do that. And so it's a, it's a real relationship building exercise because they want when they then present that opportunity to their, their clients, to the candidates, that they have real confidence in what they're presenting. And so I would say for the really the first 30 plus years of our company's history, there really wasn't much of an investment in terms of trying to get in front of those individuals. But we, we have started doing that here again in the last six months and we've had a few different brokers who have then come back to us and said where have you been hiding? Like how has this been the case that I've never heard of you or I've never really focused on kind of either thrift more broadly or your concepts more specifically. These are phenomenal unit economics. There's so much room to grow. And so since we started making that investment again, very simple stuff of just reaching out, sharing some marketing materials, highlighting who we are, hosting a webinar. We've seen the lead flow from that channel go up, I don't know, 15x in the span of, of six months. And so yeah, you should see as I would say, concepts get into that spotlight as there's more notoriety around the potential that there ends up being that pull from various industry participants to help.

[Chelsea Sloan]

Fuel growth and existing franchisees. I would say that fully 50 plus percent of our development historically has been internal. So it's franchisees who are raising their hand and saying, all right, I'm ready for my second, my third, my fourth, my fifth store. So actually we view our job as to make sure that every franchisee is set up for success. So that's at the individual unit level. But then also we want to facilitate people, you know, whatever their goals are. If they want to get the five units, how do they get there with as little brain damage Back to that concept as possible.

[Zach Gordon]

Great guys. And so okay, so you pull on the thread another, another turn of phrase that we keep returning to. You pull on the thread franchisees. Talk to one of the brig franchisees who happens to be the in the family. Then you end up at the the matriarch and patriarch who are the owners of the system and get to talking about why it actually makes sense to buy the entire system with them rolling a significant chunk. 40, 60. What can you share what base camp the parent entity look like as a business at that time in terms of revenue and Ebitda and also what you paid.

[Tyler Gordon]

Yeah, so as we talked about earlier, at the time we bought the business it was about 200 stores open across the U.S. at that point it was about $200 million of system wide sales so roughly around $1 million per, per unit. How that then translated into the financial performance of Basecamp, it was about $12 million of revenue and then $4 to $5 million of, of EBITDA. And so obviously as a, as a franchisor business, as you or, or some of our listeners may know, it's actually very similar in a lot of respects to a SaaS business in that there's a lot of investment upfront to build your process processes, your team, your infrastructure. But then when you've reached a certain requisite level of scale, the margin profile ends up being really attractive from there. And so at the time we bought the business, it was really past that inflection point where each incremental dollar of royalties or overarching revenue ended up translating really attractively down to the bottom line.

[Zach Gordon]

Well, I, I want to hear, have that inflection point defined super clearly, Tyler. But, but just before we do that, a couple observations at those numbers. And by the way, thank you so much for such transparency. That's really awesome. People are going to learn a ton from that. First thing that jumps out is $12 million in, so that's franchisors top line revenue. So in other words, the, the, the aggregate licensing fees that come back up to you as franchise soar $12 million and then 4 to 5 million of EBITDA on that. So pretty awesome margins. I mean really awesome margins. That's great. And of course those are recurring and there's a, that's really high quality, very high quality revenue recurring 10 year contracts as you said. On the other hand, I would say that I'm a little like so $200 million of, of aggregate economic activity across these stores, that's very impressive to have built. But on this, you know, the brain damage point, the return on brain damage for so much for such a big footprint, so many moving pieces, $200 million of aggregate revenue to kick out 4 or 5 million of EBITDA on the other end per year feels like low return on brain damage.

[Chelsea Sloan]

I would say there's a lot of brain damage. Hard to exaggerate how much brain damage there is in creating a successful franchise concept that gets to 200 source. So to Tyler's point, so much credit goes to every member of the Sloan family for putting in that brain damage over 30 years. However, what there's less of is capital investment. So this is one of the key benefits of a franchise business model. It's that you're licensing out your brands and your systems to people who then in our CASE are going to open up stores and they're going to spend, call it half a million bucks every time to do so. And we're not putting in any capital. Actually, to the contrary, people pay us a franchise fee. So basically we're selling again, the license to our brands and systems and we're getting paid a fee up front. And then on an ongoing basis we're taking a couple of different fees. But the most important one is a 5% cut of sales. So it's a royalty. So it's a very durable revenue stream. You know, all the rage is recurring revenue. This is contractually recurring revenue and we are taking a cut of revenue rather than of the profitability of the stores. Now that's where I think the overlay from our perspective on our focus being on franchisee profitability, not franchisee revenue, which just from an objective perspective is from a financial standpoint, what franchisors should care about the most. Just because that's how we generate our own revenue. We in fact just push our focus down the P and L for franchisees and focus on their profitability. Because if they are profitable and their profits are increasing, hopefully at a really attractive rate every year, that is going to imply that the revenue is increasing just because especially for location based franchises, revenue is the biggest driver of profitability over time. But certainly then it's going to make them more incentivized to open more stores to tell their friends, hey, you got to get into this franchise, which thankfully we've seen a decent amount of even just over the past year, is one of my best friends from college signed up to be a franchisee very recently as an example.

[Zach Gordon]

Cool.

[Chelsea Sloan]

Yeah, yeah. So we, this is why it's from my perspective, from our perspective so important for us to focus on franchisee profitability because that then implies that franchisee sales are going to be really healthy both at existing units and then prospective new units. And that's going to translate down into our success as well. So a lot of brain damage to set up systems that are worth, worth it to a franchisee.

