[00:00:00 - 00:05:16]

Will Smith: For 18 years, today's guest ran his own executive search business. Jeff Flannery was earning $500,000 many of those years, some years, much more. But what he had was a practice, one that relied on him doing service delivery himself to generate a lot of that revenue. It was not a true business. He wasn't building equity in a saleable asset.

The subject of today's interview is Jeff's.

Second chapter in his journey of entrepreneurship.

And this time around he is indeed building equity value. Specifically over $2.5 million of EBITDA this year on over $25 million of revenue across 17 massage and facial spas in the Hand and Stone franchise system. Jeff acquired his first hand in stone in 2019, so he's built that empire over years, which might surprise you less when you hear Jeff's fast talking energy and the fact that he worked 100 hour weeks for the first few years.

Looking ahead, he's got his eye on.

$50 million in revenue, a goal he.

Thinks is totally realistic. One final detail to leave you with. Jeff started his journey into eta Franchising at 49 years old.

So let that be a reminder to the mid career folks listening that it's not too late to pivot into eta. And then if you hit upon something that's working, you can build an Empire in six years. Here is Jeff Flannery, owner of 17 Hand in Stone Spas.

Webinars. Tomorrow Tuesday, the team at due diligence firm LCS will teach advanced deal mechanics. You'll learn where purchase price really moves and why networking capital and net debt are often where buyers overpay. You'll hear two case studies, one on accounts payable, the other on project based revenue. And you'll learn about inventory and how to normalize it and how to define debt correctly for your target's valuation.

These are advanced but crucial topics taught by Max Lummis and Travis Sadler of lcs, a team that does dozens of Q of E reports for searchers and.

Independent sponsors every year.

The webinar is Advanced Deal Mechanics and it is tomorrow, Tuesday, April 28th noon Eastern. Link to register is right at the top of this episode's show notes or on the Acquiring Minds homepage Acquiringminds Co. Then Thursday, SBA loan broker Heather Anderson returns for a lender office hours on add ons and carve outs Banks take a different approach when underwriting a loan.

For an add on or a tuck in.

This is something you need to understand if you're considering buying additional businesses to grow inorganically. Banks also analyze loans differently for any business that does not have its own tax return, AKA a carve out. So this Thursday, Heather will explain how lenders assess both of these acquisition special cases. Add Ons and Carve Outs the webinar is Add Ons and Carve Outs how to Get Banks on Board. It is this Thursday, April 30, noon Eastern.

Link to register is right at the top of this episode's show notes or on the Acquiring Minds homepage.

Acquiringminds Cool.

Welcome to Acquiring Minds, a podcast about buying businesses.

My name is Will Smith.

Acquiring an existing business is an awesome.

Opportunity for many entrepreneurs, and on this.

Podcast I talk to the people who do it.

The team at Aspen HR recently published a short white paper targeted at searchers Entitled A New CEO's Guide to Human Resources. It lays out the key items you should be thinking about as you transition into CEO and owner of the business you bought. The link to download that is in the show Notes Aspen HR is a professional employer organization or peo, which provides HR compliance, flawless payroll, robust HR technology and Fortune 500 caliber benefits, all for a fraction of the cost compared to using multiple vendors. Reach out to Aspen HR for your complimentary HR diligence checklist and benchmarking analysis. Go to aspenhr.com or contact Jenny Thier directly at jennypenhr.com Jeff Flannery welcome to Acquiring Minds.

[00:05:16 - 00:05:19]

Jeff Flannery: Thank you for having me, Jeff.

[00:05:19 - 00:05:47]

Will Smith: You're one of the leading franchisees in.

The Hand and Stone franchise system. You started in that system by acquiring existing locations. So your story is a great example of the intersection of entrepreneurship through acquisition, ETA and franchising and that as listeners of Acquiring Minds, will know an intersection that can work very well.

Let's begin with a little background on you, please.

[00:05:47 - 00:07:02]

Jeff Flannery: Jeff okay, I'll try to give the two minute overview. I knew at a very young age I wanted to be an entrepreneur. When I was four years old. I have a twin brother by the way, and we had a restaurant with my parents where we had American cheese melted on saltine crackers for like a nickel or something, right?

We we always knew we wanted to be entrepreneurs. But I grew up in a small town in Iowa and this was before the Internet, so there wasn't really a lot of opportunities even though I kept trying. And after college I was a recruiter. Hated it. Recruiter, kind of this kind of relevant.

Then I became a I moved to Denver, became a stockbroker for four or five years, went back to business school, went to Indiana, Go Hoosiers. Got my mba, then spent a Few years in strategic consulting for Pricewaters Coopers before they got acquired. And then I worked for this.com called free markets which back and this is back circa 2000. And they invented something called reverse auctions which is very innovative for procurement. At the time it was in Pittsburgh.

The dot com crash happened in 2001. It wasn't so much fun anymore. Didn't like Pittsburgh, moved back, did some consulting and then I had a pregnant wife, a brand new house for the first time, and I did no job. And I decided to start a recruiting firm in the middle of the recession and specialize in procurement. Right.

[00:07:03 - 00:07:05]

Will Smith: And even though you had hated recruiting.

[00:07:05 - 00:07:48]

Jeff Flannery: Correct. I didn't really love. I was good at it. So I saw an opportunity and I remember there's like 20 monster jobs.

Member of Monster. Back in the day I was cold calling them. I made my first play miss in the first 90 days and that company was cash flow positive about 90 days in. And it never looked back. Built that into like the number one procurement recruiting firm in the country used to be, if you actually would type in Google procurement recruiter, my firm would come up to tell our group and.

And I was hoping I had to make that my big business. And it wasn't. It was a practice, as my coach likes to say. And I built everything I could to like, you know, build the infrastructure, the process systems, the tools. And I discovered how difficult it was to scale a permanent placement business.

[00:07:48 - 00:08:04]

Will Smith: So your coach calls it a practice, not a real business. Yeah, and by, by that he means it. It was a job essentially high earnings, but it was never something that, you know, you, the founder or leader could step out of.

[00:08:04 - 00:09:21]

Jeff Flannery: That's exactly. I couldn't step out of it.

And so to give you an example, when I was scaling it at one point, I was scaling, I had 10, 12 people working for me. And when I went back at the end of the year and I looked at how much revenue I produced, how much profit I got in my pocket, it wasn't any more than if it was by myself. Right. So I was basically subsidizing the organization, taking all this risk, and it just wasn't scaling. And so I was stuck with this.

And you know, I did that for many, many years. 18 years, to be honest. And they're kind of my lost years. And because, you know, I was making over half a million dollars a year and my peak year was really large, almost $980,000 in 2008. In 2009 it was $62,000.

It took a 94% pay cut back to that crash. And I carried all my team, like I carried their overhead and I really took it the shorts then. But I realized then I'm like, I'm taking all this risk. I'm not getting the benefit. And I've always meant, I've always known that I've meant to scale a business, be a CEO, drive a business, be an entrepreneur.

