Michael Horowitz – Primer on Franchises – Ep.185

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(00:00:00) Intro

(00:03:18) Michael’s franchising career

(00:10:00) Choosing a smaller brand like Wingstop

(00:14:14) Transferring rights between franchisors

(00:15:27) Michael’s growth trajectory

(00:16:58) How restaurant groups continue to scale

(00:19:12) Michael’s decision to sell

(00:22:26) Choosing food franchises over other opportunities

(00:26:14) How franchises can uniquely use debt

(00:31:12) The culture shock of moving from finance to managing fast-food employees

(00:35:34) Learnings from the restaurant industry

(00:37:35) Career paths within franchising

(00:39:47) Hiring and recruiting challenges

(00:47:28) Multi-franchise investor strategy

(00:52:10) Advice for folks considering franchising

(00:54:16) What strongly held belief have you changed your mind on?

(00:56:07) What’s the best business you’ve ever seen?

Alex Bridgeman: I enjoyed your paper with AJ Wasserstein on franchising. That was pretty neat. I would love to, let’s dive into your franchise experience. How did you get started? You mentioned not having as many like backers for it. I would love to hear how did you get into franchising, talk about the brand that you chose and everything that went in between.

Michael Horowitz: Yeah. We or I did a search by myself trying specifically not to buy franchises, all the things that traditional search people would say as far as why you don’t want to do franchises, don’t have the control. I was fully on board with all of those and did not look at it at all. I then didn’t succeed in buying a business, had gone back to work, was frustrated about that, and saw other people who were having success buying franchises who had similar backgrounds to me. It took two friends of mine coming to me and saying, hey, we’re thinking of following these guys’ footsteps and buying franchises ourselves. You did a search. Can you give us some thoughts on your experience? And I said, can I join you? I still really want to do something entrepreneurial. So, the three of us teamed up and searched on the side. And then it ended up with a specific focus only on franchises and really only on large scale restaurant franchises. And then it ended up just being my business by virtue of we found a company that was much smaller than we wanted to and worked out an arrangement where we agreed to buy it with me as the operator in the hope that we could scale it to a size that it could support three of us relatively quickly, but if that didn’t work out, that I would have the opportunity to buy their shares back and make it my own thing. And that’s the direction I ended up going.

Alex Bridgeman: The brand that you chose, I’d love to hear more about that and then some of the characteristics you were looking for in choosing that brand.

Michael Horowitz: Yeah. So we bought seven Wingstop restaurants in Ohio. And Wingstop pretty quickly rose to the top of our rankings of large scale franchise restaurant companies that were the most appealing, and there really two dimensions for that. The first was that the unit economics for Wingstop are like pretty much nothing else in the restaurant industry and definitely nothing else of their scale and level of track record. So, you can build a Wingstop in my experience for about $400,000 all in, and a good Wingstop can do $150 to 200,000 of cash flow per year. Those kinds of economics are probably more like spending a million and a half to build a free standing building and hopefully getting 250,000 maybe back a year on that. It’s just nothing comparable. And the second aspect that we really liked was we wanted to do a strategy with both new store growth and development as well as acquisition, and Wingstop offered, we thought, a great opportunity to do an M&A strategy because the franchise base was super fragmented, lots of owners of one, two, three units, Wingstop was moving away from those types of franchisees to larger operating groups. And we figured if we’re willing to go into a brand that doesn’t have a lot of PE or sophisticated investor type franchises yet because it’s smaller, we can be one of the first movers and bigger fish to buy these. That didn’t turn out to be so true, but certainly the new store development opportunity and just general super trajectory of the brand from a same store sales perspective were definitely right.

Alex Bridgeman: You said it turned out not to be so true. What do you mean by that?

Michael Horowitz: A, I think we came in a little arrogant on just because there isn’t like a private equity firm in the system doesn’t mean there aren’t some really sharp savvy, well capitalized franchise groups who realize that this is a great brand and also want to grow in it. So, there were definitely other people actively looking to buy Wingstops at the same time we were with as much or more resources than we had. And number two, it’s actually quite difficult to buy small portfolios in geographies far away from you if there’s not an opportunity to scale that up fairly quickly because it takes a lot of overhead to operate in a new market, particularly in a state not near you with new regulations that can’t share any of the resources you have in your local market. So, I remember very distinctly early on having the opportunity to buy two restaurants in Alabama and thinking great, let’s go do this, first acquisition, we’re on the way, and then sort of thinking through from an operating perspective what was going to be involved to do that, and we’d need a regional manager in the market to help oversee and support the two restaurants. We would need to be making tons of trips down there to understand the development opportunity and figure out where the new sites would be, we would need to manage all of the HR, tax, local regulations and stuff differently. And I, at the time, was handling all that individually, so I’d have to learn all of it and deal with it. And then at the end of the day, it was a small market in Alabama where we could maybe build one or two new stores, but we couldn’t build ten. And so, if you did all of this work, and it all went well, it wasn’t going to add that much to our total size, but it was going to represent a meaningful operational distraction. So pretty quickly realized if you can’t get to at least five, if not ten stores in a market, it doesn’t really make sense to operate there unless it’s drivable or close to a market you already have.

Alex Bridgeman: So that five to ten stores, I’m assuming that’s for Wingstop. Is there a kind of revenue or EBITDA number that you feel like you need to hit as a hurdle rate to enter any new market?

