How to Buy Franchise Businesses, Then Sell to PE

Summary

Acquiring Minds: Episode Summary – "How to Buy Franchise Businesses, Then Sell to PE"

Release Date: December 26, 2024

Hosts: Will Smith, Chris Williams, and Tim

Guest: Alicia Miller, former owner of a portfolio of Sylvan Learning franchise locations and author of Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.

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1. Introduction to Alicia Miller’s Entrepreneurial Journey

The episode begins with Will Smith introducing Alicia Miller, who transitioned from a two-decade-long corporate career in high tech to acquisition entrepreneurship in 2013. Faced with a demanding corporate job that entailed extensive travel and a desire to balance her family life, Alicia sought a more flexible and fulfilling career path. She discovered franchising as an optimal route to business ownership without starting from scratch.

Notable Quote:

• Alicia Miller (03:46): “I wanted basically a business in a box and that's what franchising is at its core.”

2. Transitioning from Corporate to Franchising

Alicia shared her motivations for leaving the corporate world, emphasizing the lifestyle changes that necessitated a shift to entrepreneurship. With a toddler at home, the unpredictability and rigid demands of her high-tech role became unsustainable.

Notable Quote:

• Alicia Miller (05:18): “I had to give it up to be the kind of mom that I wanted to be, which is, you know, around a lot.”

3. Choosing Sylvan Learning: Acquisition Over De Novo

Instead of purchasing an independent business, Alicia opted for franchising, specifically Sylvan Learning, due to its proven model and support system. This decision was influenced by her preference for a structured environment with existing playbooks and a network of fellow franchisees.

Notable Quote:

• Alicia Miller (08:46): “I pretty quickly realized that I would be very much on my own, learning a new business, a new sector. And I just felt more comfortable with the franchise model.”

4. Acquiring and Managing the Sylvan Portfolio

Alicia acquired a portfolio of 11 Sylvan Learning centers across Northern Ohio and Louisville, Kentucky. These units were distressed due to the previous owner’s overexpansion and debt. Her strategy involved revitalizing underperforming locations by improving facilities, renegotiating leases, enhancing marketing efforts, and optimizing operational management.

Notable Quote:

• Alicia Miller (24:06): “These are critical tasks every business owner must do or oversee. But spending time on them distracts you from the leadership in growth work you want to do.”

5. Challenges and Learnings in Portfolio Turnaround

Alicia discussed the operational challenges she faced, including managing geographically dispersed locations and ensuring consistent performance across all units. She highlighted the importance of selecting the right locations and personnel to drive profitability.

Notable Quote:

• Alicia Miller (22:25): “I was able to successfully renegotiate rents and get landlord assistance on revitalizing these and bringing them up to, you know, an updated standard and make them look a lot better.”

6. Exiting to Private Equity: Strategic Considerations

After stabilizing the portfolio, Alicia sought to sell to private equity (PE) firms. However, she discovered that Sylvan Learning did not attract significant PE interest, limiting her buyer pool primarily to other franchisees. This realization influenced her advice on selecting franchise systems with potential PE interest to maximize exit opportunities.

Notable Quote:

• Alicia Miller (33:24): “There really isn't any PE in there. So that narrows your group of buyers to other franchisees, small franchisees like myself.”

7. Insights from "Big Money in Franchising"

Alicia’s book delves into the intersection of franchising and private equity, providing a comprehensive history of how PE has influenced the franchising landscape. She explains that PE firms have become pivotal in scaling successful franchise systems by consolidating multiple units, thereby increasing their market value and attractiveness for eventual exit strategies.

Notable Quote:

• Alicia Miller (37:07): “Private equity has been probably the biggest sea change in franchising in all of franchising's history.”

8. The Role of Private Equity in Franchising

Alicia outlined how PE has professionalized franchising, focusing on franchisee profitability and system-wide growth. She contrasted systems like Sylvan Learning, which lack significant PE involvement, with brands such as Planet Fitness and Orange Theory, where PE-backed roll-ups have transformed their market presence.

Notable Quote:

• Alicia Miller (38:03): “Private equity has been probably the biggest sea change in franchising in all of franchising's history.”

9. Advice for Aspiring Acquisition Entrepreneurs

Alicia emphasized the importance of thorough due diligence, selecting franchises with robust unit economics, and understanding the franchisor’s openness to PE involvement. She encouraged prospective buyers to align franchise opportunities with their lifestyle and community impact goals.

Notable Quotes:

• Alicia Miller (67:35): “Continue to do as much due diligence as you can. Don't get too enamored too fast with something.”
• Alicia Miller (69:07): “Think about what your lifestyle is, what you want as an entrepreneur, and how you can contribute to your community in a meaningful way.”

10. Closing Thoughts and Contact Information

Alicia concluded by highlighting her ongoing work with franchisors and private equity firms, assisting them in preparing for institutional capital and identifying suitable acquisition targets. She remains optimistic about the franchising and acquisition entrepreneurship landscape, encouraging listeners to explore franchising as a viable path to business ownership.

Notable Quote:

• Alicia Miller (72:15): “If you're seriously considering any franchise concept, go spend time with franchisees in that market and see what they're doing every day and what that business means to their local community.”

Connect with Alicia Miller:

• LinkedIn: Alicia Miller
• Email: bigmoneyinfranchising.com

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This episode provides valuable insights into acquisition entrepreneurship within the franchising sector, particularly emphasizing the strategic role of private equity in scaling and exiting franchise businesses. Alicia Miller’s firsthand experiences and expert advice serve as a comprehensive guide for entrepreneurs aspiring to navigate the complexities of buying and selling franchise enterprises.

Transcript

[Will Smith]

Today's guest had for years entertained the notion of one day becoming a business owner. Well in her early 40s, with a toddler at home and traveling too much for her corporate job, Alicia Miller decided the timing was finally right. This was 2013, and franchising was the most obvious path. Probably still is for most people. But Alicia, without the benefit of the books or the pods or the general awareness of entrepreneurship through acquisition, arrived on her own at the insight that we celebrate on this podcast that buying an existing business, an existing franchise business, in her case, would be better than starting from scratch. The first half of today's interview is Alicia's story of acquiring a portfolio of Sylvan locations. Sylvan is in the education and tutoring category and how she improved, grew and sold that portfolio a few years later. The second half is a distillation of what Alicia has learned since post Exit. Alicia remained in the franchising space, but with a focus on private equity, and she's recently published a book about the intersection of franchising and private equity and what you would be owner need to know given the trend. So if you're thinking about buying an existing franchise business or businesses, this conversation is a primer on how to carefully choose a franchise system where PE is or might eventually become active. It's a key consideration if you expect to one day exit the business you buy. And to that point, this is an appropriate lens to apply to any industry you're eyeing. Even if you're targeting independent businesses, not franchise resales. Private equity's presence in an industry, as in a franchise system, can have effects that are seismic. Here is Alicia Miller, former owner of a portfolio of a dozen Sylvan locations and author of Big Money in Franchising. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it. Running payroll, paying your bills, closing your books, and producing financials. These are critical tasks every business owner must do or oversee. But spending time on them distracts you from the leadership in growth work you want to do. So let system 6 do it for you. Owned and led by a former Searcher, Chris Williams, System 6 is a leading outsourced finance team for hundreds of SMBs, including over 50 searcher acquired businesses. Chris, Tim and the System 6 team understand firsthand the challenges, the opportunities of jumping into a business as its new owner. So whether you own your business already or have one under LOI, talk to System 6 about how they can give you time back and improve your financial operations. Mention Acquiring Minds and they'll provide a free review of your books and financial ops, a $500 value. Check out system6.com, link in the show notes or email helloystems6.com Alicia Miller, welcome to Acquiring Minds.

[Alicia Miller]

Thanks for having me.

[Will Smith]

Alicia, you have authored a book called.

[Chris Williams]

Big Money in Franchising, Scaling your enterprise in the era of Private Equity.

[Will Smith]

It is a book about how entrepreneurs.

[Chris Williams]

Can and should think about the universe of franchising now that private equity is so active in that world, the opportunities it presents, and, of course, obviously, the things to avoid. When I first heard you talk about the book, my interest in you was piqued further because your own foray into franchising was buying a group of existing franchise businesses. So you were also doing entrepreneurship through acquisition, as we now call it, which of course is the subject of this podcast, Acquiring Minds.

[Will Smith]

So I wanted to invite you on.

[Chris Williams]

For your story of buying, growing, and exiting those businesses and then explore everything else you've learned since and poured into this great book.

[Will Smith]

So start us off, please, Alicia, with your life.

[Chris Williams]

Before getting into franchising and buying businesses, what path had you been on?

[Alicia Miller]

Sure, let's do it. Before franchising, I was following a fairly traditional sort of corporate career mode. I had worked in high tech for the better part of 20 years, and I loved it. I really did love the space.