And I felt like I was kind of wasting my talents. And, you know, I was financially successful, but I was. Professionally, I was miserable, just absolutely miserable because I gave myself golden handcuffs. Usually companies give you golden handcuffs. I gave myself golden handcuffs.

And so the risk to go start,.

[00:09:21 - 00:09:35]

Will Smith: Because you were just making so much money, it was, it was basically very successful, but you still didn't really like the work. And you couldn't scale this into a proper business, even though you really tried. You hired people under you or whatever the word is. I'm not sure it's hired if they're.

[00:09:35 - 00:09:56]

Jeff Flannery: 1099 and built processes and tools and systems and invest a lot of time in infrastructure. You'll see that theme as I talk about my business now. And I probably could have done some things different, you know, if it was a temp service business that. That's actually easily scalable in hindsight and. But I'm sure I made some mistakes.

Right.

[00:09:56 - 00:10:04]

Will Smith: And it also a practice, quote, unquote, practice is also not a saleable asset. So this was not something that you weren't really building equity value either.

[00:10:04 - 00:10:09]

Jeff Flannery: Absolutely. Then, no.

And you'll find when it's done, I didn't get anything for it. So.

[00:10:09 - 00:10:31]

Will Smith: Yeah. Yeah. Okay.

Well, this is all valuable and interesting for the audience because, you know, a part of a big exercise in. In acquiring businesses and is really understanding what a business is and when and when businesses are too dependent on an individual. Well, some businesses can be that and we call that key man risk, but others are just not real businesses.

[00:10:31 - 00:10:31]

Jeff Flannery: They are.

[00:10:32 - 00:10:33]

Will Smith: They're practices.

I like that word.

[00:10:33 - 00:10:39]

Jeff Flannery: It's like a law practice. Right. Think of like a lawyer. Right.

Or a. Yeah, an accountant. Right. Exact same kind of thing. Right?

[00:10:40 - 00:10:45]

Will Smith: Yeah.

Although accounting practices are practices, they can be grown.

[00:10:45 - 00:10:46]

Jeff Flannery: Those are easily.

[00:10:46 - 00:10:51]

Will Smith: Well, and they're very popular now actually among acquirers, so go figure. I believe we could have a side conversation about that.

[00:10:51 - 00:11:07]

Jeff Flannery: But yeah, the challenge is recruiting firms is that, you know, they get a permit, it's a sales job ultimately, and they're getting a percent of their sales.

Right. Once they get training, really good at it, they're like, well, why am I giving you half of my commissions. I'm going to go start my own business and I don't need you. And that was. It's difficult to scale, so.

[00:11:07 - 00:11:11]

Will Smith: Well, that reminds me of real estate brokerages. Residential real estate brokerage.

[00:11:11 - 00:11:12]

Jeff Flannery: That's a good analogy.

[00:11:12 - 00:11:31]

Will Smith: Yeah. You.

You train up all these agents and they're the. They're your revenue generators. And then they get good enough. Your highest earners are the. Are the ones that need you less and less over time.

They own their. The relationships as a commission business. So the value is in the relationships and they just step out and go to another brokerage or go out on their own and there's no. They don't need you anymore.

[00:11:31 - 00:11:33]

Jeff Flannery: So perfect analogy.

[00:11:33 - 00:11:37]

Will Smith: Yeah. Yeah. Great. Thanks, Jeff. Carry on.

[00:11:37 - 00:14:43]

Jeff Flannery: So. So, still struggling here. What am I going to do? And happenstance. I had a business school buddy come out for a conference one year and a work conference, and he said, oh, by the way, I'm going to build a hand in stone.

I'm like, what the heck's a hand in stone? He said, well, it's a spa business. It's a franchise spa business, does massages and facials. And he said, jeff, I think you'd be great at it. And I was like, well, you know, wow.

You know, I've been looking for something. I've resisted the franchising model for a long time because I'm an entrepreneur. I'm kind of a control freak, right. And so I went there with gusto. I went and evaluated this whole market from a consulting perspective.

I wasn't going to look to just at hand and stones, look at all the concepts. And I did. And it just so happens that the day I was supposed to meet the Hand of Stone area representative, she had a heart attack the night before, and she's still alive and good today. But needless to say, that meeting didn't happen. And I don't know if I want to say the concept, but there's one concept I really zeroed in on, and I was going to do it.

And as part of due diligence. By the way, if you do consider a franchise, I highly encourage you, always in the fdd, there's going to be a list of all the franchisees. Pick up the phone and call them and do your own due diligence. Right. Don't just take what the franchise or story is.

And I did that. And in this specific system, they had one person own like 10% of their units, 10, 15%. And he had never built any of them. And so I was asking him about the system and doing due diligence. And he happened to own one.

I live in Scottsdale. He had, there's only one of these locations in Arizona. And he happened to own it. He had had it as part of a bigger acquisition he'd done, and it wasn't doing well. It was losing money.

And so the idea was I was going to buy that from him and I was going to build multiple locations. Right. And if this system's lawyers had gotten back to me quicker with the franchise agreement, I would be in that system today. And I'm very glad. I'm not.

But what happened was California had just passed this law about a piecemeal labor law, and they made it to that, oh, we're going to change this. Oh, by the way, if you've been doing this in the history, we're going to go back the last five years and charge you employers all this money. And so he had a big financial liability at this point, so he wanted to get out of this business. So he calls me up and said, jeff, hey, I got a great deal for you. Why don't you buy my locations in San Diego and Southern California as part of this?

There's like five or six of them. And my twin brother lived in San Diego at the time. I'm like, great, let me take a look at this. And the franchisor wasn't too happy because they want to build new locations. Right.

But this is when I learned a valuable lesson. And that is when you go through the due diligence process with a franchise or they're legally obligated, there's certain things they can't tell you. Profitability, some other stuff. But if you go and buy an existing franchise and you talk to them and you get your due diligence, you get significantly more data than you would if you just build a new franchise. So anybody that's ever considering going the franchise world, even if you don't eventually buy an existing location, if you can like talk to them and go do the due diligence, you can get a significant more amount of data than you can from the franchisor because of all the laws and everything.

[00:14:44 - 00:15:05]

Will Smith: This is so. This is such a good tip. And so when you're talking about the information that will be provided to you by the franchisor, if you're, if you're considering standing up a new unit or whatever, doing a de novo approach, the classic approach, that's the FTD FDD, sorry, FTD French franchise disclosure document, sorry, item.

[00:15:05 - 00:15:10]

Jeff Flannery: 19 is what you want to focus on item 19. Though they may or may not disclose the revenues of the system.

[00:15:12 - 00:15:39]

Will Smith: Exactly. FTD item 19. We've heard that a lot on this podcast for anybody who's done franchise. And so you think a newbie would think, oh, man, look at all this great transparency. This is regulated.

And so we can, you can really learn a lot about the franchise system by looking at this regulated transparency, this document. You can go access the document on various websites and as it turns out, first of all, there's a lot, there's a lot of ways that that can be maybe manipulated is a bit strong, but massaged that number.

[00:15:39 - 00:15:42]

Jeff Flannery: First of all, it's an aggregate business, pardon the pun. Massage.