Michael Horowitz: Great question. I think it depends just how big your organization and your goals are. But for me, the question was really can the market and the investment you need to make in the market generate enough cash flow after deducting whatever additional overhead that market would require to make it worthwhile. And so, with Wingstop, maybe five restaurants that are all doing pretty well can get you to a million of cash flow at the store level before overhead. Those restaurants would have to be doing pretty well, let’s say maybe five restaurants more likely 750 to a million. And then you have to deduct the regional manager in the market. So now you’re down to let’s say 600 to 850,000. And your investment is going to be 2 million bucks to develop those five stores, more if you’re buying. That works. But it can pretty quickly, if that number falls down to like 300, 400, 500k, not that it’s not a great return, but it’s not the same reinvestment opportunity that you’re going to have in a market where you can run 20 stores or if you could buy two stores that are 60 minutes driving away from where you are today.

Alex Bridgeman: So you mentioned this, you wanted a franchise where you could have that new store build as a growth path while also just acquisition of existing stores. Any reason, why did you choose that path as the one you’re most excited by versus the more pure acquisition, something like McDonald’s where it’s fairly well saturated, and there’s not as many new store opportunities as something maybe smaller like Wingstop?

Michael Horowitz: There aren’t many brands that would be excited to approve a new franchisee whose strategy is entirely to do acquisitions and no development unless they really need to get rid of some operators that are not performing as well as they could be. The lifeblood of a franchise is their royalty stream. And they can grow it either by increasing same store sales or getting more people to open more locations. So it’s sort of table stakes in most franchise acquisitions to come to the brand and explain how much you’re willing to spend to build new units in their system in order for them to bless your transaction to buy existing ones. And there’s anywhere from the Wingstop equation where that investment’s something you really excitedly want to do to other brands where that investment may be totally upside down and something you don’t at all want to do to somewhere it’s kind of in the middle. And you can sort of say it’s a cost of doing business. I wouldn’t normally want to make this investment on a standalone basis. But if it’s a vehicle for me to also complete an attractive acquisition, that’s an okay kind of additional investment to make and call it a cost of doing business and amortize it across all the other deals I plan to do in this brand. But the other thing that I didn’t fully appreciate when I got into Wingstop is that when the new development investment is such an attractive one to make, it benefits all of your existing restaurants and all of the rest of the system so much more than brands that don’t have that. So, in the time that I was in Wingstop, when I joined, I think they had about 1100 restaurants, maybe even a little less. When I left, I think they’re pushing 1700 now. And the addition of those 600 restaurants over five years contributed a massive amount of additional money to the national advertising fund. So Wingstop went from 2017 never running a television ad to 2023, the first year they’re running television ads year round. And during that same period, our same store sales or average unit volumes went from about 750,000 a store in 2018 to about a million and a half in 2023, and that wasn’t because I was some genius restaurant operator. It was largely because the awareness of Wingstop and their ability to get the word out through marketing was growing at a super click because people were just building and opening new restaurants left and right.

Alex Bridgeman: Yeah, there’s kind of a rising tide that you could ride as that marketing spend went up.

Michael Horowitz: Exactly.

Alex Bridgeman: That seems like another piece of criteria or characteristic that you would look for with that particular logo you’re going to choose, someone who is committed to marketing spend and expansion and in growth mode.

Michael Horowitz: Definitely. And there are a lot of groups, if you’re looking at younger franchises where they’ve sold a lot of franchise rights, but they haven’t yet opened most of them. So I’ve seen some where there’s some 20 open and they’ve sold 100. And that could be great and could be a sign that this thing really, really works. But it could also be a reflection that most franchisors don’t charge that much money to sort of reserve the right to open a location. And so it’s not uncommon for someone to be willing to say, sure, I’ll buy the rights to ten so I can lock up XYZ city for myself, but not really have the intention to follow through on building the ten unless it works out. So that can be a little bit of a misleading statistic compared to actually looking at Wingstop was opening 120 units a year reliably every year. So, a lot of confidence that that was going to continue, and there was a reason people were doing that.

Alex Bridgeman: Is that something people do where they will lock up all the cities in maybe a state or two and then have those options and those rights to build and just sell those rights to some other one, some other builder?

Michael Horowitz: I’m not sure how many franchisors allow you to transfer those rights. Wingstop, for example, does not. So it’s less like an investment. You’re not like buying options that will grow in value, and you can flip to somebody else to develop the territory. To me, the value of doing it is that there is real value to having an entire market to yourself. You get to pick all the best locations, you control all the marketing, you control the service in the market, you can share resources between yourself, no one’s ever going to open something close to you and cannibalize a store unless you decide it’s a good decision. And so, it totally makes sense for a franchisee to say what does it take for me to lock this market down for myself? I’ll make that investment to protect the territory. Hopefully it turns out that all of those units are worth opening and actually operating the business in. But even if not, I bought myself however many, three, four, five years of having this place to myself to pick the best spots and get off the ground.

Alex Bridgeman: Can you talk through also your journey from the first acquisition of stores to the point where you sold and what that growth trajectory looked like for you?

