Fireside Chat | Unit Economics: An Executive Perspective with Potbelly, Goldfish Swim Schools, & CHHJ

First of all, thank you all for joining. We were just talking before this, we were looking at the registration list, and there's something like twenty-plus states represented here, four different timezones.

I know a few folks are gonna ask for the recording. There will be a recording of this as well. For those who don't know me, I'm Gary Luskovich. I'm the co-founder and CEO of Harmonyze. I'm gonna be moderating, today's conversation with these three folks. We're really gonna be talking mostly about unit economics and franchisee profitability.

But we are gonna try to take a little bit of a different take. A lot of it is gonna be focusing on the person behind the profitability, not in aggregate, not talking about system health, but starting to talk about actual franchisees, operators, individuals, and then starting to ask some of the hard questions that we've heard come up around profitability and some of that murky middle.

So, for those who, who don't know what Harmonyze is, we're the AI coach and command center for franchise brands. So we sit at the nexus of financial data, operational data, brand data, and we index on things like, what is the franchisee's goals? What are they going through in their personal life? What is their unique competitive landscape in their geography?

These are the things that we think about when analyzing it, and naturally, it brings up, some interesting conversations. So I'm gonna introduce the panelists, and then we're gonna dive right into the questions. I'm gonna start with Matt Davis. Matt Davis is the CFO of Goldfish Swim School. He's a CPA and a CFE.

Matt has a ton of experience, both in the finance, benchmarking, unit-level performance side. He works on both the franchising and corporate side of Goldfish Swim School, so a lot of interesting and applicable experience there. Next we have Jennifer Durham, who's the SVP of Franchising and Development at Potbelly.

She's led finance, technology teams, very financially and, unit profitability-focused development leader, which is why I've asked her to come on. And finally, we have Dan Whalen, who's the SVP of Operations, at College Hunks Hauling Junk. , Tons of experience, specifically on the operations side, franchise support side.

And I recently learned Dan Whalen also stars in some commercials for College Hunks Hauling Junk, so please feel free to check that out as well after. Alright, and then final thing, if you guys have questions, as the conversation's going, ask them in the Q&A. I know some folks prefer to do it anonymously.

Feel free to do that. We're gonna try to run the Q&A on our side for the next forty to forty-five minutes and wrap up around the fifty to fifty-five minute mark, , just so that you guys aren't kind of down to the wire and have some time for your next call. So I'm actually gonna start with, Matt.

Matt, the first question's to you, and it's something that's core to everything we're gonna talk about today, which is about the quality, versus the quantity of, profitability? There's some, there's things you can measure, and we like to talk about in absolutes, but there is this quality and longevity aspect to it.

So I was wondering if you could help us just explain how you think about it.

As I think about quality and quantity, so quantity is the thing that you see first, right? So you see right out the chute, that's a number and it's, it's the cocktail hour conversation of, "This is how my business does.

These are the businesses I have." And quantity, it's useful for that initial conversation and just getting that, feel of where someone's at. The quality is, Gary, you kind of alluded to there, quality is a lot more work to understand. Well, quality is understanding, how do I get there? And, and as I think about it from a finance lens, finance and accounting really is the scorekeeper of, of earnings.

And so working back through, what is the quality? And so I focus more on the quality side of it because when I think of earnings, I want the earnings to be sustainable. And so sustainable, understanding the drivers and the levers that drove what those earnings were, really getting into the quality of what drove that.

And so the specific example there is I can have a really good year. My EBITDA or my profitability could show really good numbers, but if I've cut back on my marketing spend, if one of my franchisees is, is doing well for that year, they've dropped their expenses for marketing, well, they're not driving new customer growth.

Next year, that's not necessarily sustainable if that doesn't allow for new customers to come in. So it allows them to spike earnings for a year, but not sustain it for, for the future. And obviously we're all in for this for growing healthy businesses with long-term enterprises growth. So, that, that's how I think about those two.

When you drop into, it's a lot of work to figure that out, and so that's, that's the time spent of understanding what those parts are. And as you look at the quality and as you, you drive to those drivers, a lot of times you look at, okay, what's driving it operationally? What's driving it marketing? Or what's the other part of our sales funnel?

That's where the answers lie. That's work, the work, where the work is done. Finance just gets to play a little role of, of scorekeeping, of driving us to where the answer might, might actually reside. Mm. I got it. can I build on that, Matt, if, if I- Please ... if I could? I think, from my perspective, I think quality, when you think about it from the perspective of a, a franchise owner, might be very different, if they have multiple locations versus one location.

when it comes to, quality, the performance might be average, and average might, you know, may seemingly be okay in terms of profitab- average profitability. But if it is really, you know, s- that, that is their, their whole entire business, I think, it varies when you think of the co- the, the, the composition of that franchise owner and their, and their location count as well.

So when you talked about quality and quantity, for, for me it was about what is it for, you know, single unit versus multi-unit and, and how might that factor in, to the, the equation. But I agree with everything that you said, too, in terms of, being the scorekeeper, and, and, and have, letting it tell the story of where to, where to take-

Jen, could you ex- actually, can I- can you explain that?

Ultimately, if we're measuring what I heard Matt say was kind of this like it's longevity and making sure that that EBITDA is sustainable. Why is that different for a multi-unit versus a single unit?

Because if your profitability is, call it 15% on a single unit, that may be okay at the unit level, but let's say you have some significant overhead to support the business, at the unit economics level, it may be seemingly okay, but if your overhead kind of outside of the four walls of the unit is significant, in our business at Potbelly, we have multi-unit owners that have shop development agreements for multiple locations.