[00:15:43 - 00:16:06]

Will Smith: Yeah, exactly.

Didn't even mean that the, you know, it's, it's an aggregate number or, you know, it basically takes an average of the system. So it says like what the average revenue of a location or territory is, among other things. So it's easy to be. And it's almost always going to be a rosier interpretation of the reality.

Right.

Generally, I mean, I want to be fair here.

[00:16:06 - 00:16:45]

Jeff Flannery: I think the revenue they disclose is accurate, but the way they position it, because they can segment as much as they want or not, right? And so I've, I've read a lot of FDDs and some FDDs will say, hey, this is what our revenue is by state, and this is our revenue by mature locations, low, high, medium, right? They can slice it and dice it as well or as little as they want. And you'll find if you start looking at some systems, if they start doing like an overall average or whatever, maybe they don't want you to see everything, right?

So they're positioned the way they want. So. But the thing is, it's not exaggerated, right? But it's the only, the thing is, it's only the revenue, it's not the profit, Right?

[00:16:45 - 00:16:45]

Will Smith: Yeah.

[00:16:45 - 00:17:31]

Jeff Flannery: So you're not seeing any cost structure. You're also not seeing any operational metrics, right? And so, but when you, when you like, imagine you're buying an existing business from the existing franchisee, it's the same kind of due diligence you do for any other business. They can give you data, they can give you the data, they can give you their profit margins and their expenses. And the other thing they can do too is one of the things that's great about most, not all, but most franchise systems, they give a lot of data and you can see data from other locations, right.

Of what their sales are and other stuff. But as a new franchisee they can't show you any of that. But if you buy an existing business and you say let me see what business intelligence information have you got about not just your unit but other units in the system and now you're starting to get some more data to see how healthy the system is or not really good tip.

[00:17:31 - 00:17:41]

Will Smith: Okay. So you get a look under the hood of this franchise system, the real one based on, based on a guy's actual P. L's absolutely not the, not just the FDD item 19.

Okay.

[00:17:41 - 00:18:32]

Jeff Flannery: And so we go through this due diligence and I come to two conclusions. One, I am not doing this deal. This industry is a lot less profitable than I was kind of led to belief. The second thing I said is the only brand I'm going to do this business with is hand in stone, so the best brand.

And three, I'm only going to buy an existing unit to begin with. I'm not going to build one to begin with because what I found was, is, you know, in this systems, you know, at the time I think it costs, it's more expensive now, but I think it was like six or seven hundred thousand dollars to build a spa. And these are a membership based business so they take like two years to get break even. Now once you can scale them they're great because you've got that recurring revenue but it takes a while to scale and, and so a lot of times it's better to buy if, when you can, an existing business that's cash flowing then spend all this money and then all of a sudden you have to wait two years to get cash flow positive. Right?

[00:18:32 - 00:18:33]

Will Smith: Yeah.

[00:18:33 - 00:19:04]

Jeff Flannery: What I didn't know was that, and this is where this is learning for me. You know, franchise systems, they kind of know each other and everything. And when there's a profitable existing location that's for sale that is rarely going to hit the public market, an existing franchisee is most likely going to swallow that up before you have a chance to even know about it as a public person. Right.

And so that I didn't appreciate that at the time, but that's. So this happened. I evaluated it, I said I'm not going to do it, I'll wait for one. I put it on the shelf.

[00:19:06 - 00:20:11]

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Pioneer is not a single person, but your true deal team. Visit pioneercap.com or click the link in the notes.

[00:20:14 - 00:22:21]

Jeff Flannery: So I went back to my recruiting firm, my practice, my job, right? And I did that for a couple more years and then personal situation. At the time, I had three kids, a wife who's now an ex wife, and she was a stay at home mom and she wanted to go back to work. And I valued our freedom and our travel, so I didn't want her to get a job and restrict us. And at the time we had some friends that had just bought like a little fitness business.

And I'm like, you know what, let's just go on biz by sell. Maybe I can find a little fitness business for you to run. You have some flexibility. I know how to sell memberships. I'm a sales guy.

We can maybe find something, right? And I remember the day to this day was December 23rd, 2018. And I go on biz by sell and I find there's a hand in stone for sale in the Phoenix metro area. It's in Peoria, Arizona. I'm like, wow, this is serendipity.

Like, okay. And this was like two years after I'd done that due diligence before, right? So I looked at it and I knew it was trouble. I knew it was trouble, right? But my buddy Scott, he is in the franchise, he's been at Handstone for a while.

He's a really good, experienced franchisee. I immediately call him up and say, what do you think? And he starts giving me his opinion of how it might be mismanaged. And so I go through the due diligence and I decided to buy it. And the purchase price was $150,000.

Remember, these things go for 6, 700,000, right? To build, right? To build a brand new one, okay? And so I buy it and I go, we finance it with an SBA loan. So I know your team, everybody probably wants to know the economics.

Let me tell you the economics, please. So SBA loan, I think I put 10% down like 15 grand or something. There's a franchise transfer fee which costs like 20, 25 grand, right? I got to have working capital, some other stuff. So I'm probably in it for, I don't know, 60 to 80 grand, maybe 90, something like that, Right.

And now when I bought this, like, I knew it was a problem. Will and I. And I love fixing problems. Well, I didn't realize how big a problem it was. I found out later after the fact that I hadn't bought it.

This spa was going to go bankrupt the next week. The next week.

[00:22:22 - 00:22:22]

Will Smith: Wow.

[00:22:22 - 00:23:41]

Jeff Flannery: It was going to be the first hand in stone to go bankrupt in five years because there's been a few go bankrupt now since the pandemic and stuff, but still a small number. But anyways, it was a disaster.

And so I went to. I flew to Philadelphia. The headquarters had to go through franchisee training, right? And after I went through the training, Jared Fujerski was the VP of Ops at the time. He says, jeff, come here.

I want to show you what you bought. And he gives me the scorecard. It's all these numbers and stuff, and they're color coded. And it was, green is good, white is okay, Yellow's danger, and red is a disaster. It was 90% red.

I mean, just a complete disaster, right? And then, you know, the idea was to begin with was for. For my wife to run it, right? That was the original goal, but then I changed mine. I'm like, no, I'm going to go all in on this.

And so when we first. The stuff that happened was. The first two weeks is shocking. I'm still in this business. I had an employee with a very significant complaint.

Customer complaint could have been criminal. Before I even took over the business, I had to terminate. I just didn't rehire them. I anesthetician the first week I was there, that she was texting during her service and phones in the room is a no, no, because there's cameras and stuff. It's immediately terminable, right?

And that was. I found it in between her smoking marijuana in the break room. And it was my fault. It was my fault. She was texting the service and doing marijuana.

I had half of our front desk.

[00:23:41 - 00:23:43]

Will Smith: What do you mean, your fault? What do you mean, your fault?

[00:23:43 - 00:23:45]

Jeff Flannery: It wasn't my fault. She's just, oh, I see.