[Tim]

I loved the innovation I saw.

[Alicia Miller]

I loved working and partnering with engineers and marketing folks to, you know, bring.

[Tim]

This technology into the world.

[Alicia Miller]

And I loved the travel and, and.

[Tim]

The team and everything. But what changed, I think for me.

[Alicia Miller]

Was like many people, you know, I had a lifestyle change. I had a baby, and I had.

[Tim]

To get off airplanes. And it was very clear that the career I was building in high tech.

[Alicia Miller]

Was, you know, what I loved, which was go to market.

[Tim]

So that sales strategy and sales execution.

[Alicia Miller]

That means you need to be in the field and working directly with customers.

[Tim]

So I was building a career for a place that I no longer could.

[Alicia Miller]

For a destination I no longer could go. So I had to, I had to give it up to be the kind of mom that I wanted to be, which is, you know, around a lot. And so franchising came onto my radar.

[Tim]

Because I'd always wanted to run my own business. But I'm not an inventor.

[Alicia Miller]

I mean, I, I do actually have a patent, ironically, based on my. My prior days at Motorola, but I'm not an inventor of a business. I wanted basically a business in a box and that's what franchising is at its core.

[Tim]

It's a distribution model. So that you can find a model.

[Alicia Miller]

That works and you can get it running in your local community and run it.

[Tim]

That's what I wanted to do and.

[Alicia Miller]

That'S what brought me into franchising in the first place. And I haven't left.

[Tim]

I'm, this is going to be it for the rest of my career.

[Alicia Miller]

I love franchising.

[Chris Williams]

Great. And when you turned your attention to franchising and said you'd said you wanted to be a business owner, was that, was that something that you'd entertained throughout your career or, and kind of maybe inevitably ended up doing? Or did you really only start thinking, did that really only occur to you when you considered what options you could take away from corporate?

[Alicia Miller]

A little of both.

[Tim]

I had entertained the option many times over the years, but for various reasons.

[Alicia Miller]

I just couldn't take the leap and take the risk. You know, that corporate salary can really seduce you into sticking around, especially as you start to climb the ladder and.

[Tim]

You get rewarded for all that good.

[Alicia Miller]

Work and then you have stock options.

[Tim]

And other things that might bind your.

[Alicia Miller]

Wrists and not make it so easy to leave anymore. But thankfully I've got a really understanding.

[Tim]

Husband and we kind of sat down and talked about it and he said.

[Alicia Miller]

You know what, I've got a corporate career too. So if we're going to take a.

[Tim]

Risk and start a business, one of us can do that and one of.

[Alicia Miller]

Us can keep the so called, you know, stable corporate job, which as we.

[Tim]

All know, corporate jobs aren't always stable.

[Alicia Miller]

But and that's the bet that we.

[Tim]

Made, is that one of us is.

[Alicia Miller]

Going to go do this entrepreneurial thing and the other one's going to stay in a more of a traditional corporate role. So that's how we thought through it as well.

[Chris Williams]

Well, good bet. And by the way, how does he feel these days?

[Alicia Miller]

Good, good. Except that, you know, my, my current consulting business, which I, you know, I'm still very involved in franchising, has me on the road a lot more. And so we have sort of dueling travel schedules that we have to manage because we still have, you know, a kid at home, so that's okay.

[Will Smith]

And at the time when you considered.

[Chris Williams]

Or learned about and got serious about franchising was the concept of buying an existing business, a non franchise and we'll call independent, for the purposes of this conversation, business on your radar at all.

[Alicia Miller]

I did, I actually worked with a local business broker and did some searching.

[Tim]

On my own for a local business to buy.

[Alicia Miller]

But I, I pretty quickly realized that I would be very much on my own, learning a new business, a new sector. And I just felt more comfortable with.

[Tim]

The franchise model where not only did I have the support of the corporate.

[Alicia Miller]

Team and an actual, you know, playbook to go and run, but I had other franchisees that I could work with. You know, it's very lonely when you run a business sometimes and having peers.

[Tim]

In an organization, other entrepreneurs that you.

[Alicia Miller]

Can lean on and build friendships with.

[Tim]

And borrow best practices from, to me.

[Alicia Miller]

Just was a much more comfortable fit for what I wanted to do.

[Will Smith]

And what year is this?

[Chris Williams]

And how old were you at the time?

[Alicia Miller]

So this was 2013, so I was 43 and had a toddler at home.

[Chris Williams]

Okay, great. So tell us about your search, as it were, and how you ended up with the businesses that you did.

[Alicia Miller]

So I think because of the stage.

[Tim]

Of life I was in, I sort of gravitated to child services, naturally.

[Alicia Miller]

And one thing I would do differently now is I would open my aperture up to consider other sectors because there.

[Tim]

Are a lot of really attractive franchise.

[Alicia Miller]

Businesses in other sectors that weren't really on my radar. So sort of things like gutter cleaning, window washing, painting, health services.

[Tim]

There are just so many other businesses.

[Alicia Miller]

That are interesting to me now that.

[Tim]

I know more about them.

[Alicia Miller]

But at the time I sort of.

[Tim]

Because I had a little kid at.

[Alicia Miller]

Home and I was looking for some.

[Tim]

Flexibility and had sort of education on.

[Alicia Miller]

My, my personal radar, I did spend.

[Tim]

A lot more time investigating child services businesses.

[Alicia Miller]

And as I was thinking about it, you know, I, I wanted to build up a business and sell it within a fairly short amount of time. So the average 85, if you believe.

[Tim]

FRAN data, 85% of licenses in the.

[Alicia Miller]

United States, franchise licenses, are 10 year agreements. So it's pretty long.

[Tim]

And I was having trouble visualizing 10.

[Alicia Miller]

Years in the future, but I could visualize five. That seemed like something I could get my head around. So I'm like, all right, what kind of business can I run and build up and then sell within a five year arc? To me, that screamed you've got to pick an existing business, run it, improve it and sell it, maybe consolidate other units, for example, instead of starting one from scratch, building it up and, and doing that. So pretty quickly I gravitated to systems.

[Tim]

That had resale units available where I could get enough of them that I had a nice chunky asset to run.

[Alicia Miller]

Together with a lot of units, a team that I could, that I could work with and you know, when you.

[Tim]

Take over a portfolio, some of the units are great performers and some are in the middle and some are underperformers. So I knew that if I could lift the underperforming units or close them.

[Alicia Miller]

And swap them in for, you know, other locations that are better, that over time I could probably hit my objectives in that more narrow time frame. So that's what I focused on.

[Chris Williams]

Well, you were thinking like a private equity person.

[Alicia Miller]

How appropriate.

[Tim]

I didn't know it at the time.

[Chris Williams]

Yeah, yeah, this was kind of a entrepreneurial private equity or, or the, at least I should say the model of private equity just done at, at the individual entrepreneur scale. And just this point about five or ten years. So you, the light 85% of licensing agreements in the franchise universe are ten year long. Ten years long, meaning what exactly? What does that mean?

[Tim]

So you're in that franchise agreement for.

[Alicia Miller]

10 years and then it, when you.

[Tim]

Renew, most agreements require you to. This is very state dependent so you've.

[Alicia Miller]

Got to get a franchise attorney to help you when you're thinking this through. But generally speaking, you're signing a new.

[Tim]

Franchise agreement at the then current terms.

[Alicia Miller]

Whatever those are, and you don't even.

[Tim]

Know what those are going to be.

[Alicia Miller]

Are right what those are going to.

[Tim]

Be ten years from now.

[Alicia Miller]

So that's another reason why I had a much more narrow time frame in mind for myself. But you know, the longest franchise agreement is 36, I think 35 or 36 years. There's some in the restaurant sector and.

[Tim]

There'S, there are other quite long legacy.

[Alicia Miller]

Agreements out there and there's also systems that are, you know, two years, five years, much smaller. So you know, you got to think through what your own time frame is and what your, and what you want to do. Some franchise agreements have a minimum guarantee. So that is if you decide you want to, you, you don't want to do this anymore. You're still in that franchise agreement and you owe them money as if your.

[Tim]

Unit was performing at the average level.

[Alicia Miller]

So you've got to read that agreement very closely and be certain you've got an asset you can sell. Not just close, but sell when you're ready to move on, move on and do other things in your life because.

[Tim]

Then whoever you're selling it to picks.

[Alicia Miller]

Up that obligation for the remainder of that agreement.

[Chris Williams]

Okay, so to be clear on these agreements and their lifespans, it doesn't mean that you have to stay for 10 years, but it would mean that you'd have to find somebody Else to take over the agreement from you to see out the duration.

[Alicia Miller]

Yeah. So you've got to build a sellable asset.

[Tim]

If you can't sell it, you can't exit.