And so on their first location, if they've hired a multi-unit owner, that is a significant expense, that has to come from somewhere. so I guess what I'm saying is at the unit level, it might be fine, and if they had 10, it might also be fine. But as you, kind of push/pull on that really important jump from single to multi, there's a lot of overhead considerations at play for most businesses as you kind of think about how you scale.

Ken, do you- Yeah, I can, I can piggyback onto that just 'cause we, w- we own and operate about eight locations across, across five states as, as corporate entities in addition to our, our franchisees. And so as we look at those units' performance, and essentially they, they're the model home for the franchisees, and we do a lot of testing and piloting in there first to make sure it works before we scale it.

but those margins are gonna be viewed a certain way based on the centralized support that's gonna be layered in on top of that, that might not be relevant at the unit level. And then you might have, you know, at the unit level, you might have an owner who's probably worth more than what a market rate manager might, you know, offer or command, out in the marketplace.

on kind of the general quantity versus quality, there's kind of a big pendulum in our business where we've got, apart from leads, you can either drive more revenue through price, or you can do it through volume, and those are kind of two levers that you can't really manage in isolation.

And especially with our business being as seasonal as it is, you know, moving season is, is historically in the summer, so we have to have franchisees plan for that heading into the shoulder months. but if I see a location that just cranked record NOI or EBITDA, but they did it at the cost of job count going backwards by, like, 20% because their average ticket went way up 'cause they just capitalized on the demand, well, short-term play, similar to what Matt was talking about there.

And then conversely, you know, even if you wanted to discount, on some of the idle days on the calendar after you know you've cleared breakeven because it just makes sense to do so. There's a risk trade-off with how much we're gonna be shipping out these trucks, right? We've got young team members driving these big things, and so there's kind of a diminishing return past a certain point if you just stack job count, as high as humanly possible, and that's what you gotta be careful about, especially heading into the winter where you're kind of possibly tempted to go, "Hey, let's just cut the price and let's keep the jobs or the trucks running."

You know, you gotta be factoring in all that kind of stuff, both the short term and the long term.

how do you assess that in, when you're looking at the profitability of a location, right? In the sense that an owner-led business is different than a manager-led business, and the economics maybe don't match in there.

Yeah. So we have all of our franchisees on a internal bookkeeping service, so we get financials every single month on the eighth business day, and so we already kind of know what it's gonna be looking like very early on, and then we also have some leading indicators that can kind of forecast what we might be walking into.

So we always strip out the owner comp, to kind of just neutralize things apple to apples. But you'll see some big disparities or some anomalies with how involved certain owners are. And so you see some margins that are just probably not super sustainable that would need to be added back or accounted for if you're gonna look to sell.

we do have, like, a fully burdened look as well, so we watch both of them. and then I think the life cycle of the business is also important. So, like, an owner heavily involved, hands-on in the business in year one or two, I'm actually very happy with versus an owner who's, like, contingent and tethered to the business when they're doing north of $3 million in sales because to transfer that out is gonna be a heck of a lot harder.

I don't want a location that's doing 700,000 staffed to do three million in the office, right? Or through the owner wages, and vice versa. you don't want something with a shell of a, you know, management team operating a huge business. Mm-hmm ... certainly a middle ground there and a lot of nuance, but I like looking at both ODI as well as, just that fully burdened EBITDA look.

Matt, do you do that as well? Do you also kind of break out this idea of how involved is, is the owner as an input into the quality of profit, you know, level of profitability?

Yeah, yeah, so what, what we do is, it d- it depends on... So if I have an owner/operator, that, that's a general manager salary, and so I try to standardize that across. So what I try to do is an apples, apples comparison for our, for, for everyone's income statement. So if, if I have an owner/operator, they're gonna be in that general manager salary and pulling that.

On our standard chart of accounts, I also have owner salary. So if I have a engaged owner, but they're not operating the business, they're, that's gonna still be on their regular income statement, but it's not gonna pull into my comparable or what I would call a controllable P&L, through that. So that lets me see it stacked up every one of my locations on the same apples to apples comparison.

And so we, we do leave it in or pull it out depending on the role of, of the franchisee ar- around that.

Got it. Okay.

Jen, I

also-

Oh, yeah. I would also add just kind of the, the... when you do pull it out, if you don't add it back when the owner is heavily involved, it could give you a false positive. So you could have a, whatever, say it's a million and a half business pulling 20%, right?

But that's still, that dollar amount, if the owner's wages aren't in there at a- in there at all, and if they have an SBA loan to pay below the line or even some other, you know, for us it's trucks, they're also gonna be below the line. There's not a lot of money left for that owner to be taking home. so those are also some things that we kinda look for in terms of, like, watch areas.

'cause again, you can have kind of a misleading story if you don't have that context.

That- Yeah. It makes a, that makes a lot of sense. And what I was gonna ask Jen was around if that ever leads in development, right? And I can imagine that, you have different owners and maybe somebody's good in a emerging market, right, or a new territory that is unproven or, or somebody is, a multi-unit and they're well capitalized, and they know the system, right?

And I wonder if you ever see a pro and a con to one and the other, or what I'm seeing, you know, there's a large preference for multi-units that are well capitalized and can run the business and have that long runway. Is that always the preference, or is there a case to be made for the owner that's gonna put in 80 hours a week, and figure it out?