[00:23:45 - 00:23:46]

Will Smith: That's how she reacted.

[00:23:46 - 00:24:31]

Jeff Flannery: It was my fault. I was trying to develop my team because it's a membership business. And I gave him a sales T. I said, listen, you ask them to sign up and you shut up. I use that term on purpose so you understand it like it's a million dollar Sales tip.

And then one day, my sales associate, she's missing. I call her cell phone. She's not there. I call her husband. I said, I'm worried about your wife.

Where she. She's like, well, she quit. Why she quit? Because you were mean to her. Cause you told her to shut up.

I'm like, oh, boy. Okay. But that's not the worst of it. Like, her and this other girl there in cahoots, they. They put a fake one star Yelp review.

The first two weeks were there, I got it removed. And then they somehow got a hold of my. My wife's cell phone number, and they had a stranger call her and start threatening my children. Threatening my children. What?

This all happened the first two weeks that we did this. And I'm like, what the heck did I get myself into?

[00:24:31 - 00:24:32]

Will Smith: Oh, my God.

[00:24:32 - 00:24:49]

Jeff Flannery: And so we survived that. And, you know, I'm.

I'm at this point now I've decided, you know, I'm gonna. I'm gonna give up my recruiting business. And I like to put a phrase, you know, when Cortez landed in Mexico, he burned his ships so he'd be well motivated. I burnt my ships.

[00:24:49 - 00:24:50]

Will Smith: Burned the boats.

[00:24:50 - 00:24:50]

Jeff Flannery: I burned them.

[00:24:50 - 00:25:04]

Will Smith: Burn the boats.

Now, Jeff, I'm surprised that you burn.

The boats after all this bad news. I feel like people usually burn the boats when there's a hopeful.

Some hopeful signs. But you were just getting nothing but like, oh, my God, what have I done?

[00:25:04 - 00:25:12]

Jeff Flannery: Well, I think I designed to burn the boats before this happened. Maybe I should have to try to put that fire out. I don't know.

Get some water, boys.

[00:25:13 - 00:25:14]

Will Smith: Yeah.

[00:25:14 - 00:25:55]

Jeff Flannery: And anyways, we got through that and, you know, and I decided in this business that I was going to roll my sleeves up and I was going to learn it from the bottom up. So a lot of franchisors, I don't franchise, they don't want to get their hands dirty. Right.

They want to, like, you know, manage from afar and hire a manager. I didn't. I rolled my sleeves up. I mean, I folded towels. I fought with the computer system every day and lost.

I did all the hiring and, and I sold memberships, and I really dived in the sales process and everything about it. And I, I, I, you know, I'm here. I am checking client. I'm this big MBA executive strategic consultant. I'm checking clients on a Saturday night.

Right. That was the only way I was going to learn the business and master the business. And.

[00:25:55 - 00:27:01]

Will Smith: Yeah, say, say more about that, Jeff. Why?

Why? It sounds very logical. Master the business said, you know, you just invested your professional direction into this thing, so of course you want to learn it as well as you can and then go from there. But what you just said about many franchisees is probably also true about many people in entrepreneurship through acquisition, where they really try to skip the step of getting their hands dirty. And in fact, and I'll, you know, somewhat guilty of this, we so celebrate, like hiring an operator or getting your businesses to run themselves.

That is the ultimate goal, even probably yours, that we try to accelerate through, you know, the working in the business, not on the business, as the phrase goes. So you either had vision or something that was like, no, I need to like, pump the brakes and do every little thing in this business so that be. And treat it as an investment. Really, what that is, is an investment of your time. So anyway, I'm taking words out of your mouth.

Why. Why did you do that? And why. Why were you. Why are you so rare to see the value of that?

[00:27:02 - 00:29:48]

Jeff Flannery: Well, I can't speak on the rareness of it, but I'll say that, you know, a lot of people hire an operator. Well, that's your expertise. They gotta come in, they leave, there's your expertise is gone, right? Like, you know, I, I had to understand it. And you know, this is where I'm not the best franchisee because I, you know, they give you a playbook.

We'll talk about this later. But they give you a playbook. But I always want to make a better playbook, right? I want to be the best and I want to understand operational efficient inefficiencies. And I want, and you know, I have a. I knew it was a membership selling business.

And when I went. It's funny, when I went to corporate for training, right? And they show me their sales pitch and nothing against my buddy Jared, but I'm like, okay, this is. I can do a lot better than this, right? And you know, like, there's.

There's some things other. Typically the franchise. You're supposed to take their playbook while kicking and screaming. Sometimes Hand Stone has made some changes because of me, because I, I show them, like, we charge enrollment fees now. We never used to.

And they said no one would ever pay it. And I'm like, okay, I love a challenge. I love when someone tells me I can't do something, but, like, I want to dive in and become excellent, right? And so I don't want to build an excellent organization, an excellent culture, and I can't do that from afar. Now, the intent was never to run the spa forever.

Right. The intent was to really understand the business, build the processes, the systems, the culture, and then, you know, put a manager in place. Right? And that was always the goal. But I had to.

I had to do it first. And I always, you know, I read Malcolm Gladwell's book where it talks about 10,000 hours. You know, I was gonna get that 10,000 hours really quick. And quite frankly, I got there in like less than three years. I was working 100 hour weeks.

We can talk about that later. But so we drove in and we did that and we were building that business. And then three months later, ironically, another spot came for sale. And this was a brand new one, only been open six months. And the person that owned it, he was very.

He was wealthy, he was an executive. He owned a lot of another business that he sold. And he was just doing this with his son. I think he had some personal health issues. And so typically, Candice Stone doesn't let a new franchisee sell location six months in.

But they made an exception here. And he called me. He called me, interestingly, because he had stole one of my employees right before I got started, which is a no, no. And I handled it very professionally. He remembered that, and he said, jeff, I, you know, I really value the way you handled that.

And I think, how would you handle it? So I don't remember exactly the details, but I didn't go and yell, how dare you take my employee. I didn't. I didn't do that. Right?

I said, help me understand what's going on here. And anyways, so. But I'm like, I didn't want another one at the moment. I did, but, like, I didn't have the capital. I wasn't going to spend 700 grand.

He says, jeff, I'm going to give you a deal of a lifetime. I'm like, it's got to be a deal because I'm not going to. And he did. He sold to me for $50,000. So.

[00:29:49 - 00:29:55]

Will Smith: And was this one pretty at least after it was only six months old. But was it on a. On a good trajectory, losing its butt?

[00:29:55 - 00:30:46]

Jeff Flannery: I mean, yeah. I mean, these things, I mean, to give you an idea, I think this spa had 200 members, and it needs like 600 members to break even.

I mean, we. So by this point, my Peoria spot is probably a little bit cash flow positive. And over the year, it became more and more cash flow positive. But like, every nickel that I made in Peoria I had to funnel to Glendale, right? So we were making no money.

Right. So we bought that. But the interesting thing back to Peoria is the, you know, I heard through the grapevine after like a month or two, the executive meeting, they were like, we thought it was gonna take a year or two to fix Peoria, and Jeff fixed it in a month. I didn't quite fix it a month. But like later that year at their national conference, they, they presented us an award.