[Tyler Gordon]

Right.

[Chelsea Sloan]

Because a franchise agreement is kind of a preposterous agreement if you look at it from a certain angle, which is I'm going to pay you.

[Zach Gordon]

So one sided, you mean, it's so one sided.

[Chelsea Sloan]

I'm going to pay you upfront, then I'm going to give you a 5% perpetual cut of my revenue. You're going to have so many different ways to tell me what I can and can't do in my business as a Franchisor, you have to have really phenomenal, and I would say differentiated systems that make that worthwhile. I'm very confident that that's what we have and our systems are getting better and better. But okay, so to get back to your original question, a huge amount of brand damage, setting up those systems that are differentiated, that are working, worth people signing up as franchisees to take advantage of, but very little in the way of capital intensity, which is a very big benefit.

[Zach Gordon]

Returning now, Tyler, to the threshold that you talked about, the inflection point of when kind of the, the profitability of the franchisor really takes flight. Say more about that, please.

[Tyler Gordon]

Yeah, so if you're starting up a franchise system, so as Zach pointed out, you're not the one who's actually putting in the capital to develop the store yourself, you're not the one who's operating the store, but you want to have a really compelling reason why somebody would sign up to become a franchisee and sign what is a minimum of a 10 year contract and hopefully something that they'll be involved with for decades to come. And so how do you do that? It's setting up a lot of processes, a lot of infrastructure to not just help stores get from signing a franchise agreement to a successful grand opening, but increasingly generate an attractive revenue profile and return profile for years to come. And so there are a lot of investments that were required upfront. And it's not just your typical, oh, we need a back office to run a business. You want to build a field operations team, you want to build a marketing team such that the franchisee doesn't have to do that on their own. In our case, a massive critical and competitive advantage for our stores is our tech infrastructure. And so somewhat counter intuitively, as a clothing resale franchisor, we spend a few million dollars every single year on our tech development, most of which is in the software side. And so that's a lot of infrastructure that is required whether you're operating one store or supporting one store, or 100 or 500 or 1,000. And so to the extent you have this long term vision and you have this viewpoint that hey, we're going to scale over time, you make those investments up front, but you need some amount of installed base before you even break even. But then because the margin profile for there becomes really attractive as you scale, so does EBITDA on much more than just a linear basis.

[Chelsea Sloan]

And so the break even, in just sort of industry parlance tends to be at like 40 or 50 units, especially for location based franchises, sub 4050, you are doing a humongous amount of hustling to go and try to convince people to join your fledgling brand. Even if it's successful, let's say in an original market. Well, does that guarantee it's going to be successful, you know, a thousand miles away? In a lot of cases it doesn't because there are concepts that are just fundamentally regional. And so early franchisees are taking some. Any franchisee is taking risk, obviously, as any business owner is by signing up with a franchise. But especially early on, the risk profile of, of a franchise is just naturally going to be higher. So it's a very long march typically to get to 40 or 50 stores. And then from there that's where you start to see incremental units, incremental dollars of sales translate into a really attractive financial proposition for the franchisor.

[Zach Gordon]

Yeah, well, wow. If you guys had 200 units are again 4 to 5 million of EBITDA on 12 million of revenue. So that's what, 33 to 37 or 8% net margins already. And so those margins are only going to improve from an already very high base. No wonder you paid double digit, double digit multiple.

[Chelsea Sloan]

You know, it's kind of funny to come full circle in terms of our engagement with this opportunity as we sit here today. We think I'd say along similar lines like, wow, our concepts are adding or are generating a lot of economic value and we have of course some kind of role in that and some cut of that as the franchisor. But gee, why aren't we opening stores ourselves? All roads lead to that conclusion. So we're very excited Tyler and I are to be opening stores. We got enough fish to fry at the franchisor, I would say for the next year or so at least. But at some point in the not too distant future, we're excited to open some of our own stores as well.

[Zach Gordon]

Isn't that a distraction? Isn't it like you want the franchisor to have a few of their own stores so they, you know, they, they know what it's like. Basically they can, you know, they can really empathize with the franchisees. But fundamentally your, your value prop is different than being store operators?

[Chelsea Sloan]

I don't think so. And that can be true for some concepts. You know, it was true of rbi, I would say that was certainly something that we would talk about in earnings calls. And now, you know, RBI owns something like 2,000 restaurants. So there are reasons why it can make sense for the franchisor to be Also participating on the unit level or the franchisee side. I would say in our case really the differentiation for our two concepts is operations. So it's operational efficiency, it's moving through hundreds of thousands of units of inventory every year. And that's just, that's descriptive of an average store. So really the battle is won and lost in operations for sure. Marketing and brand building, this is important just as it is for any consumer facing business. But really our value proposition is all tied up in our operations. And so for us, I would say in directly owning stores, to me that's one for one exactly going to be then translatable into the level of support that we can provide as the franchisor. Just because we'll be living and breathing these operational complexities that really as franchisor it's our job to try to minimize, to alleviate over time. So I actually think there's complementarity in our case now we're not going to be, I don't think, you know, the store level manager necessarily. Although I'd be very happy to do that for, you know, as long as it takes for me to really understand what it's like to be a store manager. I can't speak enough about how important it is to understand your business at the ground level. So I anticipate that's definitely in the future for me and for Tyler. But as soon as we understand something then it's about okay, systematizing it and teaching it to somebody else who can, who can handle it. So I would say our vision is not to be spending some massive percentage of our time on stores that we own necessarily only doing so I would say in function of one, making sure that they're successful, but then to sort of picking out the insights that we can from our own operations such that we can translate them across our entire systems.