[Alicia Miller]

The only other way to exit is to close.

[Tim]

But depending on your agreement, you might.

[Alicia Miller]

Have liabilities that you still owe to the franchisor.

[Chris Williams]

Okay, so your, your thought was that you wanted, you know, a shorter time frame, five years and you, in, in your exit plan was to, you know, even if you were in a system that had 10 year agreements, you would exit this portfolio to, there would be a taker and they take over the, the agreements.

[Alicia Miller]

Great, great.

[Chris Williams]

All right, and you liked education, so what, what did you find?

[Alicia Miller]

So I initially gravitated toward early childhood education daycare. And I was living in an area where every. I knew this because I was a.

[Tim]

Busy mom looking to place an infant in daycare and everybody had a wait.

[Alicia Miller]

List and I'm like, aha, there's a business opportunity there. Right. They all have long wait lists to get in. And so I looked around and there.

[Tim]

Really weren't any brands of scale that had territories available. And all the existing brands with scale.

[Alicia Miller]

Like a Goddard or a Primrose were already sold out in my area. So also they didn't, they didn't like having multi unit owners. They really at that time preferred single or maybe two unit owner operators. And I was looking to maybe own more than that. In retrospect, I think I probably still.

[Tim]

Could have dug some more there because.

[Alicia Miller]

If you can make a great living.

[Tim]

With two units, why would you want.

[Alicia Miller]

To own, you know, 20?

[Tim]

Right.

[Alicia Miller]

So but from a complexity standpoint, but at that time there just really wasn't anything available. So I kind of moved on from that. Next I looked at various child education and entertainment concepts and I gravitated more.

[Tim]

Toward the education side because I felt.

[Alicia Miller]

Like even though it's discretionary spend, people.

[Tim]

Spend money on their kids education, they prioritize that. And I didn't have any particular affinity.

[Alicia Miller]

To say sports concepts or something like that. So that's how I ended up finding the academic support sector franchising. And that's, you know, sylvan learning is one that came on my radar pretty early. And as it happened they had a.

[Tim]

Number of units for sale that were.

[Alicia Miller]

Resales, that were had experienced some amount.

[Tim]

Of distress because the owner had sort of gotten ahead of his skis, had.

[Alicia Miller]

Too much debt, had over, expanded into markets he shouldn't have been in, and corporate ended up taking them over and.

[Tim]

Needed to sell them because they're not in the business of running units themselves.

[Alicia Miller]

This is I think, a pretty much 100% franchised system.

[Tim]

So they were looking to sell them.

[Alicia Miller]

And it was a number of units all within driving distance of the place that I lived. So it started to look like a.

[Tim]

Bit of a match and that's when.

[Alicia Miller]

I started digging into it.

[Will Smith]

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[Chris Williams]

What the category offers. You gave us a name. Sylvan. First of all, give us some of the other names. Sylvan. What are some other brands we might recognize?

[Alicia Miller]

Sylvan, Mathnasium, Kumon, Huntington Learning are all in in this space. It's there's a good history in this space. I like that as well. This isn't necessarily a new sector.

[Tim]

It's a sector that continues to innovate.

[Alicia Miller]

But it's a proven sector. I liked that Sylvan's been around for a long time. They offer tutoring. So when you think about tutoring, this is mostly reading and writing and math homework help.

[Tim]

They offer STEM classes and robotics now and some other things.

[Alicia Miller]

But really it's they're focus is kids in elementary school through high school, some college prep.

[Tim]

It's not as much of an emphasis for them.

[Alicia Miller]

I think it was about 10% of the business or 15% at the time. So it wasn't college prep heavy, but.

[Tim]

Really more around kids who are falling behind in school or wanting to get.

[Alicia Miller]

Ahead and getting some remedial help to help them accomplish that.

[Chris Williams]

So so it generally the category targets kids having a hard time as opposed to the kids excelling who want even more. That's not who it's for.

[Alicia Miller]

It's both. But I would say it skews more.

[Tim]

Toward kids who need some help.

[Alicia Miller]

And this is partly for kids and partly for parents.

[Tim]

There comes a point, and I'm seeing.

[Alicia Miller]

This now with my My kid is. There comes a point where you're kind of rusty on the middle school math, you know, and you learned pre algebra.

[Tim]

Differently than they are learning it now.

[Alicia Miller]

And, and I had to go and buy a workbook and reeducate myself about pre algebra. It's just, it's been a while, right? So parents get to this point where it's like, well, it's beyond my ability.

[Tim]

To solve this around my kitchen table. They're getting frustrated. Homework is becoming really stressful for the entire family.

[Alicia Miller]

And it's just one of those things that it's easier to get, you know.

[Tim]

A third person involved and to get some help. We even had students whose parents were.

[Alicia Miller]

Teachers who were sending them to us. And one lady I remember in our, in my Cincinnati, one of my Cincinnati schools said, I'm a math teacher and my kid is failing math. It's really bothering me. I need to get, you know, outside.

[Tim]

Of myself and get him some help because clearly I'm not making it happen.

[Alicia Miller]

And you know, any parent will tell you sometimes your kid will not listen.

[Tim]

To you, but will listen to somebody.

[Alicia Miller]

Else on the same topic. And you know, it just, it is what it is. There's, it's, you know, I was worried at the time about the, all the.

[Tim]

Online tutoring options that are available to people.

[Alicia Miller]

And what I've realized is there really.

[Tim]

Is no substitute for that one on one help. When you're sitting over a piece of paper together and you can walk them.

[Alicia Miller]

Through how to do fractions and you can watch them do it and correct.

[Tim]

Their work, it's just there's something that.

[Alicia Miller]

Happens that's magical when it, when an instructor is working well with a child. So I like the model. It's in some ways similar to swim schools if you think about it. You know, at the time I swim schools weren't even on my radar. That's another category where if I had it to do over again, I would have looked at that one much more closely because those are a great model as well.

[Tim]

But if you look at a swim.

[Alicia Miller]

School model, they'll put, you know, four kids in a lane and each kid.

[Tim]

Takes a turn over a 30 minute lesson, right? So you've got one instructor, four kids.

[Alicia Miller]

The tutoring model at that time works similarly.

[Tim]

You have three to four kids around.

[Alicia Miller]

A table, one teacher each, you know, doing work because they've got to do.

[Tim]

Some independent work and then the teacher.

[Alicia Miller]

Helps them with some work so that the ratio, the staffing ratios made made sense to me. Other models have kids working on their own.

[Tim]

And the teacher will walk around so.

[Alicia Miller]

You can get an even higher teacher student ratio going. But it made sense to me. They got a mix of one on.

[Tim]

One help, but they also got time.

[Alicia Miller]

You know, to do the independent work.

[Chris Williams]

And the concept of remote, this was pre Covid, so it wasn't quite on our radar like it is today. But it was, I'm sure, on your radar. You didn't feel like that was something that would disrupt the model? You weren't too threatened by that because as you just said, you thought that there's something about the in person experience.

[Alicia Miller]

No, I wasn't worried about it.

[Tim]

And it had been around for a.

[Alicia Miller]

While anyway, and it didn't seem to.

[Tim]

Put that much of a dent in.

[Alicia Miller]

These, any of these tutoring concepts. So I, I wasn't too worried about it.

[Chris Williams]

Okay, all right, great. Okay, so you, the Sylvan portfolio or group of businesses are distressed in your area. All within driving distance, I think you said. How many of them were there? How many units or locations? 11.

[Alicia Miller]

11. 11 schools. If this goes on the list of what I would do over again or what I would do differently, they were.

[Tim]

Within driving distance, but there was a long drive between the farthest schools. Right.

[Alicia Miller]

So some were in my immediate market and some were three hours away in two different, opposite directions. So if I had to do that over again, I would not have purchased.

[Tim]

Units that were so far away from.

[Alicia Miller]

Me because here I am trying to avoid travel and now I'm driving three hours to get to oversee a school. Okay, that's still travel. So yeah, it's still time on the road and away from my family and potentially an overnight.

[Tim]

So if I had it to do.

[Alicia Miller]

Over again, I think I would have been more disciplined about finding opportunities that were closer to me and I could.

[Tim]

Put my eyes on them more frequently, at least initially. Once you get the hang of it.

[Alicia Miller]

I think, you know, having starting to consolidate a bunch of units into a, you know, know a bigger territory, depending on how much you want to travel or the infrastructure you can afford to watch it for, you would have made more sense.

[Tim]

But initially it was a lot of.

[Chris Williams]

Driving because part of this is, I mean, if you, if you, the number of units you have reaches a certain critical mass, it's necessarily going to mean more geographic distribution. So. Yeah, but just doing this for the first time or initially a challenge, Six hours, I guess, between the two furthest. Look at it. And where was this? What region?