They, they, they like featured us. And we actually made that the fastest growing handstone in the system the first year we bought it from, from the brink of bankruptcy.

[00:30:47 - 00:30:47]

Will Smith: Great.

[00:30:47 - 00:30:58]

Jeff Flannery: So, but even then we still weren't making any money yet, right? We peer made money.

Glendale wasn't making, was losing money. But we were setting up the groundwork for really, you know, the launch the next year, which was 2020.

[00:30:59 - 00:30:59]

Will Smith: Oh, dear.

[00:30:59 - 00:31:03]

Jeff Flannery: And then that little thing called the pandemic hit in March, right?

[00:31:03 - 00:31:04]

Will Smith: Yeah, yeah.

[00:31:04 - 00:31:15]

Jeff Flannery: So obviously we're all scared what's going to happen to our businesses and stuff. And a lot of businesses be scared, but we do facials. Who's gonna let people touch their face in the middle of the pandemic? Right?

[00:31:15 - 00:31:17]

Will Smith: Exactly.

Oh, my God.

[00:31:17 - 00:32:51]

Jeff Flannery: I'm like, what? More curveballs can get thrown at us? Right? And so we're all shut down.

And I'm working to get my Arizona spas back up and running. And then out of the blue, I get a phone call from corporate and they're kind of desperate. There's four spas in Northern California that one of them had made a profit a little bit, but the other three had never made a profit. And the owners are waving the white flags. They're going to close.

Right. And so typically a franchisor would never give someone that. I only have two smaller spas. I've been in the system a year. I'm in Phoenix, I'm not in California.

Right. But they're desperate. So like, Jeff, can you buy these bars and save them like you saved Peoria? Okay, so this is April 2020. 2020.

April 2020. And you know, we got very little limited infrastructure. I'm starting to build the infrastructure and stuff, but there's just two spas right now. We only been out of a year. And so I'm like, okay, well here's.

And if I do this, I don't want to just buy one in another market. I have to have scale. I have to get all these deals to happen or I'm not going to do it. Right. And so what I had to do is I somehow negotiate to get the PPP loans transferred to me, which at the time, if you remember, the rules weren't set up.

They just approved the PPP loans. There was no tools or systems in place from the government of can you transfer a PPP loan? Right. I had to renegotiate the landlords and get rent concessions from them. And I had to.

I had to get concessions from the franchisor. I'm like all the balls in the air to try to do this. This isn't going to happen. This is complicated. But somehow we did.

[00:32:51 - 00:33:04]

Will Smith: And, Jeff, how did you. How did you remain confident in the model, given the social distancing trend that you. You were. You found yourself in a space that was the most vulnerable to the shutdowns and lockdowns.

[00:33:04 - 00:34:28]

Jeff Flannery: I had the belief that the world would get back to normal at some point.

Now in California, I'll talk to it in a minute and begin a lot worse than we thought it would because of. I don't want to play politics, but the political politics of California. And I thought eventually the world would get back to normal. Right. So I believe in the model.

I believe in the model before. It's just a lot of times these models are good. It's just. It comes down to the manager and the owner, and you have to execute, which is why I rolled my sleeves up. Right.

You have to really understand this business, especially if you're going to hire people, you want them, if they're going to challenge you on stuff, well, wait a second. I did what you did. I know what's capable, what's not. Right? So I had confidence the model and.

And I was. I had confidence that the world would get back to normal now the way it happened. So we bought these spas in the summer of 2020, thinking they're going to open up in July. We didn't. Thank you, Governor Newsom.

But then it drug out, drug out. Getting a little more worried. Finally, I don't know if you know how California worked. They had this criteria of how a county could open. And so finally, Marin county, which one of my spouses could open.

So I flew some people out to California to train, retrain, get the team out and stuff. And then we were going to open on Monday because the state said we met the criteria, we could do it. And then on Sunday night, Governor Newsom changed the formula, moved the goalpost so we couldn't open. Right. And it just so happens.

[00:34:28 - 00:34:31]

Will Smith: So you'll be voting for Newsom in 2028, I gather.

[00:34:31 - 00:34:50]

Jeff Flannery: You know, don't give me again. I don't. If You're a Republican, Democrat. This is what it is.

But don't change the goalpost. And so I was so mad. And anyways, they had me, a news crew in the parking lot that day and they're like, would you like to go on the Record? I'm like, yes, I would. And I think I led the news for NBC that I forget about the station that night.

[00:34:50 - 00:34:54]

Will Smith: So there's a rant. There's a, there's a Jeff Flannery rant.

[00:34:54 - 00:35:07]

Jeff Flannery: Yeah, about, you know, you can't move the goal post if you're going to say this is the criteria. You can open with this criteria. And then we put all the time and expense and money in this and then you move the criteria, you know, for eight hours before you're supposed to open.

That's not fair.

[00:35:07 - 00:35:10]

Will Smith: No, that's brutal. And so brutal. Where was it, Jeff? Where in Marin?

[00:35:10 - 00:35:41]

Jeff Flannery: San Rafael. Yeah, so we did that and then we reopened only to California, closed again in December. They're the only state that I know that other states might have. Other states didn't. We had to close again three months later.

So it's pretty brutal and it was much more difficult than we thought. And to be candid, if we didn't get the second tranche of PPP money that came out, we would have been in real trouble. Back to like, you know, we. I took, I took an enormous amount of risk doing this. Like, I put all my chips in the table.

All of them.

[00:35:41 - 00:35:51]

Will Smith: Well, that half a million dollars you'd been making for years at your, with your search practice, I assume you had a pretty hefty balance sheet, personal balance sheet at that point.

[00:35:51 - 00:35:52]

Jeff Flannery: Not that hefty.

[00:35:53 - 00:35:53]

Will Smith: Not that hefty.

[00:35:53 - 00:35:55]

Jeff Flannery: Okay, not that hefty.

[00:35:55 - 00:35:58]

Will Smith: And. And you. And you spent it down on this.

[00:35:58 - 00:36:48]

Jeff Flannery: I did. Well, you're right because I was not taking a pay, you know, even though we talked about the period thing, I got in for, you know, for Pure and Glendale, all in.

I was probably in for 200 grand, but I'm also, you know, I need like 300 grand a year to live and I was hitting my savings. Right. And so opportunity costs and everything else. The true investment for you is higher. The actual out of pocket cost to acquire these were probably 200 grand for both those.

Right. And with some debt, 200 grand for both of those. Okay, yeah. So. And then obviously the opportunity cost and me dip into my savings because I'm not making an earning or earnings or anything.

Exactly. So then the California ones, though, I think I bought two of the spas for 50 grand each. But owner notes that I didn't to pay for a while. The other one, I paid like 154 or something. But I also got their PPP money for three of the four spots.

So I basically, in essence, got them for free.

[00:36:48 - 00:36:57]

Will Smith: And so why do you consider that that was so risky, even though there was a real risk that they would? Because you were basically having to subsidize.