Yeah. To, back to my multi-unit comment, our target is to have, multi-unit owners that have exclusivity in a territory to do multiple shops. There's great efficiency in, in having that. So our structure a little bit different than those, on this panel where we have a, an in-shop general manager, and, and the owner is really focused on the, the overall business, including development.

if the owner is acting in the capacity of a general manager, that usually doesn't bode well for any kind of development activity. there are just only so many hours in the day. So if they lose their general manager, and they are, serving that role, that's usually, an indication that we're gonna put the brakes on development 'cause they need to get that fixed first before they can really fulfill their growth commitment.

so Jen's highlighted, it's a, it's a franchising thing. So what Jen's highlighted is that one or two unit, and every brand has a different threshold for where you can go from one, maybe two, maybe three, where you can do it as a, as a single operator being more involved, to then scaling it into allowing for more robust home office and s- and support team around that.

And to, Jen, your comment of like, I, I can't necessarily develop with that franchisee that has one or two units, that hasn't got... They're... You get caught in this no man's land between a few units and then multi-unit, and that to make that growth curve build out your team, there's a risk involved with it.

There's a risk reward of there's some extra costs involved. But I, if I'm able to make that, bridge that over to multi-unit, the quan- That's where, so you talked about quality and quantity. Well, the quantity of earnings and a quality of earnings. So I have good quality of earnings, plus now there's a quantity of multi-unit, five, six, seven locations, whatever that looks like, and that's a good answer.

We may never get to the second question, Gary, but I suppose that's okay. 'cause I think- It's fine ... it's leading to a- another point, which is we, we set that expectation right up front with new franchise owners and, and existing franchise owners, that this is, this is the plan.

And, and, and in terms of the pro forma, we build it into the pro forma so that every... When I say pro forma, meaning their overall business plan for what they expect their business to be, five, 10, 15 locations. so that that overhead, that expectation on, investing in the operating, partner and, and the, and the people needs in order to, to grow is, is well set from the very, very beginning so that it doesn't come as a, as a surprise.

Now, life will smack you in the face pretty hard, so not everything can be planned for. but if, if at least when on the way into the agreement everybody knows what's expected, then hopefully, there's at least a, a good solid plan to, to work from.

I love that, and maybe I'm gonna use that as a springboard into the, the next question.

Matt, you had said this thing about, the support we provide and how much we coach people as they go through that ramp. And one of the things I'm curious about is now what we're seeing in the broader market is that joint employer is easing up.

And is there a willingness across the board, and Jen, maybe this extends all the way through to development, where you promise more at that onset to be more involved, to be more hands-on, to kind of help them through that growth curve in a more hands-on way than historically, right?

Maybe I'll start with you, Dan, 'cause you're on the operations side and, and you do this every day.

Yeah. Yeah, we do do it every day. that hasn't really changed, over the years that I've been here, and I've been with College Hunks for 10 years. I was a coach and ran a shop and have done it all.

so I think that, you know, our... fortunately for us, our coaches are highly, highly credible to begin with. so they've, they've been the operators. We actually have a coach that used to be a franchise owner, and so all that kind of stuff really helps in terms of just, hey, what we're saying is, is battle-tested.

It's tried and true. those company-owned stores that I said, we funnel a lot of stuff, a lot of innovation, a lot of thoughts through those things, and a lot of them never see the light of day. But if there's statistical significance and it holds up over a long period of time, we're the first to go share that and run like the wind with our franchisees.

I will say that we have kind of adjusted, how we've approached our touchpoints in really trying to get more face time with our franchisees, perhaps in a different manner, to where, like in the past, maybe you'd have two one-hour m- one-on-one calls with your franchisees. Now, we do one per month to really dig into the financials.

You've got ad hoc options through Calendly, but we do a weekly regional huddle, with all franchisees, so it's a chance for franchisees to come together, and we basically j- we just bring the data, and we set the stage. But then they basically share the best practices with one another, and then the coach is really just there to make sure the guardrails, are there on the conversation and so that it remains productive.

But that is something that we've layered in, when we went geographic in terms of our, coach deployment, and it's been, you know, the level of engagement that our franchisees are experiencing right now is unlike anything I've ever seen, and it's 10 years in, so,

Wow,

so you

guys have- Really interesting.

I love that idea, Dan. I think I'm gonna steal it. I think that's a really cool

structure. Yeah, have at it. I didn't think it was gonna work as well as it did, and we also, fired it off in the middle of summer, which I'd mentioned was our peak season, so- Yeah ... again, we're really encouraged by that.

so you have information going top-down from the brand, but you also have it coming peer-to-peer, and also from the FBC to the franchisee.

So they have three different touchpoints for sharing best practices and cross-collaborating.

So they're engaging with brand central, far more often on a monthly basis than they perhaps ever were. And we're still doing the other stuff like the webinars and- the newsletter communications and things like that.

but each week will be themed differently, and it'll be based on kind of what we're seeing macro-wise in terms of particular KPIs that might be ebbing and flowing in particular directions. So we'll bring kind of that as the theme to this week's huddle. We'll set the stage. We'll know who in the room is just kicking you know what in that regard, and we'll kind of softball it up to them preemptively with, "Hey, so and so in, you know, Louisiana, I know you guys do a fantastic job.

Can you share just quickly for the group, how you kind of go about this?" And micro trainings, all those different types of things.

Yeah. I love the construct of making it a sharing of information. there's certain op-eds that people would be hesitant to share about their business, but when it comes to, business metrics, and the fact that everybody's measured the same way it creates relationships, with their peers in a powerful way as well and, in a more frequent environment than maybe is typical of, most brands and the way they bring franchise owners together.