[Tyler Gordon]

Yeah, I'd say it's interesting. I mean whether you ask people who in invested in our search or our family members, even some of our franchisees, there's very frequently this question like why haven't you opened stores already? This just seems like such a no brainer from a financial standpoint as Zach pointed out, just even from an inside standpoint and being as close as you possibly can be to the front lines. And I'd say the reason for that is Zach and I only ever want to do things if we think we can do them to a really, really high quality standard. And there's just so much going on and so much opportunity at the franchisor that requires our full and undivided attention and 100 hour work weeks easily. That, yeah, that distraction does not make sense today. But as we continually invest in our team, which is an incredible team we have here at basecamp, I would say our ability to allocate some of that bandwidth to owning and operating stores will free up in a way that I think not just is attractive again for us from a financial standpoint, but to Zach's point, also will help unlock insights that then we can internalize and apply across our franchise system.

[Zach Gordon]

Sure, sure. Well, that seems like the big win.

[Chelsea Sloan]

I will say that our head of new store. So this is the person who oversees the, you know, several dozen stores that are making their way from signed franchise agreement to grand opening at any point in time. So Taryn Watson, phenomenal leader of that function. She owns a store with her husband and mom in, in Dallas actually. And it's I think the number 7 or 8 store in our system. So if there's a question, can you be a phenomenal, you know, corporate employee at the franchisor and a super successful franchisee? Is there a precedent? There's, there's at least one. And I would say the Sloans as well, you know, they're on both sides of the fence as well. Really? Just because we view the economic opportunity on both sides of the fence as, as so attractive.

[Zach Gordon]

Yeah, guys, I still have a lot I want to cover just making the audience aware and we're also going to get into the opportunity more about this. So when I've had franchisors on in the past, you know, you get the audience comment like, hey, is this just a, you know, a pitch or an ad for, for the franchise concept? Of course it's not. I was introduced to you guys by Rick and Royce or sort of indirectly via Rick and Royce. So, so you are, you know, we, we come to come together honestly via ETA ecosystem connections. But I, I want to spend time on, on the opportunity here and I said we would kind of get a more of a picture of the business. Let's do that. Both of both brands. Let's do that. Then let's hear about macro trends and thrift and then we'll see what, see what else we can have time for.

[Tyler Gordon]

Perfect. That's perfect.

[Zach Gordon]

Tell us about Uptown Cheapskate first, please. What does it look like, what's the experience, etc. What, what can you, what can you share to give people a picture?

[Chelsea Sloan]

Absolutely. So from a consumer perspective, I would say what we offer is very different than just about any other kind of thrift. Operation out there. This applies both to uptown and to kid to kid. So what we're trying to do is provide all of the historical benefits of thrift. I would say the two most important being this treasure hunt. What am I going to find? I'm going to feel so great walking out of the store component. And then two is value. So just by definition, nobody is going to buy a secondhand item that they can buy new for something approaching the same price. Right. So value is a massively important. It's the most important driver, I would say, of consumer purchasing behavior in, in our space. So those are benefits that consumers will, I would say, historically attribute to thrift. More broadly, however, there have been a lot of costs associated with thrift as well. Just visualize what, what you will when I say the word thrift store. Disorganized, dusty, maybe cluttered. This treasure hunt you talk about return on brain damage. You got to be, you know, sifting through all kinds of stuff that you wouldn't even wear to a costume party to maybe find the one thing that you actually do want to buy. So there's a lot of brain damage associated historically with going to a thrift store in order to arrive at those sources of value that I mentioned. So what we're trying to do is extract out those sources of value and leave everything else behind. So an uptown or a kid to kid is meant to look and feel much more like a full price boutique. In fact, I would say that our concepts compare very favorably even to a lot of other full price boutiques. They're nice places just to be. I would say they're clean, they're very well organized. You know that there are sections for, let's say you're in an uptown for women's tank tops, for women's, women's jeans, men's jeans. Everything is very well organized as it would be in a full price boutique. Same thing at kid to kid. Although we have a, I'd say more diverse selection of merchandise to include equipment and toys and books, things that parents need for their kids. So it's very upscale and it's really easy to find things that you're excited to buy and unlock. Again, those same two sources of value, the treasure hunt and then just value. Really good prices in and of itself. I would almost analogize it to, you know, walking into the hills with your shovel looking for gold and you stick your shovel in the ground and there's just like a gold nugget that pops out. That's, that's the type of gold digging that people.

[Zach Gordon]

That is over promising, my friend.

[Chelsea Sloan]

And I'm talking about from. I'm talking about from a consumer perspective. I think that our stores, when they are run properly, which the vast majority of our stores are run really, really well, that's what people should feel when they're walking through our stores. And that's, in fact, what you'll hear. Even if. So I go to. And Tyler and I go to, I would say, collectively, a bunch of grand openings over the course of a year. And it's almost as if our marketing team has planted people in the store where I'll just as I'm browsing the aisles, hear people saying, is this the actual price? Like, how is this even possible? Is this stuff new? Is this a thrift store? What is this? Wait, I can actually. I can sell my clothes to this store as well. Because that's another important point of differentiation. We do very little consignment. We're paying cash for clothes that people can come in and sell to us every day of the week. This is not something that most. That most consumers have experienced before. So again, it's marrying the traditional benefits of thrift with the traditional benefits, things that people are used to from just sort of the full price world as well.