[00:36:57 - 00:37:31]

Jeff Flannery: Them further and they were bleeding. And I guaranteed the leases that I signed.

Right. I did only guarantee them for like two years, but I mean, I put my name on all those leases. I mean, the collective lease payments were 50 grand a month between those four locations. 40. 40 grand a month.

You know, so you put some significant, you know, skin in the game on those things. And then we haven't talked about the franchise. If you close a location. I found this out later. There's something called liquidated damages that, like, you know, they're like, well, this is the royalty fees we could get.

So if you close before your deal's up, they can come back to you for hundreds of thousands of dollars. So you are putting yourself at risk on that too.

[00:37:31 - 00:37:39]

Will Smith: But you couldn't kind of have negotiated that away with the franchisor since they were coming to you and being like, please, Jeff, please go save these.

[00:37:39 - 00:39:11]

Jeff Flannery: Talk about mistakes. That was a mistake I made.

I didn't realize. Oh, yeah. I mean, I could have and should have, and. And that's a mistake on me. And.

And it came back. It became an issue a couple years later because I did close one of those spots and. But I should have. And that's learning for me that I won't make that mistake twice. So, okay, so we buy these.

And then in the meantime, there was happened to be. You know, up to this point, I've only bought projects. Well, there's a really profitable big spot, the biggest spa in Phoenix at the time became for sale in 22. In 2020 as well, during this whole thing. And I knew I had to have it because I wanted to build my base in Phoenix.

So I bought it and I did the purchase agreement, but I didn't have the money. I had to raise like a half a million dollars in 90 days that I was faking it till I made it. And I'm like, you know, I've always, like, you know what? I'll just. I need to solve the problem.

You find the problem. So I got a list out of 60 people, and I started picking the phone and seeing what my reputation could get me. You Know, like my. All my years, like, what, what, you know, are people going to invest in me? And I'm like, again, if I don't get this money, that deal's falling through.

And the second or third person I called, they said, you know what? I'm in for 50 grand. And about three days later, they called back and said, jeff, you know what? Would you give me a better valuation? I gave you all half million.

Yes, I would. So I was very fortunate that they had this guy, this one of my friends, and he still invests. He's the investor. Yes, about the investor. He's the investor.

Right. And he's still the investor today.

[00:39:12 - 00:39:19]

Will Smith: And now, was he taking. Was he taking equity in just that one location or in your entire enterprise across units?

[00:39:20 - 00:39:45]

Jeff Flannery: Uh, so to begin with, my first two locations I kept separate.

Cause I wasn't going to put it in a Cal corporation that the California could touch. Right. So I created a new entity, this really profitable spa that I had bought in Arizona, plus the California spas. So now that entity's got five locations, and then my other entity's got two locations. Eventually they merge.

And so we're going. And then now. Now we're off the races. So we Fast forward to 2021. We're finally open.

[00:39:45 - 00:39:50]

Will Smith: Sorry.

Sorry to interrupt, Jeff, but. But what happened in California? Did you. Did you save them?

You save them?

[00:39:50 - 00:40:12]

Jeff Flannery: Yes. So we opened. We finally opened in January 21st. Right.

And now we're open for good. And we did on the revenue side, not so much the profit side, the revenue side, we killed it. Like, we double those spots in like two years, like a revenue. I mean, maybe three years. I mean, it was.

We almost. We almost doubled the revenue from. For. After two or three years of all those California spots.

[00:40:13 - 00:40:14]

Will Smith: Fantastic.

[00:40:14 - 00:41:23]

Jeff Flannery: And turned those around. We're really starting to get momentum and. And now I think I'm going to take over the world. And so we start buying more spas. In 2021, we bought one more in Chicago, one more in Phoenix, which is our base area, Scottsdale.

And then we bought two in Virginia and two in Chicago. Okay. And the goal was that, hey, we're going to build beachheads and then we're going to get some other locations around them. Because ultimately you want to get scale, you got to get four or five locations at least in a market, so you can afford an area manager and some other scalability stuff. Right?

And so that was the goal. Didn't work out that way. That was the goal. So we bought two in Chicago, two in Virginia, and that was 2021, 2022. We bought six or seven more.

We bought I think three more in in the Phoenix area. We bought one more in the Chicago area and bought two in Houston. And then, and then we're really doing well revenue wise, but our profit margins are not good. And I knew going into this that hey, I'm working 100 hour weeks still, right?

[00:41:23 - 00:41:25]

Will Smith: Still three or four years in.

[00:41:25 - 00:41:28]

Jeff Flannery: I worked 100 hour weeks for probably four years, four to five years. Wow.

[00:41:30 - 00:41:32]

Will Smith: Does that mean at the sites usually?

[00:41:32 - 00:41:46]

Jeff Flannery: No. I mean sometimes yes.

But I have an off site office. I try to get the spas as much as I can. It's not as much as I like. I'd like to get there more but yeah, I was traveling but I also was building a team and an infrastructure,.

[00:41:48 - 00:43:01]

Will Smith: You know.

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[00:43:03 - 00:45:52]

Jeff Flannery: One is I did have at the time, you know, was my ex wife was in the business and she did some things well. But I also, I built two people who are still with me today, who are my core leaders and they were, you know, one I hired as my manager in the fall of 2019 and the other one I hired in the summer of 20 and they've helped. They're part of my core management. They're still here today. They're critical parts of our organization.

So then things start to kind of come off the rails a little bit. Our profit margins are bad by the way, the way that I financed it. This is probably something the audience wants to know. How did you do this? Because the PPP money was gone, right?

So to begin with I was financing those with owner notes and largely owner notes as well as I had a little PPP money to begin with, but largely owner notes was that tranche in 2021. When I got to the end of 21, I finally developed a banking relationship with a traditional bank, which I don't know how, because at the time, I didn't have enough history here to really kind of qualify for regular loans. But I kind of talked my way into it, and so I finally got a traditional bank, and they helped us finance the rest of our acquisitions. So we went from two spas in April or May of 2019 to 19 spas in five states in 2023. We only made one.

We only went one. We had 18 in 2022. We only made one acquisition in 2023, another one in Houston. And so that's when things kind of go off the rails a little bit. So we got ahead of our skis operationally.

You know, we discovered, like, some of these spas were. Didn't do well because of a manager. If you have a bad manager, it kills you. It really does. And there's certain spas that we.

And we. And it's really hard to get labor in this marketplace, especially after the pandemic. And we invest a lot of time and money. We'd fly them to Phoenix. We have a great onboarding program.

We'd have them here for two or three weeks. But we kept having some challenges in certain locations for managers, and that was all the difference. Great manager, the spa blossoms, bad manager, it tanks. And so we're kind of getting our operations together during this time. There's a lot of things that happen during this time.

I was going through a divorce, and my lender, who had. I'd cross collateralized all of my locations, decided that they. And they said, jeff, we're going to be with you there for the growth to the end. Right. And then they decided they didn't want to be in franchise lending.

And so they puck. Not only did they puck her up and they said, you don't. We're not lending you another nickel. They made things a little difficult. Right.