[Alicia Miller]

Northern Ohio, all the way down to Louisville, Kentucky.

[Will Smith]

No.

[Chris Williams]

Okay, can you tell us about this portfolio, the revenue it was generating, put some numbers. What can you tell us about it? To add a little bit more color.

[Alicia Miller]

So it's tough because I'm under an NDA and so there's only so much I can say but this, each of these schools should have been kicking off, call it $100,000 in profit per school. Rough and tough based on the F, the franchise disclosure document. And many of them were performing well under that.

[Tim]

A couple of really strong performers with great center directors were overperforming and therefore compensating for the fact that some were underperforming.

[Alicia Miller]

But the real thing I saw was.

[Tim]

There were a bunch of locations that were just tired. They really needed to be revitalized.

[Alicia Miller]

There wasn't much marketing in these locations. Some of them were nearing the end of their lease and needed to move to a better spot. Better parking, better visibility, smaller footprint. Some of them were in these very.

[Tim]

Old legacy.

[Alicia Miller]

I don't know, hard to find buildings. And I just realized that some of these just needed to move. And I was able to successfully renegotiate rents and get landlord assistance on revitalizing these and bringing them up to, you know, an updated standard and make them look a lot better. So that was a big focus initially.

[Tim]

To improve operations, also swapping out some of the talent and putting people in.

[Alicia Miller]

Those schools who were more engaged in the front office.

[Tim]

I didn't have to worry about the.

[Alicia Miller]

Educators so much because they were all.

[Tim]

Great at what they did. It was really who was running the location on a day to day basis.

[Alicia Miller]

Needed was where the work needed to be.

[Chris Williams]

Okay. And the. So they should be reaching $100,000 of earnings per location across 11 units. That would be $1.1 million in STE. You said there were some underperformers, but you also said there were some over performers. I know you're bound by what you can say, so I'm going to just assume that the portfolio was generating high six figures, maybe a million bucks a year in, in earnings. An assumption you can neither confirm nor deny.

[Will Smith]

But a sizable, a sizable business even with those underperformers.

[Chris Williams]

How did you buy this business, buy this portfolio?

[Alicia Miller]

So Sylvan needed to sell it because they were running it. So I wasn't negotiating with a, a franchisee, I was negotiating with corporate.

[Tim]

And if I had to do it.

[Alicia Miller]

Over again, I think what I didn't realize was how much they wanted to sell it. Not because these units were bad, they.

[Tim]

Obviously were as a group were performing reasonably well, but because they just weren't set up to mount to run these units.

[Alicia Miller]

They didn't.

[Tim]

They had someone sort of as a.

[Alicia Miller]

Side job on the operations team running it. And I think I could have negotiated.

[Tim]

An even better deal if I had.

[Alicia Miller]

Understood that a little better. Also, I was willing to take on some of the projects, whereas if I had it to do over again, I would have cherry picked the best locations and said, look, these are underperforming locations. You deal with them. Right. So I was basically taking on an.

[Tim]

Unpaid job to go and turn some of these locations around.

[Alicia Miller]

And I was betting on myself that I could do it. But I think probably a couple of them, I just would have said, I'm not taking these. And if you guys aren't willing to do the deal, that's fine.

[Tim]

You know, the willingness to walk away.

[Alicia Miller]

When you're in a negotiation is really.

[Tim]

Important to maintain all the way up.

[Alicia Miller]

Right to the end, even if you.

[Tim]

Put a little money into escrow, for.

[Alicia Miller]

Example, to, you know, keep them talking to you, being willing to leave that.

[Tim]

Money on the table and walk if you can't get what you want to make it the best possible deal to move forward.

[Alicia Miller]

That's definitely a learning that I took from that experience. But I still, I still acquired it for, you know, low fives, basically. I mean, I was paying for the fixtures and not much else because it was at the.

[Tim]

Because some of the units were underperforming.

[Alicia Miller]

And because corporate was having to support the overhead. It was not a profitable business from corporate's perspective and they wanted it to be sold. So.

[Chris Williams]

So when I said a million dollars in Earnings or high 7, fig. 6 figures in earnings, in fact, the portfolio wasn't generating any earnings.

[Alicia Miller]

Yeah, it should have.

[Tim]

Each. Each of the locations should have been.

[Alicia Miller]

Kicking off a hundred, but they weren't.

[Tim]

Right.

[Alicia Miller]

So there were some that were well.

[Tim]

Over that and there were others that.

[Alicia Miller]

Were break even or under collectively. It wasn't a productive portfolio and that's why they wanted to sell it.

[Tim]

And this was after they had quite.

[Alicia Miller]

Closed a bunch of units.

[Tim]

So these were the remaining.

[Alicia Miller]

These are the remaining units.

[Chris Williams]

Wow. Okay. All right. So you basically pay low five figures for an unprofitable business.

[Alicia Miller]

Yeah.

[Chris Williams]

Okay.

[Alicia Miller]

Yeah. So I'm walking in and taking it over, knowing I'm going to have to put money into it. So I didn't get an SBA loan. This was just funded from myself. And I had budgeted, I think at.

[Tim]

The time, I had budgeted about 300,000.

[Alicia Miller]

To, you know, do some moves, do some renegotiate some of the leases and hire some more people and, you know.

[Tim]

Invest more in marketing.

[Alicia Miller]

There were just, I, that was the budget that I had kind of started.

[Chris Williams]

With, and plus what you, what you acquire them for.

[Alicia Miller]

Yes.

[Chris Williams]

Okay, so, so 325, 350 sort of thing all in is what was what you were kind of projecting pro forma.

[Alicia Miller]

Yeah.

[Chris Williams]

Okay, well, just on your point about negotiating with them, I, I, so my, my little napkin math was, was way off. The, the over performers were not coming close to correcting for the underperformer. So you were losing money or the portfolio was losing money. On the other hand, there is maybe, maybe they would have had a lot of options, Alicia, other than you, you know, other, other franchisees, of course, but presumably they probably had reached out to those, those obvious contenders already and been denied. So if they're still holding onto this portfolio, it may be, may mean that they don't have an obvious buyer. But I guess I'm just saying from your perspective in your, your, your point about the, the psychology of being willing to walk, this was a turnaround.

[Will Smith]

Yes.

[Chris Williams]

But also a pretty magical opportunity for somebody who liked this category, who decided on her own before seeing this opportunity that she liked this category. And here you can get a sizable portfolio in your geography in one slug. It's pretty appealing.

[Alicia Miller]

Yeah. And I saw a clear path to.

[Tim]

What was going wrong in the underperforming units.

[Alicia Miller]

Right.

[Tim]

In each one had a different story.

[Alicia Miller]

You know, one was literally in the wrong location and nobody could find it.

[Tim]

One had a center director that didn't.

[Alicia Miller]

Know how to sell.

[Tim]

One had an absence center director that wasn't there enough.

[Alicia Miller]

And just little, little things like that. Plus, across the board, they weren't doing any marketing at all.

[Tim]

Right. So because the owner had been in distress, the first thing he did was cut marketing.

[Alicia Miller]

Okay. Well, sales go down. So those things were fixable in my mind. And, and you know, it proved to be, it proved to be true.

[Chris Williams]

Great. So you, you get in there and we're not going to do the whole story because I want to make sure we have time to get into what's happened since and your learnings there. But I guess you've just given kind of a, a preview of what you did. You made these corrections, you moved some locations, you gussied up some of the tired locations, you put the right people in the right seats and got rid of some of the other performers. So a classic sort of turnaround that might be too strong, but a, A light turnaround.

[Alicia Miller]

Yep. Yeah. And I also opened one New unit in my local market.

[Tim]

There was a hole in the market.

[Alicia Miller]

And I, I put a new one in as well. So I did go through. I'm trying to think I had to.

[Tim]

Have moved or re. Or remodeled at least six of the locations, plus I opened a new one.

[Alicia Miller]

So I did go through that real.

[Tim]

Estate and construction process as well.

[Alicia Miller]

That had a lot of interesting learnings from it. So, so yeah, the, the portfolio, as.

[Tim]

I left it was in much better shape.

[Alicia Miller]

But what one big learning that I took from it was I, I knew that if I built it up and.

[Tim]

Revitalized it, that there would be buyers.

[Alicia Miller]

Because they had consistent interest in this franchise over decades.

[Tim]

Right.

[Alicia Miller]

So that I felt reasonably comfortable with.

[Tim]

What I didn't understand was the absence.

[Alicia Miller]

Of private equity as buyers at the unit level puts a bit of a ceiling on what you can get, what you can sell these businesses for. So if I had it to do.

[Tim]

Over, I would look more seriously more.

[Alicia Miller]

Closely at sectors and at franchise systems that had enough scale where you could.

[Tim]

Consolidate a much bigger portfolio over time and build a much bigger, chunkier asset to then sell.