[Zach Gordon]

And what does it look like? Are these.

[Will Smith]

Are these anchors in a strip mall?

[Zach Gordon]

Are they standalone, which is square footage? Generally, give us. Give us a visual.

[Chelsea Sloan]

You're almost always going to be in a shopping center or a strip mall. And I would say our bread and butter is probably like B minus, C plus centers, which actually is an advantage from a real estate perspective, because you don't need to go pay, you know, 60 bucks a square foot to be in the A plus center in the center of town. In fact, what we found is once people understand our model, and that's the first barrier, just because when we open up a new market, people are like, what is this? I've never seen this before. Once you get over that hurdle, people are very willing to drive an extra five minutes, maybe down the street from a TJ Maxx, something like this in that B minus center that's down the road. They're very willing to travel to get the benefits that we provide. Again, both on the selling side. So we offer cash for clothes on the spot, and then on the buying side as well, where the consumer can go and find stuff that they really want to buy for prices that are, call it 70% off original retail square footage is typically 4,500 square feet, although I'd say we definitely have Some smaller stores all the way down to 2,500 square feet. We also have some larger stores that could be 10,000 square feet. But I would say our center of gravity is right in that 4,500 square foot footprint.

[Tyler Gordon]

Yeah, and I would say that what's the, what's the overarching goal? Goal is to make each one of our stores, whether it's an uptown or a kid to kid, a destination. And not just a destination in terms of again, that treasure hunt and the, the individuality that you can access, but also just from a environmental standpoint. And so if you think back to when we were growing up, where would be the cool place to go hang out on a weekend or at night? You go to the mall. And so that's where people would be to socialize and develop a sense of community. That obviously is not the case now in most parts or large parts of the US and so we would hope, whether for an uptown for teens and young adults or a kid to kid, for the young moms to really be the place that you go and, and you build community. And so that is the experience, this vibrancy, this community support orientation that hopefully exudes from the second you step foot into one of the stores.

[Zach Gordon]

Great guys. And. And then tell us about the piece of selling clothes there. What does that look like?

[Chelsea Sloan]

Yeah, absolutely. So it's funny, what we just described up to this point is all the consumer facing part of the business. So it's kind of the skin that we put on for consumers to get them excited about shopping secondhand. I would say, however, that the real differentiated value that we generate is on the back end. So it's in processing hundreds of thousands of items, merchandising them in a really attractive way, and selling through them very quickly, sort of hooking into that front end skin that I mentioned earlier. And where that process starts is at the buy counter in our stores. So you can think of the buy counter and they actually, these buy counters take up a decent amount of the square footage of any one of our stores. That's almost like a little factory within the store where as a vendor, and I'm a vendor, I would say probably every other month to a local uptown that we have here. And a kid to kid, I'll bring in, I typically am bringing in two bins worth of merchandise that me, my wife, our kids no longer have use for. I will bring them up to the counter, the person behind the counter will take them in, I'll input my information, and then I'll be in Sort of the queue which is the start of this assembly line in this mini factory. From there, the first employee, we call them the pre sorter, will go through the items that I brought in and will from, let's say I brought in 100 items. They will segment out the items that the store actually views as resellable that they want to buy. And that might be 30 or 40 items, depending on the mix. Okay. Then they've got those 30 or 40 items, the remainder. So the 60 or 70 that the store didn't take, I can either take back as the consumer, or in almost every case, the store will donate on my behalf to a local charity, a church, or something like this. The 30 or 40 then that the store is going to buy in. They then start interacting with our proprietary software. We have a product appraisal system called Baseline Bends. They're inputting attributes for every item. So let's say it's a pair of jeans. I'm going to say it's a men's pair of jeans. It's this brand, it's in this condition, a couple of different attributes. And at the end of that journey, what will be presented to the employee is a matrix of prices with one that's highlighted in the middle as the suggested price. And that suggested price reflects the millions of data points that we're generating in any given year. Frankly, it's hundreds of thousands even every month at basecamp across our systems to come up with what is actually the right price for the item with that set of attributes. Okay, great. So then they've selected that price. They do that for all. Let's just say it was 30 items that they selected. They do it for all 30 of those items. And at the end of that process, then they total up all of the dollars that the store is going to pay me as the vendor for each item. Round to the nearest dollar, and there's your payout. So I end up walking out the door with cash. We actually just in the last couple of months rolled out a digital payments option so I can get it via Venmo or a gift card. There are a number of different options that the consumer has to choose from, but basically I'm getting cash and I'm walking out with the stuff that I perceived as no longer having value for me.

[Tyler Gordon]

Yeah, and so what's. What's then the value to the vendor who's coming in? So in Zach's example, himself walking into an uptown or a kid to kid.

[Zach Gordon]

And just to be clear, guys, vendor, because it's a Bit confusing of word, but vendor is just, if it's not clear to the audience, the individual who wants to get rid of, sell old clothes to you guys. Yeah, but you guys, your, your phrase for that is vendor. Go ahead.