And that's a learning for me and learning for the audience of choose your banking relationships wisely. Right. And so it was difficult, Jeff, going back to the.

[00:45:53 - 00:45:54]

Will Smith: The financing piece there.

[00:45:54 - 00:45:54]

Jeff Flannery: Yeah.

[00:45:54 - 00:45:57]

Will Smith: Were. Was it SBA debt that you were traditional?

[00:45:57 - 00:46:03]

Jeff Flannery: Well, the only SBA loan I had was the very first SPY bought. I haven't used another SBA loan since. It was traditional.

[00:46:03 - 00:46:08]

Will Smith: And just curious why you didn't use more SBA money and instead use conventional.

[00:46:09 - 00:46:23]

Jeff Flannery: It was easier. Okay. And I. I thought that the STIPULATIONS are going to be better because keep in mind a lot of these businesses were losing money. So I was, I couldn't get SBA for it.

Right?

[00:46:23 - 00:46:23]

Will Smith: Yep, yep.

[00:46:23 - 00:46:24]

Jeff Flannery: So.

[00:46:24 - 00:46:40]

Will Smith: And, and before you established the relationship with the bank that you're about to tell us then, or just did tell us that they walked away. But before having the relationship at all, you were using seller notes, you said to do a lot of your acquisitions.

[00:46:40 - 00:46:41]

Jeff Flannery: Yeah. Yes.

[00:46:41 - 00:46:46]

Will Smith: Were those like 100%? What was the kind of the typical shape and feel?

[00:46:46 - 00:46:48]

Jeff Flannery: I have to remember there are so many different deals, Will.

Right.

[00:46:49 - 00:46:49]

Will Smith: Okay.

[00:46:49 - 00:47:05]

Jeff Flannery: So in the, in 20. Let me tell you, in 2020, I'll tell you exactly 2020, the big location in Arizona, it was about 60 or 70% owner carry over a five year note. Okay.

[00:47:05 - 00:47:06]

Will Smith: Okay.

[00:47:06 - 00:47:50]

Jeff Flannery: The California ones was zero down and it was a five year note for those. Actually, I think that bank was a two year note, but those weren't very expensive. It was 50 grand purchase price for each of the two locations and one was 150. So they weren't huge, but I think those were, they might have been.

I think the 250 grands were two year notes and the 150 was a five year note. But I negotiated no payments for six months. Right. I'm like, guys, you gotta let me get this. We don't.

We're gonna open. Right. And so I, I did pretty well. And you know, they were happy to get out of it. Right.

And I ended up paying both those notes early, by the way. But yeah. And then in 2021, do we. I think 2021 actually is when we started using bank financing. 2021 was, I mean, almost all bank financing.

So.

[00:47:51 - 00:48:05]

Will Smith: And, and these units that you were acquiring were from retiring owners. And just like the dynamic you described, they'd be made available for sale to existing franchisees in the franchise network before they hit the public, before they went out on biz by sell or somewhere.

[00:48:05 - 00:48:55]

Jeff Flannery: I would say first off, they weren't retiring. What I learned in the franchise world especially is a lot of owners, they hit what I call the I don't want to cuss the effort moment where it's not what they thought.

They don't want to be closing the location Saturday night. They thought they could be an absentee owner, make a lot of money. And all of a sudden they realize now because when they first come to me on the challenging ones, right. The ones that aren't doing well, you know, it's like a car. Once you pull that car off the lot, it's not worth what you thought.

And just as a side note, people might not realize this, and this is crazy to me, but when it's approved franchise, you can go to the SBA and get a loan for 7, $800,000. That location that's not even built yet and has no revenue. Okay. Two months after you open, and let's say you're even doing well in revenue, you can get $0 in SBA financing for that. Because once it opens, it comes a multiple of ebitda, right?

[00:48:55 - 00:48:55]

Will Smith: Yeah.

[00:48:55 - 00:49:07]

Jeff Flannery: And it's like. But you can get. They'll give you a check for 800 grand up front to build it, but once it. Even if you're, you know, starting to do a little bit of revenue, it.

You can't finance it anymore. Right. Until you start to get the. A lot of people don't realize that.

[00:49:07 - 00:49:08]

Will Smith: Yeah.

[00:49:08 - 00:49:21]

Jeff Flannery: And so. So we had some seller, but largely we kind of transitioned in 21 to more bank financing. We built that bank relationship. It took forever and a day. It took forever, but we finally got that, and then we use that.

[00:49:21 - 00:49:26]

Will Smith: But, Jeff, these units that you were buying, where were you? Were hearing about them through the grapevine. Sellers.

[00:49:27 - 00:50:53]

Jeff Flannery: This would be a good tip for people, too. So a lot of franchisees, they don't necessarily go to the franchisor to tell them they're selling.

Sometimes they do. Okay, so I'm an old sales guy at heart. I used to be a stockbroker. I made 150 cold calls a day back in the day. I have no problem picking the phone and calling people.

And that's what I did. But the other thing I did, too, is as a system, one of the things we did. So I'm kind of a unique franchisee. We did a lot of innovative things in Hand in Stone. And one of the things that I did was I said we should be charging enrollment fees because our member price massages and facials were basically giving away for free.

Right. And I'm like, there should be an enrollment fee for this because there's a premium for that. And I did that. And then a lot of the franchisees didn't believe I could do it. They didn't.

They thought. And so one time there was someone in our owner's Facebook group. They're like, hey, I'm thinking of charging an enrollment fee, and I want to give away a robe. What does everybody else do? And a lot of people said, oh, you'll never work.

Don't give away any. You know, don't. It won't even work. And I finally said, well, we charge enrollment fees. I don't give away anything.

And you thought the Internet broke, right? I don't believe it. I don't believe it. I don't believe. I'm like, fine, I'll do a call.

So I did a zoom call. I had a bunch of franchisees do it. And then on that call, I said, oh, by the way, I'm purchasing spas. If you're interested, call me. Right.

Just put that one slide up. And all of a sudden I got pinged. And so I did it that way. But also, I was not afraid to pick up the phone and reach out to the location and say, hey, you are who I am. If you're ever interested in selling, I'd love to talk to you.

Right.

[00:50:54 - 00:51:03]

Will Smith: So you had a little bit of a kind of a deal flow engine in the background that you were running. Or was it more just like sometimes Jeff would just like, fire off an email sort of thing?

[00:51:04 - 00:51:48]

Jeff Flannery: Both. Okay.

And, you know, you keep in touch with everybody. And one reason I'm. I'm. I'm actually an attractive person to sell to is because I can close the deal. A lot of people, they kick tires.

They don't get there. They don't get the financing. There's. Our business is tricky to get financed because we're a membership model. We have a lot of deferred liabilities, and a lot of bankers don't understand it.

So a lot of people think they can buy it. And the banker says they can do it. At least the sales guy, the banker. And then they get to the underwriter, he's like, wait a second, I don't understand this business. I'm not approving this.