Michael Horowitz: Yeah. So we started with buying seven restaurants. We signed a five unit development agreement with Wingstop, which gave us the full rights to all of Columbus, Ohio, for three years. We built two restaurants the first year, two restaurants the second year, one restaurant the third year, finished out that development agreement. And then as we were finishing it out, Wingstop kind of came back and said you’re getting finished, what else do you want to do? I said these have gone well, I’d like to do more. And partly because of what we just talked about, the brand was just performing so well and the awareness was building, we had a conversation, sort of hey, we now think Columbus can actually support more restaurants than we did originally. So I signed up to build another five in Columbus, built another one of those. Then had an opportunity, I’d been in touch with the franchisee in Cincinnati about 90 minutes away. They called and said hey, we’re finally thinking of selling, what would you pay for our business? Quickly put a deal together to buy their business, signed a new development agreement to capture all the Cincinnati territory. Then Dayton, Ohio, is kind of in between the two of those. There was a single unit there that had been for sale, put together deal to buy that one, which was logical for me to be the buyer for that because I had both markets on either side. So that got us to the 20 that we were at when we sold.

Alex Bridgeman: So if you’re going to- so if you’re at 20 restaurants and you’re looking to grow from there from that point onwards, so whoever bought your 20 restaurants, what are they going to do next? Do they continue going through city by city, or how does this scale increase as they look to grow faster?

Michael Horowitz: Yeah, the group we sold to already owned about 90 Wingstops as well as tons of other restaurants and other concepts. It’s a pretty big platform. And boy is life easier in the franchise world as you get bigger because the resources you can afford as you scale just gives you so much operating leverage. So we had six, seven people at the corporate level overseeing our 20 restaurants excluding me when we sold. And those people had to wear a lot of hats. If somebody didn’t take money to the bank, they had to run over and make sure it got there. If our security camera went down, they had to watch the- call the IT guy and watch the footage and figure out who did what. And if a piece of equipment broke, you had to supervise the maintenance technician and make sure the job got done, all these sorts of things. The group that bought us, they have their own team for security cameras, they have an entire finance team with different specialties, they have an entire team that can advise them on maintenance, all this different stuff that lets the people in the field do more specific jobs and the jobs that they really know and love. So, it just lets you open and build so much faster. The buyer sent, I think, 11 people to the market the day we closed to help hold everyone’s hand and make sure the stuff that needed to get turned over got turned over. Like I don’t have 11 people to send to do a 20 store acquisition. Like I could maybe spare three. So the more restaurants you have, the more overhead resources you have, the more easily you can acquire larger and larger numbers. There aren’t that many big opportunities to buy portfolios of that size at Wingstop. But there are absolutely opportunities to develop. And I think that was the other piece that really made us an attractive candidate is we weren’t just selling restaurants, but we were selling restaurants in territories where there was room to keep building more restaurants.

Alex Bridgeman: In your decision to sell, is that next phase of growth something you would have been excited to do? Or was it just kind of right opportunity came about and worth selling?

Michael Horowitz: From an investment perspective, it was something I was excited to do. From a mental health and operations perspective, it was not. The restaurant industry is a really challenging industry. And I went through COVID, chicken wing shortages, labor shortages, all these different things, and was sort of starting to come to the viewpoint of like, yes, I could make this investment and it would be profitable. But I could also make this investment and it’s one more headache of a place that might have staffing issues, might have facility issues, might not be profitable if it doesn’t work out. And I just was increasingly unexcited about dealing with those problems, which just made it abundantly clear, you’ve hit a point that you aren’t going to be the best person to run this business anymore. You better find somebody else who wants it.

Alex Bridgeman: Yeah, that kind of self realization is important to understand. What kind of questions were you asking yourself to put together that was the case for you and it was time to do something else?

Michael Horowitz: The biggest question for me is one that all of my friends asked when I started to tell them I was thinking about selling and I think a lot of searchers ask themselves when they’re looking at buying a business from someone, which is, why would someone sell to me at this price, couldn’t they just hire a CEO to run it for them and go to a beach and collect the check. So I spent a bunch of time thinking about if that was realistic for me to do. And the two reasons that I decided it wasn’t were, first of all, I had a team that ran the business on a daily basis and did 99% of the daily tasks that needed to be done. But I was still responsible for a lot of the infrequent and more senior management type decisions, investing to sign a new lease, building a new location, hiring a new corporate level team member, signing up with a new vendor and negotiating their contract. And all of those are things that there are absolutely people out there that I could have found or even on my team could have learned to do really well. But it was going to take a real investment of time to train people to do it to the point that I felt comfortable handing it to them or go interview and recruit and put a bunch of trust in someone to make those decisions. There’s a lot of barriers just mentally to wanting to do that. And then the second piece which really solidified it was my net worth was entirely tied up in this business. I’m pretty young. It wasn’t realistic to me that even if I found this person to run it for me, that I was going to go sit on a beach and let this person manage the business that represents all of my wealth and totally be able to check out and not worry about it and think about it in the same way that I did when I was actively involved. So that was really the important factor for me of I couldn’t hand the business to someone else, sit on the beach and just ignore it. I naturally want to be involved in those decisions and end up frustrating myself.

Alex Bridgeman: One thing we actually didn’t even talk about or touch on was there are, of course, food franchises, but there’re also- that’s, what, 65% of franchises are restaurants or 70% or something like that. But there’s still another 30ish percent that aren’t. Did you look at that 30% as options, or was food just so attractive in certain ways that that made more sense to you?