[Tyler Gordon]

Yeah, and if, if you think about it just at a very high level, we bifurcate our customers into two buckets. So one bucket is vendors and those are people, locals in our community, who come in and will sell items to our store. So that's the first bucket and the second bucket is shoppers. And so those, the people who then will come in and actually purchase those items when they make their way to our racks. There's obviously a huge amount of overlap between those two groups. And so most of the time the person who is coming in and selling to us as they're waiting for their then to be completing will turn around to become a shopper themselves and just basically trade up sizes or trade up styles in the case of Uptown. And so really what is the value proposition to those vendors? Zach talked about before, what the proposition is to the shopper? So hey, they come in, they get access to deep value, individuality, sustainability. There's so many reasons why the shopper would come in. For the vendor, I'd say it's really two core components. So one is convenience. They can bring in their entire closet, their closet, their kids closet, and be able to have an avenue to receive some residual value all in one place with cash on the spot. And the second is a fair payout. And so yes, they could go online and maybe sell each individual item by itself to find that market clearing price to the penny. But the reality is the amount of friction there or having to stop by multiple different stores really is just not worth the squeeze. And so for us, it's again, convenience. Clear out your full closet and get a fair cash payout on the spot.

[Zach Gordon]

Sure. Now this cash payout is not going to be a significant amount of money. I mean, most people probably, I suspect that one of the user experiences as a vendor is, wait, you're only going to give me 20 bucks for this? You know, $300, whatever that I bought?

[Chelsea Sloan]

Yeah. And so the average payout is actually pretty consistent across brands. It's about $40 for the items that somebody will bring in to sell to our stores. And really we try to be fair. And I'd say that just from a data perspective, I'd say objectively we are. There are a lot of costs associated with, and there's just a lot of friction associated with managing each individual item being A SKU in your store. There is so much complexity there that we have to wrangle on the other side of the counter. So for a consumer there just aren't many options is what it comes down to, that are better than what we're describing here. And then it's incumbent upon us, once we've paid out a fair price, to then manage the complexity in a systematized way such that we can also be profitable. And so that's what we need to take care of at the store level. I would say really importantly as well though, we do offer between 20 and 25% additional value if a vendor who's coming to sell to us accepts store credit rather than cash. And so they can access significantly more value that than they can use on, let's say the next size up, if you're a, if you're a young parent. Also relevant is that in the vast majority of states you can do something called the tax free trade, which is, let's say I went into a kid to kid and I sold $100 worth of merchandise. I could, on the same day, it has to be on the same day I could buy up to $100 of merchandise as a shopper and that $100 would be tax free. And in as much as our ecosystem is fundamentally driven by value, so it's actually very similar to fast food in that regard. People are highly, highly sensitive to value. If we're able to deliver an extra 5 or 10% in value by virtue of avoiding sales tax, that actually that, that makes a difference.

[Zach Gordon]

Thank you for that walkthrough. That was great, by the way. And so now let's just zoom out and talk about thrift overall, the industry, the macro trends, whatever, tailwinds, whatever headwinds maybe. But just to put some numbers around the unit economics again. So you said 200 stores, about 200 million in aggregate system value. So call it a million bucks. Ish. Let's just call it a million dollars for easy math per store. So that's $3,000 a day, assuming seven days a week, $3,000. And so how much is the average item in the store? If I know it's a wide range. But if I want to buy a pair of jeans, what is it going to cost me? 20 bucks?

[Chelsea Sloan]

Average item at uptown is 12 or $13. Average item in kid to kid is about $6. So that's another, I'd say very important reality of this business, which is that the residual value we're talking about, it's not unlimited just because to use Tyler's example of trying to sell individual items one by one on the Internet, you can't make any money selling $6 items on the Internet. And actually from the customer's perspective, even at uptown with the, you know, average price brightem of 12 or 13 bucks, if you tried to buy that on the Internet, your shipping cost would be about the same as the item cost. So the whole point of the exercise, which is to get a really great price on the item, would already be, be defeated just by virtue of that shipping cost.

[Zach Gordon]

And, and what you're addressing here is why you were, you got comfortable that the Internet wasn't gonna undermine this business model or eventually kill the business model.

[Chelsea Sloan]

Correct. In terms of the financial performance of the stores. But then also it gets to what you were asking earlier. Hey, if I'm a vendor and I'm walking out with 40 bucks and I just brought in multiple bins worth of stuff, how should I feel about that? My, my point is that you should feel actually pretty good because there's so much friction in this business or in just, you know, turning what is at the point in time you're going to sell it stuff that no longer has value to you, there's so much friction that really nobody else in our view is able to wrangle quite in the way that we do.

[Zach Gordon]

Yeah, yeah.

[Tyler Gordon]

I would say what's interesting is who do we view as our biggest competitor for these items of clothing? It's not some other brick and mortar concept. It's not some platform on the Internet. It's either the dark and dusty corner of somebody's closet or the landfill. Like that's our biggest competitor. Most people just accept the fact that, hey, I've worn this a few times, there's no residual value. I'm just going to throw it out. It's trying to convince them that, hey, if you come into our stores again, we'll give you a fair payout and a lot of convenience. And so that $40, especially for the value conscious customer who honestly was expecting zero if the alternative was the landfill, it can be a meaningful payout and there's something emotional.