[Alicia Miller]

Sell to a private equity firm.

[Tim]

And that didn't exist in the Sylvan system at the time and still doesn't.

[Alicia Miller]

There really isn't any PE in there. So that narrows your group of buyers to other franchisees, small franchisees like myself. And that's when I realized I had to kind of bust it up. So instead of selling all 11, I.

[Tim]

I broke it up into basically regions.

[Alicia Miller]

So three regions, and eventually found buyers.

[Tim]

For each of those regions.

[Alicia Miller]

But, you know, if I were to.

[Tim]

Do it again, I would enter a much bigger system with many more consolidation.

[Alicia Miller]

Opportunities available and with the end game of selling it to a private equity firm.

[Tim]

But that means PE already has to be sort of in the system or reasonable certainty that they're going to enter.

[Alicia Miller]

The system in order to build that, build that up.

[Chris Williams]

And how many units did Sylvan have at the time?

[Alicia Miller]

Oh, they had about 500 at the time.

[Chris Williams]

So you consider that not a very big system?

[Tim]

No, I think I do see it as a big system. But the challenge, what I didn't see at the time was there was no.

[Alicia Miller]

Private equity in that system.

[Tim]

With 500 units, there's plenty to consolidate. Right.

[Alicia Miller]

And that was my initial.

[Tim]

My initial thought was, well, I'll start with these 11 and I'll see if.

[Alicia Miller]

I can double or triple it, you know, within a short period of time. And what I realized is it's just not.

[Tim]

No one is coming in wanting to.

[Alicia Miller]

Buy 35 units in that system. It's just not happening for various reasons.

[Tim]

But there's other systems where that is much more the case.

[Alicia Miller]

So, for example, Planet Fitness, Orange Theory. More than half of those units are owned by private equity. Big chunky, you know, 50100 centers all in one, backed by one PE owner. So some systems have it and some. And some don't. So that was a. But that's a learning process for me. And, you know, that's why I say if I had it to do over again, that's one thing I would think about differently.

[Chris Williams]

Well, I assume that's one of kind of the biggest things you want to leave the audience with. So we're going to, we're going to start pivoting here in, into, into your key learnings.

[Will Smith]

But before we get too far away.

[Chris Williams]

From your story, if you had turned these businesses around, these 11 opened another. So your total portfolio toward the end is 12, right?

[Alicia Miller]

Yeah.

[Chris Williams]

And, and you were then. And it sounds like even though it was distressed, you were able from day one of your purchase to be working on not in the business. None of these locations needed you to go be managing director or be at location.

[Alicia Miller]

Correct?

[Chris Williams]

Correct.

[Alicia Miller]

Yeah.

[Chris Williams]

So you're, you're, you know, business, the business, the role of the business owner doing strategic things, doing, you know, real value, additive things from day one is very appealing to a lot of this audience. And then you emerge from doing all those things with a much healthier portfolio. Did you ever consider holding onto it is where I'm going. Did you ever consider, you know, I don't need to be married to my original plan of selling in five years. Now I have 12 units that are all, you know, humming along beautifully, generating, you know, $1.2 million in cash flow. Let me hold on to this and maybe, and maybe buy more. No, you were committed to the plan. Why?

[Alicia Miller]

I was committed because by that time I realized that my, my available potential buyer market was not going to meaningfully change if I held onto it for another five years. So that's when I realized that, okay, I've done my.

[Tim]

What I set out to do.

[Alicia Miller]

It's ready to sell, so do it.

[Chris Williams]

Okay. All right.

[Alicia Miller]

Yeah.

[Chris Williams]

Okay. So now as we do pivot into what you want to leave the audience with, people considering buying into franchise systems first, give us a little bit of, like, kind.

[Will Smith]

Set the stage for us in terms.

[Chris Williams]

Of private equity's role in the franchising universe. You spend a good deal of the, or, you know, the first, the first section of your book is really kind of a history lesson. It's fascinating about how franchising evolved and private equity evolved kind of in parallel. And then, then the two met and, and kind of more recently than you might think. It wasn't until the 90s, I think you write, where things started, where the two started, you know, courting each other. And it's only, it's only accelerated. So set the stage for us here in 2024. Private equity's role in franchising. What do people, what context do people need to understand?

[Alicia Miller]

Sure. So this is, this is really the.

[Tim]

Book I wish I had read before I invested in franchising at all. Right.

[Alicia Miller]

It just, I see so much more.

[Tim]

Now than I did when I first came in.

[Alicia Miller]

I'm much better educated about what's going on. Private equity has been probably the biggest.

[Tim]

Sea change in franchising in all of franchising's history.

[Alicia Miller]

And franchising has been around for a century. So this is a very big deal.

[Tim]

That it has had such a big.

[Alicia Miller]

Change over a very well established, huge sector of our economy. What they changed are a couple things. They have cherry picked the biggest, best, fastest growing brands.

[Tim]

Anybody who wanted a PE partner at.

[Alicia Miller]

This point has had plenty of opportunity to, to get one at the franchisor level.

[Tim]

And also now even at the multi.

[Alicia Miller]

Unit franchisee level, as I said, there's, there are PE firms rolling up big systems. Right. So that changes things for everybody who doesn't have a PE partner. So if you think about it, there are 4,000 active franchise brands that are still offering a franchise license for sale.

[Tim]

700 of them have gotten PE backing.

[Alicia Miller]

At either the franchisor level, the franchisee level, or in some cases in both. But that's 20%.

[Tim]

So there's a long tail of brands.

[Alicia Miller]

That have not yet attracted private equity. Perhaps they will, perhaps they won't. A lot of them never will. They're too small. They're not really attractive to PE for various reasons. And I didn't know that coming in right now. I do now I can look at a brand and say, okay, that guy's never going to attract private equity because he's not building something valuable that private.

[Tim]

Equity can get behind.

[Alicia Miller]

You got to think about traditional PE firms. Mandate is very clear.

[Tim]

They've got, their model is they pool.

[Alicia Miller]

Money from limited partners in a blind pool. They go invest in businesses, they try to grow them, improve them, and then they sell them, usually within about a.

[Tim]

Five to seven year time frame. I think the average hold time now.

[Alicia Miller]

Is about seven years.

[Tim]

So they don't, they don't have time.

[Alicia Miller]

To mess around with a mess. They don't really want a teeny little, you know, business. They don't have time to grow it into something huge and meaningful. So that means they've focused, they're very.

[Tim]

Focused and they've cherry picked their way.

[Alicia Miller]

Through franchising now pretty effectively. It forces them to, you know, dip.

[Tim]

Down a little bit and to buy some smaller brands.

[Alicia Miller]

But it's changed the landscape of franchising pretty dramatically. There you look around in private equities everywhere, everywhere now.

[Tim]

They're everywhere.

[Alicia Miller]

At conferences, they're everywhere.

[Tim]

At any kind of franchising event that.

[Alicia Miller]

You go to, bankers and private equity firms are everywhere. But they've also helped. They've professionalized franchising in a lot of positive ways.

[Tim]

Not everything they've done has been perfect.

[Alicia Miller]

Of course, but that lens of how.

[Tim]

Do you build a more valuable business.

[Alicia Miller]

Over time, specifically in franchising, is an important, I think, lens that has brought franchising forward and the way they've done.

[Tim]

It is focus on franchisee profitability.

[Alicia Miller]

You know, you can't grow a business.

[Tim]

If franchisees aren't happy and profitable and.

[Alicia Miller]

Wanting to buy more units. It's very simple. So when private equity comes in and.

[Tim]

Buys the business, if they stay focused.

[Alicia Miller]

On delivering value for franchisees, the business grows.

[Tim]

They make money, franchisees make money.

[Alicia Miller]

You know, hopefully everybody's happy when they screw up and you wouldn't think that they would given all the incentives to get it right. But when they've messed up, it's because they've lost that fundamental equation. You know, they've taken too many fees out.

[Tim]

They haven't really focused on that relationship with franchisees.

[Alicia Miller]

They haven't ensured that they are satisfied and profitable. You know, smart money can make dumb.

[Tim]

Decisions and you know, we have seen it happen.

[Alicia Miller]

But by and large, PE's entrance into franchising has been pretty positive for the industry.

[Chris Williams]

And there's a, there's a few chapters in your book devoted to the bloopers, I think you call them, where it has created value but destroyed value.

[Alicia Miller]

Yeah, I'm being generous calling them bloopers because these are people, these are franchisees, livelihoods.

[Tim]

Right?

[Alicia Miller]

I mean, we, I, I don't make.

[Tim]

Light of it in the book. You know, there is really no excuse.

[Alicia Miller]

For screwing this up. It's the franchise model is so clear on how to be successful and, you know, I get frustrated when I see people who should know better mess this up.