Michael Horowitz: Very loosely, but we didn’t spend a ton of time on it. Food was attractive because it has a super long history through economic cycles, the general trajectory of people consuming food out of the home was steadily growing for decades. The brands that we were looking at had hundreds of units, if not thousands of units. And so, when you kind of narrow down to like franchises that are super established that have been through cycles successfully, that have hundreds of units, that other 30% gets a lot smaller. So restaurants are really like the fertile place to do that larger scale stuff. Unless you’re looking to be a developer in an emerging brand, which I think is a different type of risk that just wasn’t on our radar. The other thing with the non food stuff is I think there’s just a lot more you have to do to validate the concept and whether that business model or brand has staying power. You don’t really have to like figure out okay, here’s a burger chain that’s been around for 30 years, like is there any risk of people not eating burgers or that this brand is not providing a differentiated service. Like that’s just kind of self evident, way more than fitness in particular I like to pick on because I don’t think there’s been any fitness niche that I can think of that’s like persisted for over a decade. You had like Zumba was super popular like 15 years ago, came and went, SoulCycle super popular, came commoditized, rowing, I don’t know, you name it. Like the only real fitness franchises that are super successful are the ones that are way more broad, the Planet Fitnesses that are just gyms or the Orange Theory that’s a mix of all sorts of different types of workouts, and even maybe in a decade like the Orange Theory schtick is not as unique anymore. Just feels way more faddish, like you don’t have to worry about are burgers or wings or chicken sandwiches faddish.

Alex Bridgeman: That’s a good point, and one thing we talked about was Crumble Cookie on our earlier call. I think I told you there was a like chain of vending machines in Portland that myself and a friend were looking at. We didn’t buy which is really good because there were like four the machines like scattered all over Portland. It would have been- it would have taken you an hour and a half to get to all of them. But he was selling the vending machines to go build Crumble Cookie locations around Portland. At that time, I’d never heard of Crumble Cookie; I had no idea what it is, and now it feels like it’s very popular and very well known. And there’s one here in Omaha we’ve been to a couple of times, and the line is out the door with high school students who I think the whole class came to like just buy cookies every single day. But we talked about how desserts perhaps are a challenging category or some of these like frozen yogurt or not necessarily fads, but just like things come in and out of cycles and are harder to predict then a cheeseburger.

Michael Horowitz: Yeah. I mean, one of the first questions I think you can ask yourself is like have there been successful franchises in this space for 20 years. And frozen yogurt, nope. Like cookies, not yet. Maybe, I’m a little skeptical. But like, burgers, yes. Wingstop, yes. Chicken sandwiches, yes. Pizza, yes. Like those sandwiches, yes. Those are a lot easier.

Alex Bridgeman: Yeah, yeah, much easier. One thing we haven’t touched on yet either is in this expansion and opening new stores, buying new stores, how does debt come into the picture? Is debt a tool you can use? Or what are some ways that franchises are a unique model to use debt in?

Michael Horowitz: Yeah, franchises are probably one of the best SMB spots to use debt because they’re established businesses that have a lot less risk in the eyes of lenders than whatever small business you may be buying that has an independent brand. In fact, most – I shouldn’t say most banks – many banks have dedicated franchise lending groups. And depending on the bank size, their franchise lending group will lend to vastly different sized portfolios. But the SBA loan program is also really familiar with franchises because it’s the vehicle that a lot of mom and pops who open their first franchise use to get the funding to get their franchise off the ground. I believe there’re even pre approvals in certain brands through the SBA program where a brand can kind of go to the SBA, pitch themselves and get sort of a green light of yes, these economics work, this brand is proven enough, like SBA loans are good to go for them. I wish I remember where I had seen that, but I’m pretty sure there’s something like that for SBA loans. The downside is you’re going to be personally guaranteeing it for sure. You’re not, unless you’re buying a very, very large portfolio, the lending is all still personally guaranteed. But you can draw substantial amounts of debt because there’s a proven business model behind you. And you can get development lines on top of acquisition loans to continue to expand your business. And I really liked the development loan aspect because it gave me the ability to sort of manage my leverage ratios over time. So I would draw as much as I could to build the first restaurant and put in as little equity as possible. Great, the first restaurant opened and was really successful. I’ll draw as much as I can on the second one. The second one like didn’t open as strong. I’m going to back off and not borrow so much on the third to keep my leverage where I want it. And it was just sort of a continual tool to grow the business but not have to- be in control of what our leverage looks like, which for Wingstock was particularly important because our biggest cost of sale, chicken wings, is a very volatile commodity. And so there were times where my debt service coverage ratio was gigantic and looked great. And I always had to remember, yeah, but don’t keep taking on more debt because you care about solving for that gap when it’s really big, you care about making sure that that gap never gets too small. And so you don’t want any more debt than you could sustain in the really bad periods, which we had during the tenure with Wingstop, for sure. And it was a good thing we were not more aggressive on debt.

Alex Bridgeman: Yeah, what was that time and experience like?

Michael Horowitz: So that would have been late, mid 2021, to kind of early 2022, where we had a sustained period where food cost was just through the roof. The business was about able to cover its debts and nothing else. Fortunately, our lender had lended other Wingstop groups as well and understood that the rest of the P&L was stable. In fact, the sales were growing, it was just this one component was out of our control and unusually high, not just unusually but like 2x higher than it normally was. So, they were understanding in terms of covenants and whatnot, which was really helpful. But it was super stressful and certainly impacted my ability and willingness to reinvest in the brand for a bit. And then, you come out in some periods where right now chicken wings are as cheap as they’ve ever been. And the people in the brand are making a ton of money. But it’s super important to not have your leverage based on times like this but times like 2021.

