Franchising 101 with Tim Pickwell | Starting Strength Gyms #54

[stef]

Everything you never asked to know about the franchise business is covered in this conversation between Ray Gillenwater and our franchise attorney, Tim Pickwell. If business legal minutia gets your engines revving, we feel sorry for you, but the good news is you may enjoy this podcast episode. And for those of you that say we're boring...this episode is evidence that you are indeed correct.

• 01:02 Franchise attorney
• 02:54 How SS Gyms operates vs others
• 05:42 Cash flow positive
• 06:49 Franchisee success and treatment compared to others
• 09:36 Majority of revenue from royalties
• 12:16 Maintaining quality and growing as slowly as we need to grow
• 20:30 Relevant regulations and why they were created
• 27:11 Federal Trade Commission
• 31:34 North American Securities Administrators Association
• 36:56 Are the FDD and laws obsolete?
• 39:49 No SS Gyms in California and New York
• 44:50 Thank you to our members
• 46:11 How many franchise companies are self funded?
• 48:21 40 gyms is the magic number
• 48:51 What could we do better?
• 51:19 Ray Kroc
• 51:58 Good things to come
• 57:35 We love transparency

[VNV]

Good interview. The part around 46:00 was inspiring.

Tom's website pickwelllaw.com is not loading properly for me. Somebody wake up his web admin.

[Ray Gillenwater]

Good interview. The part around 46:00 was inspiring.

Tom's website pickwelllaw.com is not loading properly for me. Somebody wake up his web admin.

Thank you.

Good catch, I'll let him know. Ben is Tim's IT guy but apparently he isn't involved in the website.

[Ray Gillenwater]

Tom's website pickwelllaw.com is not loading properly for me. Somebody wake up his web admin.

Apparently he was hacked - things are back up and running now. Thanks for the heads up!

[VNV]

Apparently he was hacked - things are back up and running now. Thanks for the heads up!

Of course. I did not suspect that.

[AndrewLewis]

What seems to make 40 the magic number for franchise locations? It seems like it would scale differently with different businesses.

[Ray Gillenwater]

What seems to make 40 the magic number for franchise locations? It seems like it would scale differently with different businesses.

Revenue/profit-wise it will vary, but 40 units is "enough" for most franchisors to produce a return. It's the nature of how profit scales that's the interesting part:

For illustrative purposes:
-Average franchisee grosses $300k annually
-10% royalty = $30k to franchisor
-20 units = $600k revenue
-40 units = $1.2M revenue

Expenses grow linearly and then grow more slowly as the core franchisor team is established. Income grows non linearly, compounding in terms of number of units opened and by the growth rate of each sub-capacity unit.

Once the revenue curve crosses the expense curve on the graph, the gap between income and expenses grows quickly.

It's sort of like an individual gym's P&L: the costs to run a gym are relatively fixed, payroll costs scale with revenue, and then operating expenditures cap out which makes new members [mostly] profit past X number of memberships.

In both instances, the business has to be run with strong fundamentals with long-term success as the goal, otherwise it won't make it to the inflection point. Every day that passes before that point is more cash burned.

Franchising is a bit like the "software as a service" business - growing profit margins once the point of diminishing returns is met expense-wise.... if you make it that far. Most don't.