I was at a conference a, a couple of weeks back, and there was this, franchisor and I'd met him for the first time, and he walked around the room, and he just shared his problems the entire time, and I think he got more out of that conference than any other person.

He was just inundated with great advice and people helping and connecting, and all he was was, was nothing but transparent. I was very inspired by it. so I want to ask something and, and maybe, Dan, this is kind of relevant in this collaborative piece, which is how do you account for the fact that not every operator is operating the same reality, right?

Someone has a competitor that opens up down the block, somebody's in a more competitive market. and what we see is that, you know, you try to bunch people together by, you know, by region, by vintage, whatever, but how do you group people in a way that makes them with true, paired with true peers or with people that are actually going what they're going through, which is so variable based on their market conditions?

Yeah, yeah. The good, good question. So it's, it's shifted over the years as our kind of average age of franchisees, you know, shifted. so we've, we've got kind of a, a, a, a fairly level playing ground, loosely speaking, or more so than we ever have, 'cause we went through just rapid growth, you know, for a number of years.

And then obviously our, our business is tied pretty heavily to the housing market, so we've had to really just focus on, you know, what we can absolutely control and not pay any mind to the macroeconomic conditions. and so we're really looking at as, as, you know, leaders at, at Brand Central, we're looking at what is that franchisee doing that they can control?

Are they, you know, investing in the proper marketing channels? Are they following up on their leads, you know, to the degree that they should? Are they communicating with their clients? Are they delivering the quality of service that we expect? Are we managing to the margin benchmarks that we've set for them?

And are they leveraging their coach and all the other resources that are available to control the controllables? When those things are in play, we're willing to go down further paths if for whatever reason, the numbers aren't numbering. but if there's some things that are just, for example, we have long distance moving as an offering that we're looking to scale as an enterprise solution.

we've had some franchisees heavily inundated with that new and shiny, new flashy component of it. And, that is something that we've had to kind of level set with them and say, "Hey, I hear you that you want this to be rolling out faster and more robust, and we're right there with you. But I'm looking at your labor percentage, and I'm looking at your disposal percentage, and those numbers, my friend, for the level of year-over-year growth that you're seeing in revenue, far more should be falling to the bottom line.

So I need you to lock in with your coach, right, on these very mundane basics, fundamentals. When you get those straight, come back to me. Let's talk more about long distance. Let me hear your thoughts about what you have in terms of what could help the system. But for the time being, I need you to focus on what you can control, 'cause that's right underneath your footsteps, and that's money just flowing out the back door right now."

So it's basically get the fundamentals in place, and then we can start seeing how that goes up, down based on market environment. But the fundamentals of your business as a prerequisite should be absolutely solid.

Yeah. I'm focused on the floor, not the ceiling. Yeah. So I want the floor to go higher, and then once we've cleared that baseline, then we can talk how do we kind of take things to the next level.

Matt, do you, I know you're a part of conversations where, you know, you have different goals, right? And let's, let's assume that people have cleared that floor and they're operating well. do you, or how do you actually set goals or targets for each location when there's this array of complexity, or how do you bake into forecasting the, the fact that competitors are popping up or, you know, somebody's, a competitor went out of business may be the, the flip side, right?

do you bake that into these expectations at the location level and in the aggregate?

Yeah. a- and it starts at the location level. It's the franchisee. It, it's their target, so it's, it's conversations, it's relationships, it's working with the franchisee. If I, if I have a target for them that's not, that's, that's lower than what...

They're gonna exceed my target. If I have a high target for them that's higher than what their target is, they're not gonna make my target, right? It drives back to th- they've gone to a franchise. They wanna run an independently owned and operated business that, as we have those conversations and through relationship, where are you trying to work back to?

Where are we trying to go to? And then how do we help you get there? And so that's that relationship and working together. I like what Dan said. A- as a franchisor, our goal is to raise the average. The franchisee's goal is to beat the average, right? So as we think about that, and, and when we have conversations around what that target is, well, now, like, we're all, we're all working towards that same thing, but going back to kinda earlier, what does that individual franchisee...

Well, understanding them and what they're hoping to get out of the business or their expectation. What are they willing to put into it? And that you can't hold someone accountable to a goal that they don't choose for themselves.

Exactly. we do the same thing. it is their number, and how do we help them over-deliver on that number?

That, and if you're in development, somebody achieving or exceeding their goals is a sure sign that they're gonna wanna reinvest and continue that flywheel going.

Got it. And do those plans change based on local context or things that are happening in their life, and I guess, how do you, how do you be a partner in that?

Well, I think from the jump for us, we're brick-and-mortar, so there's a, a site, you know, identified, and, and very specific. So as they're putting together their package for review by our real estate committee, they're making a determination on volume. And it's a, it's a council of, you know, b- balancing exuberance with, with reality.

sometimes, you know, their expectations aren't, aren't realistic, so we have to kind of talk them down and, and, and kind of calibrate it a little bit. but for the most part when we, when we get down to the specific site and the economics around that site, it is their go- their expectation in terms of revenue performance, and then we have them pull together a full P&L on that as well so that we really understand their, their p- You know, equity relative to their debt investment and what their return is gonna be.

so we're, we're measuring against that. and but the calibration part happens right at the beginning as we're approving the site, so it's well before any hammers start swinging or, any, you know, sandwiches start flying, so.

Yeah, makes sense.