[Will Smith]

An SBA loan broker as Opposed to a direct lender doesn't work for a particular bank. Instead, the broker pairs you with the right SBA lender for your deal based on industry terms, risk thresholds, then helps you navigate the process better than many lenders themselves do. Matthias Smith of Pioneer Capital Advisory is.

[Chris Williams]

Just such a broker.

[Will Smith]

Matthias worked at two of the country's top 10 SBA lenders. So he's been on the inside of the SBA process and knows well the pitfalls and hurdles and how to avoid them. He struck out on his own to laser focus on the ETA and search space. Our niche is his niche. You'll see Matthias at all the ETA conferences. He's closed over 30 search deals since.

[Chris Williams]

Starting Pioneer in May of 2022, including.

[Will Smith]

Some acquiring minds guests. To learn more and get in touch, go to PioneerCapitalAdvisory.com or click the link in the notes.

[Chris Williams]

Alicia, you're talking now from the perspective of franchisors being acquired by private equity. But that's it. That's one dynamic and probably the biggest one. But a close second would be private equity rolling up individual units so active at the unit level. Say what? Give it. Give us kind of a primer on that dynamic and how it changes things. And I guess this goes back to your Sylvan story, like that's where you want, you want to find those buyers, but go ahead.

[Alicia Miller]

Yeah, yeah, full circle.

[Tim]

Some systems are going to attract private.

[Alicia Miller]

Equity money at the unit level and some will not or will not until there's much more scale.

[Tim]

So the first thing they have to.

[Alicia Miller]

See is, is there enough scale?

[Tim]

If you're only 50, 50 unit system, there's not enough, it's not chunky enough for a traditional PE firm to come in and want to roll that system up.

[Alicia Miller]

They'll wait until it's bigger. But if you've got 500 units now, you've got at least the potential for.

[Tim]

A PE firm to want to come in. And the math is really simple.

[Alicia Miller]

At the unit level, they want to try to acquire units depending on the system, right?

[Tim]

For three times cash flow to maybe six or seven times cash flow maximum. When you consolidate all of them together, they want to be able to sell.

[Alicia Miller]

It for 8 to 12. Okay, now you've got to build a.

[Tim]

Pretty substantial cash flowing platform to get that higher multiple.

[Alicia Miller]

But you can see mathematically it's pretty.

[Tim]

Straightforward what you're trying to do.

[Alicia Miller]

You're trying to take a bunch of little units which by themselves aren't as attractive and you're. And by building Back end systems building.

[Tim]

A robust team that can run this.

[Alicia Miller]

Many units together, you can build a.

[Tim]

Pretty substantial and attractive asset for then.

[Alicia Miller]

The next guy to come along and.

[Tim]

Acquire for that cash flow.

[Alicia Miller]

But not every system will let in private equity into their system. They don't want to, they like having.

[Tim]

Those smaller owner operators. So a good example of this would be Carol's.

[Alicia Miller]

Carol's was a multi unit franchisee in the Burger King system put together by private equity. They, they consolidated over time. Corporate ended up buying it back at some point. They built a lot of value there. But corporate has signaled that they're going to bust that up.

[Tim]

Rather than having a thousand units, you.

[Alicia Miller]

Know, they're going to bust it up.

[Tim]

And they, they said that they only.

[Alicia Miller]

Want owners to have 50 units going forward. So they're, this ebbs and flows. You know, when systems say well we're going to let it, we'll let PE in, they don't.

[Tim]

If, if PE is too, too big a part of the system or one owner gets too big, they start to get nervous.

[Alicia Miller]

Right. Because it puts more risk in for performance for the overall portfolio.

[Chris Williams]

Right. Well and you have just identified one of the risks that buying existing businesses in franchise in a franchise network presents that buying independent businesses don't, don't have which is there's this third party involved which is the franchisor and they can make decisions that really affect your, the trajectory of your business, your, your exit, your etc. I mean everything. So there is that risk which is a very big one. But just to, to in the defense, in defense of franchising. Of course there are a lot of things to really love about it from a programmatic acquisition is the, is the phrase you'll hear perspective and, and, and those are you know how quickly you can consolidate because, and, and so often that the, the integration is kind of pre baked. You don't really need to be integrating the businesses because they may already be using similar systems. They obviously under the same brand, same processes. So you can really move quickly if you find, if you find owners that are willing to sell you. The target list is, is, is right there. I mean you can, you can see all the franchisees that you need to reach out to. So you just kind of start smiling.

[Alicia Miller]

Speed up your due diligence. You can talk to a lot of people in the system really fast and if you think about it, something like half of the units, I read this somewhere. Half of the units existing franchise units in the United States are owned by baby boomers still. All those People need to retire at some point.

[Tim]

So there's a lot of acquisition opportunities out there for somebody who wants to.

[Alicia Miller]

Be an acquisition entrepreneur.

[Will Smith]

Well, and let's talk about that for a second.

[Chris Williams]

How did you think about acquisition entrepreneurship? Buying existing franchise resales, which is what you did, versus de novo, you know, building units or territories from scratch?

[Tim]

I've done both. For me personally, I prefer acquisition entrepreneurship.

[Alicia Miller]

It's for my season in life.

[Tim]

That's just what I'd like to do.

[Alicia Miller]

But there's a lot of 2.0 franchise concepts out there that are kicking butt. They really have disrupted their sector. And you would think sectors like for example, treats and desserts, you'd think, well, everything's been done. And then a disruptive brand or, you know, beverages feels like it's been done.

[Tim]

And then a disruptive brand like Swig.

[Alicia Miller]

Comes in and reinvents the category and.

[Tim]

Makes people think differently about that entire.

[Alicia Miller]

Category and gets some win behind it. So the right franchisee who's interested in taking that risk of building out new units in a system that's proven and disruptive, I think that's, that can be exciting too. It just personally wasn't a good fit for me. But you know, there are some legacy.

[Tim]

Concepts that I wouldn't buy into. I would if I were weighing the two.

[Alicia Miller]

There's some 2.0 concepts that I think are more attractive. And each sector, you can, you can kind of go through them and there are opportunities on both sides of that.

[Chris Williams]

You know, it's funny that I feel like there's this, this theme, this Goldilocks phenomenon in how you choose a franchise brand. I've heard you mention it twice now, just now with new, newish brands or non legacy brands up and comers where proven but also disruptive. So, so, so there's business there, there, there's product market fit like they, they got something that works. So it's proven. So you've derisked there, but it's still got, it's still disruptive enough or there's still enough Runway there that there's a lot of future growth to come. Yeah, you know, that's got to be a pretty tight window that you find a brand in.

[Alicia Miller]

Yeah, you've got to really do your homework about what, what's disruptive and is.

[Tim]

It, is it disruptive in a way that's going to give you tailwinds to.

[Alicia Miller]

Make that an effective brand. So let's, let's look at another category.

[Tim]

That I looked at initially, which is early childhood education.

[Alicia Miller]

Right. There are Very well established brands in, in daycare and, but yet there are.

[Tim]

There'S still room for disruption.

[Alicia Miller]

And so a good example would be Tierra Encandada, which is founded by a friend of mine, Kristen Denzer. They are a multilingual daycare operator. So you learn Spanish in immersion, Spanish immersion language classes along with daycare.

[Tim]

It's a simple idea, but yet very disruptive. You're getting more for your value there. You're teaching language to children at the time in their lives when they are.

[Alicia Miller]

Most likely to be able to pick it up rather than learning it like I did back in the old days. You don't get a second language until.

[Tim]

You hit high school. Well, by then your brain is already.

[Alicia Miller]

Wired to make it difficult to pick.

[Tim]

Up a second language. Much better to pick it up early. All the research tells you that now.

[Alicia Miller]

So, so here she is, she came in and created this disruptive concept with.

[Tim]

Organic food and language immersion. And she has done quite well and.

[Alicia Miller]

Now is private equity backed as an.

[Tim]

Emerging brand in the daycare space. And you, you could argue that daycare.

[Alicia Miller]

Is a very mature sector. But yet disruption happened and you know, for the right franchisee, that might be a much more attractive option than trying.

[Tim]

To consolidate in a well established system.

[Chris Williams]

It's so funny that you mentioned that particular franchise system, Alicia, because my child at daycare age, we looked at the Tierra Encantada Encantada here in Northern Virginia. It didn't work for us for a variety of reasons including location, but we did, we do have our daughter in a Spanish immersion daycare. So you're preaching to the choir on that one. And I actually, so I did look up kind of the backstory of Tierra Encantada and you know, she's Minnesota based, your friend, right?

[Alicia Miller]

Yeah.