Alex Bridgeman: Do some of the larger scale players have some economies of scale where they can smooth out some of that volatility with certain materials or vendors, or is that something that just only scales, that’s not something that goes away?

Michael Horowitz: Yeah, it’s just linear, we buy through Wingstop’s supply chain and they do all of the work to identify their suppliers, decide what the price will be, get it to you, and you just take the price they give you.

Alex Bridgeman: Okay, so you’re a price taker, there’s no term negotiations you’re doing because they’re aggregating all of those as a franchise brand.

Michael Horowitz: Yep.

Alex Bridgeman: Gotcha. Okay, that makes sense. I want to make sure I’m covering, like there’s things that I am curious about learning about franchises, but you’ve run one. So in the best- I found the best episodes are the ones where the guest is like super passionate about one particular thing or one particular area, and they talk about it. I can only guess what that is. Do you have a sense for like at this point in the just discussion so far, like, is there something like a rabbit hole that we’ve danced over that we can go into more?

Michael Horowitz: Yeah, I think from an operating perspective, I mean, the culture shock of going from being a finance person to managing fast food employees is pretty substantial. And there’s a ton of avenues for that. You can start with what looks like a logical decision to make from a spreadsheet perspective, excludes a ton of non-monetary aspects that might really make the decision different. So the example I give people a lot is you might at home get used to you sign up for your internet provider, and they gave you the teaser rate for two years. And then after two years, you call them and say, hey, you’re about to raise my rates, either cut back to the teaser rate, or I’m going to flip from Comcast to Time Warner this year and do two years of that. So I figured the same thing. My cable bills gradually grew every month, basically, with Wingstop to the point where I was like I could save 20 plus thousand dollars a year if I just switch from Spectrum to the other local company. But then you think about sending 20 texts out to your restaurants, changing over your phone lines, changing over your internet, something going wrong, the cable not working, a tech not being able to get back out. Now your restaurant can’t accept orders over the phone or the internet. You could blow through that $20,000 in savings so quickly with just a couple service provider related issues. And so you think about it’s working now, the orders are coming through. It’s not worth trying to save that 20,000 bucks because of how much could go wrong and cost me far more than it. And that’s like a decision that would never be obvious on a spreadsheet. But the first time you switch internet providers, and they screw something up, you realize that pretty quickly. That’s on the non people side. Then you go to the people side, and I knew coming in I was going to have to be slower, talk at like a more basic level, just outline things really clearly. And I thought I was doing that. And it took a couple of weeks before somebody pulled me aside and was like everyone is smiling and nodding and saying they followed you, no one followed what you were saying. You’ve got to dumb it down again, you’ve got to say it, you’ve got to repeat it, you’ve got to ask someone to explain it back to you. And those lessons took a while to learn and just were not something I fully was ready for going in.

Alex Bridgeman: Yeah, what was any particular early management experiences like that where learning that you need to repeat a message over and over for it to really sink in, is there any particular story or experience you can think of?

Michael Horowitz: I don’t have a good story that comes to mind. But I think more so than repeating it is you can repeat things over and over again and still not have the person either wanting to internalize and listening to what you’re saying or just not getting it. And so the most effective thing, which was so hard for me to do, but was to have the person say that, repeat the stuff back, demonstrate it to you and not be there to sort of fill in the blanks for them. So, I’m thinking about you’re trying to explain to someone how to review a report that shows discrepancies in their inventory and where they wasted money on food during the week and somebody gets your number. You say, where does that number come from? And they’re kind of not sure, you don’t want to say the answer to them. But you got to ask them well, what do you think this number is? How does it relate to that number? Like what other numbers do you recognize on this page? What do you think the goal that you’re trying to get out of this reporting is, and so what might these numbers tell you? And like, just keep trying different angles until the person kind of hits on something that they do understand. And you can kind of take it from there. But I was always so bad at just kind of wanting to jump in and say, well, this number is this, right? No, if you’re saying right and asking for them to confirm what you said, you did wrong. They need to be telling you.

Alex Bridgeman: That’s a good lesson to learn. What else about the restaurant industry perhaps took you by surprise jumping into it?

Michael Horowitz: I think probably the next one was I thought that people would have a bit more like intrinsic motivation or ambition than a lot of people do. And initially, when I saw somebody who didn’t seem to have those attributes, I was sort of quick to sort of bucket them in, okay, this person isn’t seizing the opportunities in front of them, they’re not that ambitious, they’re not someone we should invest our time in. And what I learned is that there are a lot of people who have that in them, but particularly in the restaurant industry, people don’t get treated that well a lot of the time, you probably haven’t come from backgrounds and places where people have told you that you can do these things, and you should believe in yourself and go after the opportunities. And so, it actually is not only okay but necessary in some cases to find a person who maybe isn’t demonstrating that ambition but you think might have it somewhere in them and try to coax it out of them and not just be quick to say, well, this person didn’t step up to the opportunity, so we’re going to move on from them. We had people, it’s kind of obvious when someone is a more junior role, and you go in, and they’re working their butt off cleaning stuff, and they’re running over to take care of customers, and they’re doing everything you could want. That person’s easy to understand that you need to invest in. It’s the person who’s like doing the job but maybe not exhibiting that same level of energy or ambition or enthusiasm that you have to say, like, hey, he’s here doing exactly what we want them to be doing. They’re doing it well, or they’re doing it well enough. They seem to be on board with what we’re asking. Like, let’s start to show them what’s available. And let’s start to push them down that path a little bit and not just wait for them to come to us and ask for it or seize it themselves.