And, Jen, I'm sure you have stories that you could tell for days on this, but on that, so Gary, you asked, like, does it change and some of that.

sometimes a franchisee comes in and they s- I want this territory and this many locations, and the wanted is a fluid thing. Like, it's a tightrope as far as going one way or another. And so I, I think of one specific franchisee of ours who had, he had a nice, grouping of locations in a cer- certain part, and he had done it for, I think, close to 10 years in that same one.

And then he got the itch to, like, "I wanna, I wanna take on a new market. I wanna do something different." And so, like, although our development team had been talking with him over that time, he wasn't really interested in doing additional development in that middle range. And then as we were talking about, he said, "You know what?

And then all of a sudden the conversations with development, those, those units that he had before were doing well, and then the conversation starts with development of, like, "Hey, where, where else can I go? What does that look like?" And all of a sudden they're working towards that multi-unit, mul- like, multi-location operation that...

Like, it's, it's fluid. It always changes, and I always go back to the, the question of want it. Like, getting up every morning, do I, can I, do I get out of bed really wanting to do this, this role? And my franchisee, that, that's a fluid conversation through the course. These are long-term franchise agreements, and getting up every morning, running a location, running multi-unit locations, like, that's a, that's a want it.

Their team's got to want it, and it's every person is part of that equation, whether it's their personal life, the whole person comes to work is something we talk about at, at the office of. And the same thing goes for our franchisee and their, their unit level e- economics as we look at that, too, so. I know, Jen, I, I have to imagine that there's story after story where it's like they said yes, or then they were excited, and then it changed on you.

Totally, and I think about the franchisee life cycle as well, which Gert Nathan ta- you know, wrote a book on in terms of where they are in, in that cycle. And, and different businesses and, and industries behave differently. You know, prior to Potbelly, I was at Pan & Stone. The, the curve in terms of revenue curve on a restaurant relative to a, a, a spa that, that offers, you know, memberships is wildly different.

And so, you know, making certain- that you understand that and that the franchise owner understands that, and that those that are supporting, the franchisees, like on Dan's team, right, in terms of, you know, the operators need to appreciate and where that franchisee is in that cycle, you know, whether they're, again, at that exuberance stage.

I, I get to, deal with franchisees on their way into the brand, so it- to me, it's like the epitome of, of their love for the brand. Now, eventually they come back around 'cause they wanna buy again, and then that you- Yeah ... you, you kind of keep that going. But there comes a point kind of at that bottom of that cycle where franchisees get to a, a, a perspective of, you know, "This is my business.

I'm running it. What do I need the franchisor for? why am I giving them a percentage of my profits every, you know, every single, you know, time I, I, I sell whatever it is that you're selling?" and that's just very natural. and, and while they do bring everything to, to the business in terms of executing the brand, there comes a point where they begin to have appreciation for the brand and being part of a larger thing in franchising, which is all, you know, everybody on this call can, can appreciate that.

But it is, it's just a cycle and, and you, and you just have to respect where people are in, in that process.

Can I, can I ask about that bottom point of the cycle? And it was one of the questions on my list, was, you know, if someone's doing well, right? And, you know, this, what you're saying was, like, a bid for autonomy.

Like, "I don't wanna be told what to do," and, you know, "Get out of my hair," and, "I know what I'm doing, I, I have four or five of these," or whatever the number is. Do you do you give them that autonomy at that bottom? And there's a few things, right? Like, because maybe you give them hours and, or maybe they kind of feel like they're more in control and they come back to you.

But on the flip side, maybe they stop answering the phone to HQ altogether, right? And I see the benefit and the cons of both, and I'm curious, and I actually wanna hear from all three of you on your philosophy or your brand's philosophy, which could be different, on how much autonomy you give high-performing franchisees.

Well, I'll start and say I'm a mom of a 15-year-old boy, teenager, so this one hits really close to home for me in terms of how much autonomy. But I was in franchising before I was a mom, so I'm certain that my experience in franchising impacts the way that I parent with respect to autonomy.

I think there's latitude to a point, and you have to determine as a brand where that point is and what you're comfortable with in terms of that autonomy and what you're going to have that creativity or, you know, that uniqueness that is each franchise owner's, perspective.

and then there are just some non-negotiables. for the brand example, it would be royalties are a non-negotiable. That's, we're not gonna allow you to pick and choose that.

participating in a, in a system event and, and being, you know, on brand from a promotional standpoint, that would be a non-negotiable. Mm-hmm. Doing your own marketing creative, that's for us, too, a big-

Well, that's a whole... Especially with AI we see things and what people create that can...

Yes. It spins out of control really, really fast. So I think, when ch- you know, the brands that I've been a part of that have done it best have taken that- That entrepreneurial spirit that every franchisor has and channeled it to the places where they can have that.

every franchisee has their... They are an independent business, as Matt had noted, right? And if it comes to what kind of employer you are or what kind of culture you create and what and how you want to behave, in, in your organization, have at it. That, that culture and, and your locations is yours to have.

This menu that you serve and, and how you kind of go to market, that's, that's branded. And so there, there's that separation and, and, and again, just channeling that, to the right places where franchise owners can have that autonomy. That's, that's my two cents.

Yeah, and I think Dan's the perfect one to follow this one through, 'cause the operations piece is really where I think, as far as the, the innovation and kinda what does that look like. So I'll likely tee Dan up here, and he'll speak to it more eloquently. But, when you say high performers, I kinda take a step back from there, because, the economics, or if, like, someone's making, is high profitability, that's not gonna give them room to innovate in my mind.