[Chelsea Sloan]

I would say there's some residual emotional value. I feel much better because again, I'm a vendor to kid to get in uptown every other month. I feel good about taking something that I feel may be self conscious about not having worn ever and oh gosh, I'm just going to throw it away or I'm going to give it to Goodwill, which is just basically a train stop on the Way to the landfill in a lot of cases. No, I'm going to put it into an ecosystem where somebody is definitely going to buy it and they're going to enjoy it in a way that I wish I had. So there's an emotional component as well?

[Zach Gordon]

Yep, yep. No. My wife and I experience similar but different. Like whenever we sell something on Nextdoor that we're no longer using, for example, our kids. Even if we sell something, you know, for 10 bucks and it's like, $10, come on. And you know, these people will negotiate with you. How about five? It's like, really? But the point is, like, we really like the. There's an emotional gratification of having just recycled something and gotten 10 bucks from it, you know, as opposed to just junking it. In this world where we all come home to like stacks of Amazon boxes every day. Makes you feel like you're doing a little bit something right. Finally. Yeah, completely back to volume here. So. So, $3,000 a day per store. Let's take uptown cheapskate. 12 to 13 items. So what is that, 250 to 260 kind of units a day? That. Yeah, that makes. That makes sense.

[Tyler Gordon]

Just.

[Zach Gordon]

Just kind of trying to play the game of like. I'm surprised a thrift store even does this much volume, But I guess 260 items sold per day doesn't seem crazy. So I'm just kind of answering my own question here.

[Tyler Gordon]

Yeah, but if you. If you look at. Then again, if you view these stores as mini factories and what you're trying to solve for is volume, it's interesting if you think about it in terms of an average store that creates one set of reality is if you look at it at some of the top performers. So take our top performing uptown store does decently over $3 million worth of sales. Does about a million dollars in EBITDA. They're selling about a thousand items every single day. And what's important to realize is if you sell an item, you have to buy the item too. So every single time you sell one, multiply it by two. So that's about 2,000 individual transactions at the item level every day. Yeah, it's a lot of volume. And that's why, again, from our perspective, everything that we do, if we're really orienting around franchisee success and profitability, you're solving for volume and you're solving for seconds. How for every single item do I shave off a second here, a second there to allow the store to realize those ever increasing levels of volume? And again, Then profitability, I'm telling you.

[Zach Gordon]

The brain damage of this business. But on the other hand, it's one of these where to the extent that you guys continue to refine and improve this model over, you know, countless transactions and years, it's an incredible moat because trying to figure this out. Some would be competitor trying to figure this out. Good luck to you.

[Chelsea Sloan]

That's our feeling. And in terms of what generates the growth of the industry, what has recently and what an RV will over the next decade, I would say that from a supply perspective, you've always had a more or less unlimited amount of inventory in the U.S. so the apparel industry in the U.S. in any given year is about $300 billion. So it's just the size of the Pacific Ocean. Massive, massive amount of new apparel coming into the inventory, let's say in households across the US Every year. So the inventory, the supply side has always been there. It's the demand side now that's kind of realizing that and catching up with the supply side. What had prevent that historically it was a stigma attached to secondhand clothing. Oh, gee, I would never shop thrift unless I absolutely had to. So really? Yeah, it was only people who out of necessity had to shop thrift that did shop thrift. Now, however, with sustainability, I'd say playing a big role, secondhand becoming cool, it's actually even better in some cases or in the minds of some consumers, especially younger ones, that something is secondhand than it's new. You're kind of unlocking now this massive amount of value that's always been there but people have been unwilling to tap into. And so from our perspective, we feel that for those consumers that maybe aren't used to thrift, have never shopped thrift in their lifetime, what combination of features are they going to be looking for? They're going to be looking for the things they want. Right. So treasure hunt and value and sustainability, but they don't want to go digging through a bin to access it. So in our view, they're looking exactly, pretty much for the combination of variables that we're focused on, which is a really nice boutique environment with all the benefits of thrift as well.

[Tyler Gordon]

Yeah. And I would say, Will, back to your point around the complexity and brain damage, it's interesting you could look at that and feel daunted, just like, oh my God, there's so much complexity in order to generate some level of sales and profit. We love the complexity. I would be a lot more nervous if we were just the 10th coffee concept or third cookie concept in a market where how do you really differentiate yourself? It's not that complicated. Whereas for us and for our stores, if we're able to systematize that complexity, if we're able to take a business model that is inherently highly subjective, what do I buy, what do I price it at, what do I give to the vendor? There's so much inherent subjectivity. If you end up making those decisions much more objective and data driven, you create a massive moat versus everybody else. And you make a business that's seemingly highly complicated and complex, actually fairly digestible. And I can't say easy to run, but definitely manageable.

[Zach Gordon]

Yeah. Well, the other thing that strikes me about the business model you talked about, that every item sold to a consumer has actually been transacted twice. Once on the way in, once on the way out. You guys are. These stores are basically marketplaces. You have to serve two masters, both sides. The sell the people you're trying to sell to and you're trying to draw people in to sell their clothes to you and care to respond to that. Is that. Do you feel like that's an accurate representation? I mean, how much attention do you have to get not just to come people come in and buy stuff, but to come in and sell stuff. How do you draw those people in?