Alex Bridgeman: What kind of career paths can you design within a franchise group like this for people like that?

Michael Horowitz: Yeah, the nice thing is that there’s a really linear progression that I think is pretty broadly applicable across restaurants and probably franchises in general that are at least multisite based, where you come in at whatever entry level you are, cashier, you are a cook, you’re a service employee at a location doing something else. You can move up, I’ll use the Wingstop sort of ladder, like into a shift lead role where you’re the person most senior of the people working at that time. And so you’re going to have to be a decision maker if something happens. And there may be things that you are told or know are not in your decision making span that you need to go to somebody else for. But hey, if there’s an angry customer, we’re going to power you up to this level to do what you think is right. And if you think you need to do more than that, you can go to the next tier. So that shift lead could then grow into an assistant manager, could grow into a general manager, could grow into a multi unit manager where they’re supporting multiple restaurants and multiple general managers, could grow into all sorts of different titles, but director of ops, Vice President of ops, overseeing multiple district managers. And what you’re doing at the end of the day remains the same. You’re still running a restaurant, you’re trying to cook food and sell it to people and provide good service and quality product. But the way that you’re acting on the business is through increasing levels of people. And so, what worked for you when you were a shift lead and you could lead by example by cleaning the fryer, or even the general manager who could lead by example taking out the trash every night and making sure they never left the restaurant without a good cleaning job, you can’t do that all the time when you grow into these roles. And so you’ve got to figure out ways to like create touch points to communicate that that’s important without you having to do it in the same way. And I don’t know that I have great answers for how to do that. But it’s certainly something that everybody kind of has to work out for themselves as they progress.

Alex Bridgeman: What kind of challenges did you see from hiring and recruiting generally? So moving back in the funnel, so instead of the person moving up in your organization, how do you get people who are a good fit into your group of franchises? What was that? What challenges did you run into?

Michael Horowitz: The biggest challenge was just being proactive around getting candidates in the door for interviews. So I’m not exaggerating when I say we went through periods where we would be spending hundreds of dollars to promote Indeed ads. And we would get nobody applying, much less showing up to the interview, much less being worth hiring. And so, unfortunately but logically, we had a lot of managers who got very used to the idea that, yeah, whatever, I’ve got ten applications, but I’ll contact all ten, one will show up for an interview maybe and that one, 50/50 shot if they’re even worth hiring. So following up on these ten people is not really worth it because my odds of getting a new candidate out of it are pretty low. But that’s exactly why following up on those ten candidates is so effing important is that you aren’t getting that many opportunities to get a new hire. You need to jump on every single person who might possibly be interested in working here and drop everything you can to make sure that they show up and get good impression of the business to want to come work there because they can walk out the door any day they want and get a job across the street at the restaurant next to you. So there were a lot of conversations I had with people who were complaining that they couldn’t do stuff because they were understaffed. And then I’d say when was the last time you contacted somebody who applied for the job? And they’d say two days before. And so, well, how many- you have six people who applied. Yeah, but those six people aren’t going to show up for the interview. It’s like, well, they’re probably not going to show up for the interview because they got contacted by 12 other restaurants in the last two days, and they might show up for one of them. We have to be one of those places that application comes in, when can you come? I’ll be ready. Let me know. So that was a big surprise that you really had to hammer that home. And obviously you have to find other avenues as well of could you recruit people when you’re just out and about during your day, and you encountered somebody in a service industry who was great, could you recruit people at your church, at the local sporting event, wherever. And then in terms of the filter for people, I wish we had the candidate volume to be more choosy. A lot of times in a perfect world, we hire people that I would have preferred we didn’t hire. But you sort of had to make bad choices around what’s acceptable and what’s not. And for us just attitude. Was the person coming in for the interview, were they smiling? Are they energetic? Did they look like they were happy to be here? Or was this like they just desperately needed something to put some money in their pocket. And the more you can kind of hire the people who at least had a personality that you wanted to be around, the better chance of the restaurant- better chance that person worked out but also better chance that person at least made the restaurant working environment a bit more positive place. And even if that person doesn’t end up being a great employee, they can have some benefit for the rest of the people who are working with someone who’s at least enjoyable to be around. Because the flip side of that equation, if you’ve got an employee who’s got a bad attitude and is standing there on their cell phone and doesn’t want to lift a finger to help people and really has to be prodded to do the job, if you don’t manage that person really aggressively to do what they’re supposed to do, which is sort of already defeating the point, if they get away with those behaviors, they’re going to breed resentment so quickly among everyone else. I’m the one cleaning the dishes, I’m the one taking out the trash, I’m the one busting my butt to cook all this chicken. They just stood there, they got away with it, why shouldn’t I also stand there? Pretty reasonable to think.

Alex Bridgeman: What franchise brands do recruiting really well?