There's two things that really drive room to innovate and to, to try things and, and be, be creative, if you will. It's, it's a high adherence to brand standards. So like that, as, as Jen was saying, like that, as we protect the brand and we protect the customer experience, like that core, if someone's doing that and doing the blocking and tackling of being part of the brand, being consistent, doing that, that earns a lot of trust and a lot of ability to work collaboratively with our, with our team.

And we want innovation. Franchise is built around innovation. And, like, we all know the, the stories of, you know, where different products have come from, and it came up through a franchisee trying something out and working back through. So I, I think one is a, is a adherence to the brand standards provides room for that latitude.

The other one is profitability. And so I would bring high performer back in there, and I would bring profitability. And it really comes to what I'll call, profitability allows them room to breathe and to think differently and to invest in their team, to invest in, in their process.

we talked, when we were going through, you know, a hard season, we talked about it used to be cash is king. We talked about cash is choi- cash is equal to choices. And so that, having good profitability gives a franchisee choices to what they're gonna do with that unit level economics. Mm. That profitability, I'm gonna reinvest in my team.

I can reinvest in my facility. I can reinvest in a, in another location. But that, that's a choice that I get by being a high performer, and I, and I tie it for, for any brand, it's tied back to that compliance, back to the brand standards and, and upholding those core values

Oh, Dave. Yeah. Yeah, you did team me up.

so obviously, you know, the beauty of franchising is it doesn't always have to come from the franchisor in terms of how we get better. So, we're not so, you know, prideful that, like, if ideas or, you know, recommendations that come from franchisees that have the, the runway to be able to, to try it in partnership with us, and especially if it's something that we've always been kind of planning on doing anyway, and they're basically offering to be part of a pilot, which we'll do that from time to time once we clear it with the corporate stores to make sure that it won't just break outright, we'll invite a group of select franchis- franchisees, whether it be from the FAC or our top performers, to participate in an expanded test of, of certain sorts.

You've got some that are really bullish about, you know, maybe their past experience. You know, we've got some franchisees that came from, you know, the industry prior to coming here that have a lot of, you know, great intel. And so, again, we, we study those folks to try to figure out what can we glean that's scalable, that we could potentially, you know, layer into our system for the entire, you know, network to benefit from.

Compliance is, like, kind of... that's a hard line. We're not gonna go against precedent. We're not gonna go against anything that could have, you know, a, a rippling effect of someone, you know, in their neighboring market or somebody on the other side of the country for that matter, because we're doing things that are out of bounds.

but also, you know, at the same time, if there is kind of a, a... and that- that's where kind of the relationship aspect of franchising can come into play, is, like, if there's something that somebody wants to do, it's not gonna break precedent, it's not gonna put anybody at risk, there's not gonna be any exposure.

Sometimes a little bit of touch the pot is actually not a terrible thing to do to build trust, so long as it's controlled and calibrated in partnership with brand central for, some sort of a test or a pilot of some sort. I think that performance adherence to, the standards for long periods of time, that builds that trust to be able to be someone that can kind of come to the table with us and figure out or sit on kind of the same side of, like, how do we attack this problem together, and what are you gonna do at the unit level, and what are we gonna do here at headquarters?

I think that, that can work, if done correctly.

that kind of latitude that you might give them, does that latitude then create a culture where they're more willing to do experimentation with you instead of keeping you in the dark?

have you seen people start to do experimentation and come to you and be like, "I have this idea. Here's the thing," because there's a trust component that predates it and there's kind of bilateral trust there?

For me, I've seen it in the past few years. I mean, I- some stuff that now I get to my desk of, "Hey, here's what I'm thinking about.

that same, experience five years ago would've been something I would've had to go chase down and walk back and have a conversation about, like, "Hey, here's, here's the implications of what you're trying to do." so I love that now we've got this kind of culture that we're, that we've built to where it's very collaborative.

It's very, like, "Hey, what do you think? Here, here's what, here's what we're trying." And then we have an opportunity to, you know, offer up all the things that we're doing that they might not see in the communication or the state of the union-type thing. and again, with the, with the, the layers of the testing, I, I think that's super, super powerful when you have franchisees that are willing to pilot new initiatives for the brand.

We've got a couple running right now, where they're willingly jumping in in the early, early stages, aware of the fact that there's still some kinks to work out ultimately, but who's gonna offer up the feedback better than an operator, right? Like, yeah, we have company-owned stores, but at, at the same time, those folks work directly for us and have to do what we say.

I mean, it's just what, the way it is, right? So a franchisee who's, you know, kind of on both sides of the, of the coin there, offers really, really great insight if they're willing to understand the components that, hey, it's not going to necessarily be perfect, but we have validated it such to a point to where I know it's not gonna be harmful for your business.

And, and I'll, I'll jump on that one, Gary, for a second to what Dan mentioned earlier in terms of just the way in which they're sharing results and, and the environment, that they're creating is, is allowing franchise owners to feel safe, right, and s- and supported. I think that even in the way they, you know, talk about results, it's, it's creating that safe space, and I think what Dan highlighted there is that.

I... So there's, there's that environment that, that makes innovation and, and latitude a little bit easier. But I also think that to some extent, this is like, nature versus nurture here, and I think that there are some franchise owners that are just more inclined to, you know, jump off the, the cliff and then go, "Oh, wait.

Did I bring my parachute?" Like, they just are risk-takers, and that's great, and I think every system needs them, but I'm balancing, you know, how much change do you really get by creating that safe space when in reality there are just people that are more or less, risk-averse than others.