[Chris Williams]

Didn't it come out of Minneapolis or something? Yep, it's great. Okay, back to this Goldilocks theme. The other one was PE being, you know, not too active, but somewhat active. Or, or, or like you could see, you could see that it would be a system would be ripe for PE to get in imminently. Um, let's, let's dwell on that one. You see this in both independent and franchise where you hear this, you hear people developing theses around, well, private equity is not here yet, but they're bound to come here. That always feels like a big risk to me. It's like, how can you possibly hang your thesis on, you know, private equity getting involved in your category or in this case your brand? Am I wrong to think that, that is as risky as it sounds.

[Tim]

There is risk there. Yeah, the, the risk of the unknown.

[Alicia Miller]

So I can look at a brand now.

[Tim]

Now that I've done all this research.

[Alicia Miller]

And have worked with so many private equity firms over the years, now I.

[Tim]

Can see which brands are likely to.

[Alicia Miller]

Attract PE and which ones just won't.

[Tim]

Right. But I think it's risky for somebody.

[Alicia Miller]

New to franchising to try to figure that out. And just having a founder say, oh, we get phone calls all the time.

[Tim]

Well, so what? That doesn't mean anything. These guys look at so many deals.

[Alicia Miller]

In so many sectors.

[Tim]

Just because they're getting phone calls does.

[Alicia Miller]

Not mean that there's an imminent deal going to happen. And franchisees also need to think about, you know, do you want to be.

[Tim]

In a PE backed brand?

[Alicia Miller]

In theory, having private equity in that.

[Tim]

Brand can help propel the brand forward.

[Alicia Miller]

In a way that is positive for franchisees.

[Tim]

But as I've said, not in every case. Sometimes they come in and make changes.

[Alicia Miller]

That franchisees, they don't like. They add fees, they might add new suppliers that kick more rebates back to the parent.

[Tim]

They might raise marketing, they could raise the royalty. There's lots of things they could potentially.

[Alicia Miller]

Do coming into the business or change the model altogether that franchisees don't like.

[Tim]

So you've got to really think it through. You should never buy into a franchise.

[Alicia Miller]

System because you're in love with the management team. You know, this happens a lot with more emerging brands. You really just kind of get on board with that founder. You really get excited about what they're building. But you know, that can change that. You know, time passes and you know.

[Tim]

You used to enjoy calling the founder.

[Alicia Miller]

And, and connecting with, with her directly. Okay, now you've got to submit a help desk ticket because PE took them over and they're, they're trying to drive scale.

[Tim]

Right.

[Alicia Miller]

You, that's not a sustainable model to everybody call the founder when everything, you.

[Tim]

Know, they need help.

[Chris Williams]

Sure.

[Alicia Miller]

You've got to, you got to mature the business. It's a natural part of the evolution.

[Tim]

Of growing a franchise.

[Alicia Miller]

It just happens a lot faster when you've got PE involved.

[Tim]

And that pace of change can be.

[Alicia Miller]

Really jarring to franchisees if they're not, you know, ready for it.

[Chris Williams]

Yeah, well, but, but let's do focus on the assumption that somebody wants to buy into a system where private equity hasn't already gobbled everything they can up and, and they're either just taking an interest or like you would predict, pretty Strongly and eventually they will. You had said that some franchise systems just never going to attract private equity interest. Maybe that's the better way to approach this. What are obvious disqualifiers so that people can know to avoid what you're about to tell us?

[Tim]

They're the same red flags you should.

[Alicia Miller]

Avoid as a franchisee. Okay, so first is unit level economics.

[Tim]

Are just not attractive. Okay, so the pri, the PE firm.

[Alicia Miller]

Doesn'T have confidence that franchisees can make money and are willing to expand. They're not going to be interested in it.

[Tim]

The average performance of that system at the unit level has to be pretty good, right? It has to be worth the franchisees effort and time.

[Alicia Miller]

Otherwise what do you do it right?

[Tim]

So you can't have one wide variation between low performers and high performers.

[Alicia Miller]

That also looks very suspicious to a.

[Tim]

PE buyer and should look suspicious to.

[Alicia Miller]

Potential franchisees, an unbackable management team. So especially emerging brands can often have.

[Tim]

This cult of personality where just the force of that entrepreneur moves things forward. But at some point you want to drive scale.

[Alicia Miller]

That means systems, process, technology, stack training, you know, get these things open and.

[Tim]

Profitable as soon as possible. If those, if the scaffolding's not in.

[Alicia Miller]

Place, it's not as attractive to a.

[Tim]

PE buyer and shouldn't be attractive to that franchisee either.

[Alicia Miller]

Keeping in mind that emerging brands, they're not, they're not profitable themselves at the.

[Tim]

Corporate level until they hit at least 30 units, 50 units.

[Alicia Miller]

It depends on the franchise system. So you've got to be certain that that brand is reinvesting in support and adding people. Otherwise you're, you know, you're joining a system that's not quite delivering on what they need to, to make you successful.

[Tim]

At the same time.

[Alicia Miller]

So there's this, this tension point where PE can come in and say, well, we're willing to, we think this is a great system. We like the model what they, but what they're, they haven't been able to.

[Tim]

Invest in is say the tech stack. Okay, well PE can come in and.

[Alicia Miller]

Fix that, but they can't fix and.

[Tim]

Aren'T willing to fix a fundamentally broken.

[Alicia Miller]

Model, typically where franchisees aren't making money. So that's same thing you should want to avoid.

[Will Smith]

And was this true, is this true.

[Chris Williams]

For legacy brands as well? Because I hear you say emergence emerging brands, but also the same for legacy.

[Alicia Miller]

Let's pick, let's pick the big daddy legacy brand that got picked up by private equity, Subway. We, everybody knows thousands of locations of Subway continue to close United States and.

[Tim]

We'll need to do so. They're in the wrong places.

[Alicia Miller]

They're not profitable units, they're not sustainable. Right. But the reason that Roark was willing.

[Tim]

To bet on that is because there's.

[Alicia Miller]

An equal opportunity to open thousands of units of Subway internationally. Now as a whole, this makes, you know, subway kicks off $725 million of cash flow a year, so certainly attractive to a private equity buyer. But, you know, the, the units in.

[Tim]

The United States that need to close, that's small comfort to that franchisee.

[Alicia Miller]

Well, just be, you know, at work's.

[Tim]

Level, they can go open new units.

[Alicia Miller]

Somewhere else in the world and they.

[Tim]

Are offset so their royalties are protected.

[Alicia Miller]

But that, that doesn't help the franchisee in the US that needed to close.

[Tim]

Right. So there are legacy systems that need.

[Alicia Miller]

It is, it is healthy to close locations that the demographics no longer make sense.

[Tim]

Right.

[Alicia Miller]

Markets move, a freeway exit might move, a big employer might move. You know, that stuff happens.

[Tim]

But a lot of these legacy concepts have a lot of cleaning to do.

[Alicia Miller]

Before they're going to attract new investors in the United States in particular, Subway is one of them.

[Will Smith]

What about a legacy system?

[Chris Williams]

One of the appealing things about a legacy system, to your point, to your earlier point points, is that there are a lot of units.

[Tim]

So there's.

[Chris Williams]

There you, I mean, you can fish in a barrel here. Lots of paths to accumulating big portfolios.

[Alicia Miller]

Yeah.

[Chris Williams]

And because they're legacy systems, they probably also have older. The demographics of the owners are going to be more boomer level. So lots of retiring owners, so lots of units that are going to be coming up for resale. How to square that with a system that maybe such a system doesn't have any private equity, doesn't appear to have any private equity interest. And I'll put, I'll put two brands on your contextualizes with two brands. First, Burger King. I know there's a lot of stories about Burger King. I don't know the history too much here, but I know the names Alex Sloan and Matt Pearlman, two guys who I guess in 2010ish started, started accumulating a portfolio of Burger Kings. And now that portfolio has become quite large. At the time, Burger King was already a legacy brand decades old. Another would be Brian Beers and Midas. So Brian has been on the podcast, he, he's accumulated, he and his brother have accumulated a portfolio of Midas locations that are doing over $40 million a year in revenue now. And he's a big advocate of finding systems where there Are Boomer retiring owners legacy systems? Because the roll up can be so fast as he's done. How do you so maybe answer my question and try to also tie in those, the Tories the stories of those two systems in recent years.

[Alicia Miller]

So I think in both cases there were opportunities, lots of buying opportunities, which.

[Tim]

Means you can be selective and be really careful about what you're buying and what you can fix and what you.

[Alicia Miller]

Can'T in the timeframe you have.

[Tim]

Right.

[Alicia Miller]

And I think especially in the Burger King case, I remember hearing a podcast.

[Tim]

That they did where they talked about.

[Alicia Miller]

How they were able to negotiate with the franchisor and also with landlords to.

[Tim]

Make a lot of very smart updates.

[Alicia Miller]

To their units to bring them up.

[Tim]

To code, essentially up to the current.