Michael Horowitz: So franchise brands don’t normally do recruiting because they’re passing it all down to their franchisees and they don’t want to be associated at all with the labor decisions made by their franchisees because they could be liable for bad behavior that happens. So, I think there’re probably outstanding franchisees at doing this in all sorts of different brands. I mean, I’m sure the brand that comes to mind for most people when you think great customer service in restaurants is Chick-fil-A. And I wish I had a better answer on how they do it so well. I tried to figure this out a lot. If you go into Chick-fil-A, I think the first thing you’ll notice, in addition to that people are really friendly, are that the restaurants are filled with people. And so part of me, we hired some people from Chick-fil-A that I thought would be great and didn’t work out as well as I would have expected. And I think part of that realization for me or my thesis around it is that in Chick-fil-A, there’s so many people doing the right thing, that it’s fairly easy to kind of isolate and weed out the one or two people who are not doing the right thing. And in a smaller restaurant, if you’ve only got four people working on a shift, and you’ve got one person who’s not quite as good as the other three, it’s a lot harder to make the decision to boot that person and really increase the workload on the remaining two people or remaining three people. So I think we kind of found that like we had to put up with a little bit more than we otherwise maybe would have when we didn’t have as many people because the cost to us of rejecting somebody was a lot higher. Now, I think that’s a crummy answer. Like, I don’t think that’s the way it should work. But it was just- I was never able to really figure out the answer to on why can’t we replicate Chick-fil-A? And I would like to think I’m not the only person who couldn’t figure out the answer. Because if there was an obvious answer, then McDonald’s and Burger King and Wendy’s and Taco Bell all would have figured it out. But you probably associate those brands all together with Chick-fil-A in a separate bucket, then you do think that McDonald’s or any of those other brands have the same service as Chick-fil-A.

Alex Bridgeman: Yeah, I certainly do. And of course, I’m sure everyone would love to, if they’re getting into franchises, they’d love to be able to roll up Chick-Fil-A’s. But there’s a lot of barriers into brands like that that are really highly desirable, and often you need to be an employee at Chick-fil-A at some point, or brands like that. So what are some barriers that you encountered when looking at some of these really well known brands like Chick-fil-A and others?

Michael Horowitz: Yeah. And you mentioned rolling up Chick-fil-A. So Chick-fil-A actually, in addition to having not quite a true franchise model, doesn’t really allow multi unit ownership. And part of the reason for that is they want to make sure the owner of that business is on site at that business. And I think that makes a massive difference in the type of customer service and employees that are coming in when the owner is there side by side with those people every day. And obviously, in a multi unit business, that’s just not practical. Yeah, there are a handful of brands that are more focused on bringing franchisees up from within their own ranks of employees, McDonald’s and Domino’s would probably be the two other ones that are most notable for this. And both of those we called during our search and explained who we were, and they said, great to meet you. Not what we’re looking for. Don’t waste your time here. And it’s worked super well for them.

Alex Bridgeman: One thing you talked about was the folks who bought your Wingstop restaurants owned brands, owned other brand restaurants or franchises. How often do you see that? And are there a lot of folks participating in that kind of strategy with maybe they’re a couple of cities, but they have multiple different franchises that they’re investing in?

Michael Horowitz: I think it’s pretty common among the bigger franchises because a franchisor does not want a franchisee to become too large relative to their entire system. So you might reach a point in a brand where the franchisor is sort of like yeah, like you’re at a good size. We don’t want to see you double, but you want to keep growing and you have an infrastructure that can support that and it’s fairly replicable. Your security camera guys and your construction guys and your payroll people and your finance people and whatnot can all do the same job over at Wendy’s and Taco Bell and Pizza Hut and whatnot fairly easily. So that’s a pretty common avenue for growth, to branch out into another brand. It’s not even necessarily in the same geography. But just back to the idea of having enough scale in a market to make it worthwhile. You’re the Wingstop operator in Columbus and Cincinnati. But now you’ve got a great opportunity to get into Rallies and Checkers in Louisville, or you have an opportunity to do, I don’t know, Five Guys in Scottsdale, Arizona, or whatever it may be. So if you look at the largest franchise groups, I would bet most of the top 50 or 100 are multi brand platforms. I get a lot of calls from people who are looking to do franchise stuff. And the common thing that a lot of people want to do is be a passive owner of these things. And they’re going to keep their day job and do this and whatnot. And it’s not impossible, but it takes a lot of work to get there. It’s not something by and large that you can do from day one, it’s something you kind of have to earn over time. And it’s also not something that franchise brands want to hear. They want to make sure their units are run really well by people who actively pay attention and care. And so if you stroll into Wingstop or any other brand and say, hey, I’m going to put together a deal and buy these ten, I’m going to hire some guy to run it, and I’m going to keep working at Microsoft or whatever, they’re going to laugh you out the door because that is exactly what they do not want. When I was pitching Wingstop and the other brands we talked to, made a huge point of like I’m moving to wherever these restaurants are. You will see me in the restaurants every day. I went to Wingstop’s four week training program where I worked in one of their corporate restaurants learning all the positions and coming home at 1am with grease all over my shirt and whatnot because I wanted to be able to walk into a restaurant and see if people were following procedure and know what was supposed to be happening. And yeah, there’s just a lot of people who are like, I get why the numbers are great, I get how there’s a really linear growth path you can do. And so I’m just going to put some money in this on the side and hire someone. And I think that’s a really misguided strategy. It may work down the road when you’ve built the team and you’ve become familiar, but I’m fairly negative on it as a start off point.

Alex Bridgeman: Yeah, that makes sense. Is there a path to buying a franchise brand, like not the locations but the brand itself or are those companies generally probably too big, for the most part, at least the ones that have that storied history or all the characteristics you would want in a brand?