[Tyler Gordon]

It's actually interesting. And this is something that surprises a lot of our new franchisees when we explain to them what the optimal marketing mix is for our stores. We spend far more time and money both at corporate and at the store level on marketing towards what we qualify as those vendors, the people who will come in and sell us their items. And in our mind, and we've now seen this play out across the country, if you have really high quality inventory at unbeatable prices in a high quality shopping environment, the shoppers will come. They will come every day. And so the real constraint is how do you create a system that really attracts those vendors into your store? And then a ton of efficiency to be able to process all that inventory so it's ready when the customer walks in and wants to buy that Lululemon pair of leggings or American Eagle pair of jeans. And so really the name of the game is on what we qualify as the buy side of the counter. If you buy it, they will come.

[Zach Gordon]

What does the resale market of uptown cheapskate in kid to kids look like? Can I find one of these on biz? Buy sell.

[Tyler Gordon]

This ends up being a unique challenge, if that's the right word, where we have a lot of people Reaching out, saying, hey, I would love to become an uptown cheapskate or a kid to kid franchisee, but I would love to buy one store, three stores, five stores to begin with, and inherit some base of free cash flow and then grow from there. The reality is the vast majority of our franchisees are incredibly happy and are more focused on growing themselves than they are focused on exiting. And so we have very few stores for sale across either of our two systems at any point in time. Just again, based on that virtue of people more in the expansion mode versus the exit mode. And so it is a constraint today, at least as it relates to attracting new people in who want to buy that base platform. But inherently it's a great thing. We love the fact that our franchisees are so happy with the decision they make that they want to double down and open a second, a third, a fourth, a fifth, a tenth store. And so that's just the reality of, of where we are today, where it's much more of a development oriented opportunity than it is a acquire and then build opportunity.

[Zach Gordon]

Yeah. And so therefore also if I were to want to come in and do programmatic acquisition would be hard. Let's say I, let's say I do my first one de novo, maybe two de novo and then I want to start programmatically acquiring more. I'm going to bump into the same unfortunate enthusiasm of all your franchisees who want to, who want to retain their stores.

[Tyler Gordon]

Yeah, and I think that, that, that ends up being a reality of franchise systems around our scale. So if we've got about 270 stores today, I think the more programmatic acquisition narrative becomes more relevant. When you're probably at about 500 stores now, there's some merit, at least in my mind, of hey, you get in, you start building your platform, you start getting to know the various opportunities either in a given region or nationally, such that as we achieve that, that scale, hopefully over time, you're then the acquirer of choice again in a regional or a broader context. But yeah, today it's again, much more on that development side.

[Zach Gordon]

What about though, the fact that some franchise, there's got to be some percentage of franchisee churn just related to retirement age? Are there not, are there not boomers who are the owners of these stores who are just ready to, to stop working?

[Tyler Gordon]

There are, although it's interesting, in several cases we have had the parents end up transitioning ownership of the store onto their kids. In a lot of other cases it is the store manager acquiring the store from the owner as they're looking to retire. Now, that's not the case in every single circumstance, but there just really are not that many opportunities where you have the initial franchisee who developed the store than looking to exit to a new entrant to our system.

[Chelsea Sloan]

And the average age of our franchisees is just pretty young, I would say as well. So if you think about retirement age kind of as the relevant threshold, then when you would have people looking to transact, there aren't that many people who are beyond that threshold. It's not zero. And you know, five, 10 years from now that population will grow, but as of right now, it's, it's small.

[Zach Gordon]

And is that a commentary on the age of the franchise system or the type of person that, that it has attracted as a franchisee?

[Chelsea Sloan]

I would say more the age of the franchise system.

[Zach Gordon]

More that it's not that young. It's 1992. Yeah, but it only really got going in the aughts, I guess.

[Chelsea Sloan]

But uptown. Yeah, Uptown really only started in earnest in 2009. Franchising and a lot of units have opened in the last five to ten years.

[Tyler Gordon]

So.

[Chelsea Sloan]

Yeah, yeah, I think it's, it's a reflection mainly of that. And then Tyler, you know, mentioned earlier that some franchisees, older franchisees, have involved their kids. And so that's for maybe the older cohort that have been involved with kid to kid. That's also a dynamic.

[Tyler Gordon]

Yeah. And if you look at it, I mean, just take Uptown Cheapskate, which is probably 2/3 of our unit count today. That unit counted. Uptown has doubled over the last five years. And so again, a full half of those stores have been open only for a handful of years at this point.

[Zach Gordon]

And so now just to close us out, guys, how do you think about really ambitious franchisees and a little bit more context to the question. So a panel that I did with AJ Wasserstein and a couple other folks in the ETA ecosystem who bought franchises and were pursuing programmatic acquisition opportunities. A great panel with those folks. I'll put a link to it. We'll put a link to it in the show notes. But one, but. But the whole topic was based on an AJ Wasserstein paper on the top 10 or the 10 things you should evaluate when considering a franchise system to commit to. To pursue a programmatic acquisition opportunity. Now, we're not. You guys aren't going to be a good programmatic acquisition opportunity. But still, I think that the point that one of the points that AJ made remains, which is how open is the franchisor to you franchisee being really hungry and trying to gobble up as many as possible. So if somebody listening wants to go build 50 of these and own, you know, 20% of your network, or what would be 20% of your network today? How do you feel about that?