Yeah. So, I could be on both sides of that argument.

Cool. all right, we're nearing on time. I do have a couple of questions in the Q&A. One of them is one of the ones I actually had, which is cool. I'll start with the kind of the, maybe the more negative one, right?

I think during COVID that we saw a lot of royalty relief as a strategy, which is, you know, forgiving some percentage of royalties or all of royalties so that the business doesn't collapse. and now just a lot of economic forces, a, a lot of complexities in some of the businesses, I think there were an article or two talking about franchisors are starting to consider this more or consider it again.

it could be a yes or no. It can be more if you like to extrapolate, but is that a feasible strategy to hold as a brand, for a period of time or for a long period of time? is that something you've seen done well? I guess take that any which way you'd like. Maybe starting with,

yeah, I think we should let the CFO start on this question.

Yeah, I, I'm happy to, and I, and I, I do have a firm answer on this one. And, but it... I would... Every brand, every business is gonna be a little bit different. So s- I, I'd start at, for us, it's a, it's a hard no, and it's, it goes back to how we structured our business, and it was, it was even before there.

I've been at Gold First for 10 years. The business has been franchising for 20 years. the founders said, "We're only gonna make money off royalties." we have a franchise fee and a royalty. like, we don't, we don't have rebates, we don't have other ways of making revenue.

That's our primary economic relationship with our franchisee. and from the CFO seat, it's also a variable cost. And so if CFO's struggling, I'm gaining less revenue from that franchisee as well. That, that's not the point, but the point is it, it's a hard no for us because that, that's our core business, but it also comes with...

So that's what we won't touch. What we will touch is we have support team. We are gonna do everything possible to provide training, to provide support, to be there in it and with you. And so hopefully we're never getting to that point, and, that process of having real hard conversations around where are you at?

What does this look like? What's going on? COVID was a unique time. It was a generational time of we all lived history in that moment, so we all did what we had to get through. Likely, our business went to zero and stayed zero for multiple months. Like, that, that I don't see happening again in the near future.

But as we think about it, so from the CFO seat, that's the answer. There's a reason behind it. There are franchisors that make money other revenue streams that what royalty relief may be an option for them because they make revenue off of distribution, or they make revenue off of rebates or something.

And that, and that's, that's part of their franchise agreement. For us, it's, it's just because we don't have those things, that's our primary ability to then provide support to that franchisee and every one of our other franchisees.

Yeah, it's, it's a bit of a non-negotiable, and I touched on it in terms of the autonomy, you know, the things that we won't, we won't touch, in much the same way that Matt noted in terms of, how we support those franchise owners.

when times are super tough and there are extenuating circumstances, I think, we go above and beyond to be human and to be great partners and find ways to s- to solve out, or find solutions, and, and solve that, that problem. and so that may mean maybe there's an emphasis on marketing and over-investment that we do, as a, as a brand for that particular location, that we're contributing.

But it, it's not at the expense of, of eliminating that, that royalty. That it's just fundamentally part of, of our agreement and part of our relationship. I mean, it just should never be seen as something that's, variable or, or negotiable.

That makes sense. And it's a cool model around the we'll help pitch in for your top line and kind of eat some of that cost, but not-- never compromise on royalty.

Dan, last one.

Yeah. I, I think, like, if, if we're saying relief as in, like, a, a credit, that's probably got a pretty slim, kinda situational lens where that actually ends up being a, a good idea. very extreme kind of anomalies. that said, I've seen the deferment potentially work out, where we're just-- we're gonna recoup it, but it's, you know, w-whatever happened.

and then it's like an investment thesis.

Like, what's the likelihood of us getting this recouped? Is this something that we should explore because this is a franchisee and they, you know, they do regularly deliver, you know, X amount in royalties annually? And if this, if this doesn't work out, then this is actually we're-- whatever we might, you know, offer up in terms of short-term relief that would be paid back is, is probably gonna cost us even more if this, if this situation, you know, goes south.

if there is, you know, a location that, that again is, is doing everything, you know, correctly by the book, and just for whatever reason, and like I said, I, I mention it just with the housing market kinda being top of mind, over the past few years and, and super proud of how we've weathered it, and we've actually gotten so much more efficient.

It's like the whole Warren Buffett quote of, you know, you don't find out who's been skinny-dipping until the, the tide comes in. so you figure out how much, you know, opportunity was on the table. But if that location just needs more runway, right? And we travel out to folks. we have brick-and-mortar just for the sake of a Google pin and a place to dispatch the team, but we go out to our customers.

So sometimes we might need a bit more, you know, runway in terms of an extra zip code or two, right, to be able to reach a little bit further and grab a few more jobs to get that top line up to a healthier level. And so, you know, could we finance, you know, that expansion fee over, you know, twelve months or something like that, right?

Rather than requiring, you know, the full chunk upfront. those are things that, that we, you know, can, can talk about, especially if, you know, the other party is, you know, willing and able and committed, and we've got, you know, clear agreements in place.

There's only one time in the agreement where royalties are adjusted, and we have an incentive if folks beat their opening timing where they don't pay, they pay half price royalties up until the time that they were required to open.

And that's our way of celebrating their acceleration and kind of giving them something back, 'cause they opened before they were supposed to. So-

Hmm. That's a good one.

That's, that's the only one.

You can structure it too- I love that ... that if they beat the, you know, the forecasted sales as well within a certain period of time in that new, in that new territory, also I've seen that done.