Michael Horowitz: There’s absolutely a path to doing it. But franchise brands that are working are really, really great businesses. You get a royalty stream off gross revenues, you don’t have to put in any of the capital to grow the system. You don’t have to spend that much money to run the franchisor business. And so even relatively small businesses, if there’s any semblance of growth there, trade for pretty good multiples. We’re talking double digits, for sure. Maybe you can find a franchisor that has plateaued at a certain number of units and has a steady cash flow stream but isn’t growing for one reason or another and find that deal. I think that’s an interesting strategy. But I think those are going to be very difficult to find. And you’ll find tons of competition from private equity firms if you find a franchise brand with 20 locations and 50 sold. And you can do the math so easily on when these open or if these open, here’s what the revenue will be across the system, here’s their royalty rate, here’s where their revenue will be in a few years. And like that’s highly predictable and highly private equity viable.

Alex Bridgeman: What advice do you have for folks who are considering franchising or acquiring franchise locations?

Michael Horowitz: So first would be you got to figure out where you want to end up and kind of work from there. If you want to be the owner of five locations and make a couple hundred thousand bucks a year with a great lifestyle, that will dictate a dramatically different set of opportunities than if you want to own 150 units and be the CEO of a company with thousands of employees. And access to capital plays into that, geography plays into that, type of industry you want to spend your time that plays into that, all these different things. So you got to figure out that first. And then once you kind of know that question, you can start to figure out which brands would fit that strategy. And then the next thing I would say is you got to reach out both to those brands to find out if they’re interested in you being a franchisee based on your background and your strategy and your goals. And, B, you should be reaching out to franchisees of that brand to validate your assumptions or what you’re reading about the brand and wherever you’re doing your research, the Franchise Disclosure Document that the brand provides, etc. and make sure you’re comfortable with the numbers that they’re putting out. There’s a brand that I looked at back in the day and I’m actually an investor now in the brand. And I thought about becoming a franchisee really hard. I think the unit economics are fantastic. But I did some research, and the average unit economics are great. But at the time, the band of outcomes on unit economics was a lot wider than it is today. It was a much smaller brand then. And I wasn’t willing to take the risk. I didn’t want the 25% chance that you make this investment and it doesn’t really work out. So I passed, but that’s not something that would be obvious if you just sort of go through and say, well, the average revenue is x, the average profit is y, that looks amazing. Let’s do it. What’s the bottom 25% look like? What’s the top 25% look like? How variable is the outcome going to be for you? You’ve got to get some data points on that.

Alex Bridgeman: Yeah, that makes sense. Moving into closing questions, what strongly held belief have you switched your mind on?

Michael Horowitz: So I think I would say when I was younger, I always believed that like group democracy voting, decision making is the best way to come to a decision for anything. And I have strongly moved away to thinking that that is a generally bad way to make decisions in most places. And the distinction is there’s an enormous value in having the conversation around the decision and getting input from everyone. But then having everyone collectively make the decision is not a good idea in my opinion. I think that it should be incumbent on, in a lot of situations, one person to say, I’ve gotten all this feedback, I’ve ingested the data, here’s my decision, this is what we’re going to do. And I’ve just seen a lot of instances where if somebody has the right to be part of this decision and ends up on the losing side, they’re not bought into that decision at all and they actively resist it. Not that they wouldn’t feel that way if a single decision maker said the same thing. But it does seem to me that there’s a different attitude when you cast a no vote versus you made a no case and somebody disagreed and made a different decision. And it also kind of takes people a little bit out of the responsibility for that decision, I think. If there’s ten people voting, I’m one of ten, so I don’t have to spend that much time really thinking about the answer. I can just make a vote and who cares, there’ll be other people to cover for me. So I think you get better engagement if it’s I want to know your opinion, I’m going to make a decision based on it. So yeah, that’s probably where I’ve changed.

Alex Bridgeman: What’s the best business you’ve ever seen?

Michael Horowitz: My inclination is to answer this question with Google search. I mean, it’s a boring answer, but it’s a network effect business. It’s an insanely high ROI business. It’s a business that controls one of if not the most valuable piece of our attention out there. I was thinking trying to come up with a business, I can give you a slightly more interesting answer. And I don’t know that I’d say it’s the best business I’ve ever seen. But one of my favorite search fund stories that I’ve heard is a person who bought a business that sells essentially another brand of slushie machine like you would find at a 7/11. And the business is awesome because they just go to a convenience store and say, hey, we’ve got this delicious drink, and you can sell it to your customers and make a bunch of money. We will give you the machine if you sign up for us for free. And all you need to do is buy packets of powdered sugar flavor from us, mix it with water and ice in this machine and sell it. They can run this business with an insanely small team. They just call on the giant units of convenience stores to sell them on we will give you something upfront for nothing that you will generate profits off of and they make their money just simply shipping out replacement flavors that it’s just an easy business with a great value proposition and not a lot of people needed. And that’s like what I love about search funds finding that kind of stuff.

Alex Bridgeman: That’s a great business. I’ve not heard of that before. But I like it. Thank you, Michael, for coming on the podcast. Good to chat with you a little bit more about franchises, which is an area I really have not explored very much. So I’m glad you could be a river guide today and walk through it a little more.

Michael Horowitz: Thank you, really. This was awesome. I mean, the people you have on this podcast are amazing in this industry. So I feel very lucky to get to be part of it.