[Alicia Miller]

Branding that immediately delivered on both that investment. They got a payback on that very.

[Tim]

Quickly, but they also it helped lift sales.

[Alicia Miller]

So if you can find those opportunities, then you can run the numbers and you know, the math.

[Tim]

The math works. But not every legacy system presents those.

[Alicia Miller]

Opportunities and not every unit within the.

[Tim]

Legacy system is equally valuable from that.

[Alicia Miller]

Perspective or fixable from that perspective.

[Tim]

So it really takes a lot of.

[Alicia Miller]

Discipline to sort through not just which.

[Tim]

Systems you should even be looking at the first place, but once you get.

[Alicia Miller]

Into the system which are these units are fixable.

[Tim]

And this takes me back full circle.

[Alicia Miller]

To my own story of that portfolio.

[Tim]

That I picked up.

[Alicia Miller]

You know, if I had to do it again, there's a couple units I.

[Tim]

Wouldn'T have picked up. I would have said instead of 11.

[Alicia Miller]

I'm only going to take these eight or these six or whatever. I think on a grander scale, the guys who've rolled up Midas and Burger King, I think have been disciplined along.

[Tim]

The way of trying not to pick.

[Alicia Miller]

Up things that can't be fixed and focusing on their own objectives. Not, you know, you can, you don't want to be in a, in a.

[Tim]

Position where you're fixing corporate's problems.

[Alicia Miller]

You've gotta, you're trying to build a business for yourself. So be selective of which units you're picking up.

[Chris Williams]

And but to your point about thinking about franchising in private equity in the intersection there as always, who's going to buy from you? You buy, you build. And then you need to have some thesis about who you're going to be selling to in a brand like Burger King or Midas. Do you think there are probably in Burger King there are. I know less about Midas. There is going to be a buyer of, of a big portfolio that's doing $40 million a year, because that's a pretty legacy brand. That's very legacy.

[Alicia Miller]

Yeah. I think along the way, you need to be communicating with buyers and gauging potential buyers, gauging their interest as you go along. And that's kind of the same thing.

[Tim]

I did is I was keeping tabs.

[Alicia Miller]

On potential buyers, incoming franchisees who were.

[Tim]

Looking at existing units as well as new units.

[Alicia Miller]

You can do the same thing, but.

[Tim]

You'Ve got to start getting feedback from.

[Alicia Miller]

Those buyers first before you even buy.

[Tim]

But secondly, as you kind of go.

[Alicia Miller]

Along, take their temperature. So it's difficult to time the market perfectly. And you want to make sure that.

[Tim]

At the point at which the best opportunity presents itself, you're ready to move.

[Alicia Miller]

Right. You've got to have your books ready to go. It's got to be ready to sell sort of at any time. And I think that's kind of what.

[Tim]

Ended up happening in the Burger King system where they. They built it up and they consolidated.

[Alicia Miller]

A bunch of units, and then corporate said, guess what? We're going to buy that back. And that turned out to be a great exit for them.

[Chris Williams]

Going back to your Sylvan example, and then we'll start wrapping up here. Alicia, the. You. I think I heard you say that, you know, that wasn't a great system from the perspective of selling to private equity. Did I hear that correctly?

[Tim]

Correct. Yeah.

[Alicia Miller]

There's no. There's still no private equity in there.

[Chris Williams]

What is it about that system you think private equity stays away from? It's a big system. It's a legacy system. The unit economics are solid. Assuming you have units that are performing as they should be, it's kind of durable demand. You know, you think that there's kind of this evergreen demand for tutoring in person tutoring. What don't they like?

[Alicia Miller]

I think two things make it a little challenging. The first is that it still is.

[Tim]

Very dependent on the skills of that center director.

[Alicia Miller]

It's not like running a gym where, you know, people can go online and.

[Tim]

Sign up for a membership on their.

[Alicia Miller]

Own and enroll in their local Planet Fitness.

[Tim]

Right. You don't have to have a really.

[Alicia Miller]

Great salesperson necessarily, although many of them do, of course, trying to get, you know, members to convert.

[Tim]

In a tutoring concept, you're asking parents.

[Alicia Miller]

To sign up for what could be a year of services, and you've got to have a pretty good salesperson in that role.

[Tim]

Well, the harder it is to staff.

[Alicia Miller]

That role, the less interested a PE.

[Tim]

Buyer is, because, remember, they're not the operator themselves. So if there's some special sauce required to be successful at the unit level.

[Alicia Miller]

That is a hard hire, that makes them less interested. The second thing I think is that it may be that corporate hasn't let them in.

[Tim]

Right. So there has to be a tipping.

[Alicia Miller]

Point at which the corporate team says.

[Tim]

Okay, we're going to now allow PE to come in and help us start.

[Alicia Miller]

Consolidating these under great undergrade operators.

[Tim]

They just maybe haven't hit that point yet. And they're not the only one.

[Alicia Miller]

There's other systems where they haven't let PE in yet and that's okay. That's just.

[Tim]

They haven't gotten to that point where.

[Alicia Miller]

They think it's a good idea. That just means that when you're thinking about that system, you can't count on that buyer materializing at some point because.

[Tim]

There isn't evidence yet that they're going.

[Alicia Miller]

To let them in.

[Chris Williams]

Really fascinating what you said about the. Essentially there's. At the unit level in Sylvan, there's kind of a key man risk problem where these things, the, these employees are not as. This is going to be kind of a loaded word, but are not as fungible. Maybe as P would like to see, it's people that you can easily replace all of the employees up and down the stack.

[Alicia Miller]

Yeah, I think that's true. There's.

[Tim]

There are definitely models within franchising that.

[Alicia Miller]

Do better with an owner operator model. They just, they just do. And that's okay.

[Tim]

But that means that that's probably not.

[Alicia Miller]

The ripe area for you to go.

[Tim]

And if you want to build a.

[Alicia Miller]

Big consolidated business, that's going to be tougher for you to. To do it, to make it work. Excellent.

[Chris Williams]

Alicia. Fascinating. Any topics or takeaways that you want to leave the audience with that we haven't already hit on?

[Alicia Miller]

I think continue to do as much.

[Tim]

Due diligence as you can. Don't get too enamored too fast with something. The entire franchise sales process is designed.

[Alicia Miller]

Designed to get you interested and move you forward quickly.

[Tim]

Once you start talking to a particular brand, I would say put the brakes.

[Alicia Miller]

On, really make sure that that sector and that brand is worthy of your time before you go too deep. Because once you go down that road, it's going to be harder and harder to keep your, your, your aperture open.

[Tim]

To be looking at other options that come up. And there's a lot of really terrific options in franchising.

[Chris Williams]

So let's actually end on that note. You remain, I mean You've made franchising kind of your, your profession. You're a consultant now, by the way, tell people what you do today other than write books about this.

[Tim]

I work with franchisors who are preparing for their first institutional capital. So trying to help them build right in the first place and on their growth strategies.

[Alicia Miller]

I also work with private equity firms on their due diligence and, and trying to help them find companies that might.

[Tim]

Be a good fit for their portfolio.

[Chris Williams]

Okay, great. And you are obviously bullish on the entire universe here of franchising and for acquisition entrepreneurs specifically, maybe leave them with a thought. You've already said that you like that path as opposed to de novo development. Anything else to add?

[Alicia Miller]

I think really think about what, what.

[Tim]

Your lifestyle is, what you want as.

[Alicia Miller]

An entrepreneur, and how you can contribute.

[Tim]

To your community in a meaningful way will help you sort through which brands.

[Alicia Miller]

Make sense and which don't for the.

[Tim]

Community that you live in.

[Alicia Miller]

And I think once you have that vision, you can take it forward in.

[Tim]

A much more meaningful way.

[Alicia Miller]

That's when it becomes more real. Is, you know, seeing yourself in that business every day. I would say if you're seriously considering.

[Tim]

Any franchise concept, go spend time with franchisees in that market and see what, what they're doing every day and what.

[Alicia Miller]

They'Re, how they're working with employees, how they're working with customers, what they, what.

[Tim]

That business means to their local community. I mean, small business powers this country.

[Alicia Miller]

And you can underestimate the power of.

[Tim]

That small business to your community.

[Alicia Miller]

Go, go sort that out before you move forward.

[Chris Williams]

Great note to end on, Alicia. How can people reach out to you?

[Alicia Miller]

I'm on LinkedIn, Alicia Miller. You can also find [e-mail] There's a.

[Tim]

Link there for the book and you.

[Alicia Miller]

Can also leave me a message there.

[Tim]

Easy to remember.

[Chris Williams]

Big Money and Franchising. The book is same name, Big Money and Franchising. Scaling your enterprise in the era of private equity. Alicia Miller, thank you very much for coming on and sharing your thoughts. Congratulations on the book.

[Tim]

Oh, thank you.