Gary, if I can pile on real quick. And the situation where you're talking about is that underperforming Z. So obviously, they've gone through discovery day. we thought they were gonna be successful. it's a tough situation, right? they're frustrated.

they're different kinds of people, but a lot of times when you're in that, they're frustrated, they're depressed, they start to withdraw. And like withdrawing is not the answer to like working out of that puzzle. And so, although we can't do royalty leave, we're gonna firefight.

We're gonna run into it and do what we can there. And it's talking to your lender. It's talking to your landlord. It's talking to all, like all your vendors and work- And like in that moment, you need friends, you need a team, you need a community, and that's what's great with franchising is you do have a brand.

You have a, a franchisor. You have peers. And it's a tough situation, but I'd encourage, like as any franchisee or any situation where it's that underperforming, it's like, like ignoring it's not the option. Like, just continuing to do the same thing is not the option. so leaning in, that franchisee or that location is, talk to the franchisor.

Lean in. Have the conversations early. Even if it's uncomfortable and embarrassing, you can help earlier in the process and avoid some of these conversations down the road that's just disappointing and really u- un- unfortunate sometimes.

all right, we have, we only have a few minutes left. it's gonna be the last question. It w- came from the chat. It was around advice for, an emerging brand. and, I'm gonna actually pile on some of my own context onto that question and, you know, I think about growing businesses.

you say you ramp the revenue and then you cut back to profitability, and that's kinda, you know, year one or, or whatever it is. And I'm wondering for you guys, right, brands go through the same thing where they ramp, and they bring in fees and, you know, franchise fees and, and franchise, and then the royalties come in later and all that.

How do you think about small brands that are still figuring it out keeping profitability front and center as they're still figuring out their system? I don't know if that's how they intended it, but that's the question I'm gonna ask.

I'll go first. and, and this is the rapid fire. I thought you were gonna hit us with some random question that goes back to like- No, no, no

emerging brands, I think, and I'm gonna go back to one, and I'm sorry, I'm just stuck on that today, so I apologize. But it's, it's knowing who you are. It's like knowing your, what your core values are, what is your purpose? Like, going back to that structure of like, what do you get up every day, and that...

So, a emerging brand is, they found a business, it's likely successful, it works on multi-unit, like that. But, like, identifying who you are so you attract franchisees that match your culture, because it's building... And, and every business is a people business. Every business is a sales business. So as you bring back to that, bring, attracting franchisees that match your culture, that you wanna grow with and spend 20 years in a franchise agreement, or 15 years, whatever, whatever that franchise agreement is.

Yeah. It is being really crystal clear on what your core values are so you can tell, "This is who I am. This is who we are. This is how we operate." And by putting that billboard out front, it allows people to self-select then and say, "That's interesting. I wanna be a part of that. I, I like what you do for a business or the mission.

I, I like that, but that culture's what I'm signing up for and that's what I wanna be additive to." So that would be really clear on your, on your core values and your core purpose.

I'll, I'll piggyback on what Matt said, and I'm gonna answer a little different. And that is, as an emerging brand, I think s- s- you're seeking franchise owners that will help you get to where you want to go. What got you there won't get you, got you here won't get you there.

Sometimes it's a very different profile for where you're headed than what has been successful to date. And, and it may me- mean shifting, to a, a different, type of, a franchise owner. And different markets may behave differently for, for brands as well.

as an emerging brand, sometimes you don't know what you don't know, and I think that's what makes it hard is that, you know, the rear view mirror is very clear, exactly what went wrong. Dashboard, can get, you know, a little messier. So, as best you can, define where you're headed. That's, and what you need to get there, to me is, is really important, 'cause the, the the world of franchising is littered with, you know, good intentions.

Dan, I'm waiting on you.

Yep, I wrote five things down. I said keep proving it out at the unit level, so keep wringing out that towel and make sure that that unit level economics, piece of the puzzle is front and center, 'cause that's ultimately what's gonna, you know, be the thing that could attract or prevent people from ultimately signing on, in the future.

I put scalable process, less owner dependent or person dependent. you're gonna grow long-term through heroic processes, not heroic efforts. So if the success happening right now is due to white-knuckling and, like, muscle, that's not super transferable. So continuing to look at, you know, how can we keep the lights on?

How can we keep the business running when, you know, the owner in the early stage wants to run out to a BNI meeting and disappear for the day or something like that? the business is still moving forward. document the heck out of the playbook. even if you've done it already, I'd go through it a few more times and make sure that the training that you have set up for the franchisees is designed to be a race to break even, because, you know, that's what it's all about at the end of the day.

We gotta get that hump cleared as fast as humanly possible, and that might mean that your training is actually not two weeks, maybe it's four days, right? Or some... You know, it's like that minimum effective dose type of deal. and then make sure the numbers work for both sides, obviously, right? big piece of the puzzle.

And then I put vision and fun. So compelling vision, and this has gotta be... It's gotta be fun, man. Like, running a business is hard. There's all kinds of ways that you could be doing to make a buck. so, like, if you're not gonna have a good time doing it and it's, like, heavy and, you know, stiff all the time, like, that's not a network I wanna be part of.

Yeah. Well, build a business with friends. That's my, my philosophy. Speaking of friends, I'm gonna give you guys, all the time back. Dan, Matt, Jen, thank you guys so much. I so appreciate you guys joining us.

and everybody, thanks so much for tuning in. Bye.

Thanks, everybody. Have a great afternoon. Thank you.

Bye now.

Bye