[Tyler Gordon]

Yeah. Say, first of all, back to your podcast with AJ and Peter and Michael. That was a phenomenal podcast for anybody who's looking for some in depth but introductory materials into how to evaluate a franchise system. So could not recommend that more highly, I would say. Thank you. As we think about the opportunity set that we have, Zach hit on this a little bit earlier where if you look at the distribution of our franchisees across quartiles, the ones with really any level of prior business ownership experience or some degree of real business sophistication coming in, it does not have to be in franchising and it does not have to be in retail at all. They're almost all clustered in our top quartile. They do incredibly well. And it's just about coming in with this mindset of, hey, I am focused on following the recommendations that Basecamp gives me of following those processes of building a really high quality team and focusing on this again as much as in the context of a factory as anything else. And so those people do incredibly well. And so I think we have a high degree of appetite for those what I'd qualify as more professional individuals who would have interest in building a platform of meaningful scale over time. I would say that at the same time, we are as much about the people as anything else. So, yes, we are incredibly proud of the business opportunity that we can provide to prospective candidates. But we feel we also have a real responsibility to protect our franchise community. They're just such an incredibly warm, welcoming, collaborative group of, of individuals. And so an important component would be somebody who's willing to come in and embrace that side too. And so it's not just looking at things from a purely transactional standpoint, but instead are saying, yes, I would love to get to 20, 30, 40, 50 stores over time and we would have a tremendous amount of enthusiasm to partner with those individuals, but making sure that they're the right people too, and so growing the right way.

[Chelsea Sloan]

And I would say Tyler and I are both very hands on. And so like Tyler said, we're waking up every day focused on how can we make our two brands better, what can we do to make the lives of our franchisees easier? That hooks into then part of our rationale for having our own stores because we think that it furthers those. Those two objectives. We look for people who like to be hands on. So passive income is something, you know, can read about and 10 figures working five hours a week or whatever. Right. I don't believe in that. Honestly. I think most of that is really overblown, frankly. We like people who are. We look for people who are going to view this business as. As fun as we do and want to spend a lot of their time working on the business and close us out.

[Zach Gordon]

Guys with what is the next year, in three years look like? What are your goals?

[Tyler Gordon]

I think that this is something we hit on at the beginning part of the conversation, which is what we could be focused on. I think a lot of people are focused on is just purely unicount of, okay, great, I want to have go from 270 to 500 on your way to 2000. Again, we view that as an output of everything else that we do. And so in our mind, I mean, Zach referenced earlier kid to kid versus uptown. Absolutely. Closing that gap in terms of unilevel performance I think is something that we will do. Now. It's going to require work, but we're very confident in it. And the reality is, I think we are barely scratching the surface in terms of the amount of volume, revenue, profitability that we can generate from an individual box. And so the investments that we're making in technology, I would say in particular, but across every part of our business, operations, marketing, finance, there is so much room for optimization. And so I would love for our auvs at each concept to be meaningfully higher in the 135 year time horizon. And again, I think if we get that right, then the unit count part will. Will be a natural growth from there. So it's much more about quality than quantity. And I'd say the longer term vision for, for what it's worth, I'd say the initial aspiration was, hey, how can we become the category defining concepts and thrift and really transform people's expectations of what's possible in the space? I would say my ambitions have broadened a little bit. Some may laugh at it, but if we can really combine all of the attributes that we have in terms of the customer experience in our stores, I would hope that a lot of our customers will take a step back and say, why would I ever shop full price again? So not just why would I shop at another thrift store, but hey, this combination of advantages is. Is pretty unique. And so that I would say is the broader, maybe multi decade vision.

[Zach Gordon]

Anything that we didn't get to guys that you wanted to share?

[Chelsea Sloan]

No, I don't think so. I would just add for me personally, I think Tyler shares this as well. We're very service oriented. I would say we really want to do right by other people. And the most important constituency for us at Basecamp clearly is our franchisees. We want to across the board to provide best in class support to our franchisees. Marketing, technology, operations, you name it. If we're going to do it, we want to be legitimately the best in the industry. And I've worked at really big franchisors and the bar isn't always necessarily even that high, I would say in particular verticals here. But frankly, irrespective of what the base for comparison is, we want in absolute terms to be providing the best possible support that we can.

[Zach Gordon]

Great, guys. Is LinkedIn a good way to contact you? We'll, we'll put Both of your LinkedIns in the show notes. Any other way? Well, what are the URLs?

[Tyler Gordon]

Yeah, so you can get in touch with us any number of ways. Obviously reach out to us directly on LinkedIn. You can also send us an email. So it's either tyler or zachcfranchise.com if you want to reach out directly. And then if you want to learn more about the concepts, it would be kid to kid. Franchise.com and Uptown Cheapskate. Franchise.com Super.

[Zach Gordon]

Well, what a fascinating thing you're building. Discovery of thrift as, as this, as this unpolished gem of, of retail and opportunity for people that has all this kind of great social benefit as well. Going from thinking you're going to be franchisees to now running this franchisor, it's just got a lot to it. So I really enjoyed the conversation. Guys, thank you for doing it. Thank you for your stamina. We're just under two hours and of course, as always, your transparency. Tyler and Zach Gordon, thank you very much.

[Tyler Gordon]

Thanks so much. Well, this is a lot of fun.

[Zach Gordon]

Hope you enjoyed that interview.

[Will Smith]

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[Zach Gordon]

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[Will Smith]

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[Zach Gordon]

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[Will Smith]

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