That's happened a lot in our business. So I become an attractive buyer too, because everybody knows now on the number of spas I bought, and when I go down a transaction path, I close. So that's attractive to sellers, right? Sure, sure.

[00:51:48 - 00:52:00]

Will Smith: Well, yeah.

At this point, you've just gotta have a banging reputation within the system for a variety of reasons. Not just cause you can close, but you're clearly a man on the march sort of thing. You turned around these California locations, right?

[00:52:00 - 00:52:15]

Jeff Flannery: Yes, I think you have to ask them, but I've got a pretty, I think, solid reputation. They know what kind of operator I am, and I got really good metrics.

So we've done a lot of things that are very successful.

[00:52:15 - 00:52:22]

Will Smith: Great. Okay, so back to your banking relationship. When the bank just then decides that they don't want to be in franchise lending anymore, yeah.

[00:52:24 - 00:52:27]

Jeff Flannery: And I'm going through divorce and you're going through divorce.

[00:52:27 - 00:52:28]

Will Smith: Right. Things are starting to go off the rails.

[00:52:28 - 00:53:00]

Jeff Flannery: Yeah. And, you know, the divorce I thought would take just a few months. It took like a year and a half.

And so it's probably a blessing. Let us take a pause. Let's fix our operations now. I'm at the point, I mean, we were, quite frankly, we're close to filing our bank covenants. And that's another thing, learning guys dive in deep on those bank covenants when you get a loan.

And I probably should have done that a little more than I did because some of the covenants were ridiculous as far as ratios and stuff. And so. But I. And why.

[00:53:00 - 00:53:05]

Will Smith: Why were you getting close to violating them?

Because I was suffering because of what was going on in your personal life.

[00:53:05 - 00:56:46]

Jeff Flannery: I think the ratios they had weren't fair. So we were doing okay, but the ratios were a little ridiculously high. Right. And so.

But. But now I'm shifting here, and I'm now focusing on operations and finance. I finally brought on a controller. I bought the first one I hired, lasted a month, finally found someone, and now I'm really cleaning up our books. And.

And I'm. I'm really understanding the cost side of the business. And, you know, and you can, you can cut costs without cutting important things. Right. I mean, our business is about people and culture.

Culture. I could talk to you a lot about our business and the values that we have and all the money we invest in our people and why that's so important. And at the same time, we look to cut costs, but not cut. Cut fat, not muscle. Right.

And we found a lot of places that we were wasting money. For example, you know, our front desk labor cost, sales associates are the most. You know, that's where your profit can get eroded. And I had managers at times that they would schedule two sales associates to open because they wanted. They didn't.

If one of them called out, they were still covered and they didn't have to come in. Well, they're. But they're dramatic. All our profit was walking out with excess front desk labor. Right.

There's a lot of other things we did.

I don't know if we want to talk about this now, but I've done a lot of innovation, too, in the system that a lot of franchisees don't do. I'm a big believer in using offshore labor when it makes sense. So very early on, I hired an executive assistant and a software developer in the Philippines many years ago. And one of the reasons that I could operate all these businesses across these states was I built a world class software platform. We use something called Smartsheet.

It's a big, you know, platform. It's a shell. You have to build everything. But I used to joke that I knew more about what was happening in my Virginia spas than I ever did when I ran Peoria, Arizona, which is 20 miles away. I made a lot of invisible things visible.

So we made that investment. But along those lines, you know, we did a lot of innovative things. You know, labor and recruiting is so important, and my team was dropping the ball on that. I built an offshore recruiting team that's still with us today. We, we found out that, you know, 30% of our phone calls were not being answered by the front desk, and sometimes legitimately.

But other than to book a massage and facial, there's a lot of things you have to go through. Like, for example, one of the things we want to find out is it is a client pregnant, had recent surgery, or has cancer. Okay. Because then we have to go through some other serious questions, and they either need to be with a prenatal massage therapist or an oncology certified therapist. Right.

And the reason I know this is because when I worked the front desk and someone came in for an appointment, they had cancer. And now I have to tell that poor person they can't get a massage. I mean, this sucks. I don't want to do this. Right?

So, like, for example, on every booking call, we should say, so Will, is there any medical things we need to be aware of, such as recent surgeries, pregnancy, or cancer? And my sales associates didn't want to say the word cancer, so they wouldn't ask the question. So I'd be like, well, do you want to ask the question now or do you want to tell that poor person they had cancer? They can't get a massage now because we didn't ask the right questions. So anyways, you know, they're failing.

70% of the. No one would pass. My sales associates were not passing the booking call. And there's also book optimizations they weren't doing. So we built an inbound call center in the Philippines, and we did that three years ago.

And that was fantastic. We saved a little bit of money. It was, it wasn't about cost savings, A little bit of cost savings, but our operational performance dramatically skyrocketed. Plus it lowered the need for us to hire talent, which at the time was very difficult to get. Just people in general.

Right. And the biggest innovative thing we did, though, Is that, you know, wait, Jeff.

[00:56:46 - 00:56:52]

Will Smith: So. So all your inbound sales calls now were routed to the Philippines and they would do your scripts.

[00:56:52 - 00:57:34]

Jeff Flannery: Correct.

Now they, if they, if they're busy, it'll roll to the spa. But that was a big, huge undertaking. And, and I have a call center director now that sits here in the United States and they, she manages that team. And you have to manage them. Like when you.

A lot of times when people want to go through outsourced labor, they make a lot of big mistakes of like, they throw it to the fence and forget it. Or they give very unclear, distract instructions. And I'm like, if you're going to have someone across the world do a job for you, and you said you want them to do a certain way and you give them, like, here's what I want you to do. They say you gave you a list of instructions. Okay, go give it to someone in your office.

Tell them to close the door. They don't get asked any questions, and they have to follow just the list in front of you. Is that list good enough to do it? I bet it's not. Yeah, right?

[00:57:34 - 00:57:34]

Will Smith: Yeah.

[00:57:34 - 00:57:46]

Jeff Flannery: And, yeah. And so the other thing, these people, these are people are part of our team. We treat them as part of our team, like, and they're part of our team. They're an extension of our team.

And I remind my team of that all the time, and it's been great.

[00:57:46 - 00:57:48]

Will Smith: And so how many people are on the ground in the Philippines?

[00:57:48 - 00:58:54]

Jeff Flannery: Well, then one more thing. I'll get to that. Probably 50.

Because now we. The biggest, the biggest innovation we did was a year and a half ago, we built an outbound call center. So we're a lead generation business. And, you know, it's all about leads. And a lot of times, you know, sometimes the franchisor and stuff, they say, oh, we're just advertising.

People will find our website and book, and they do, but you lose a ton of leads. And one of the game changers for us was to build an outbound call center where, you know, we might put an offer on Facebook, says 50% off massage or facial. That lead will go into a CRM system. Now, we've worked hard to get a CRM system integrated. We've done a lot of work behind the scenes that the franchisor didn't provide.

And that's really driven our performance to where we're driving our businesses. Members, we need prospects to become members. So some of the innovative things we've done that become scalable is we have this inbound outbound call center. These are absolute moats around our business as well as big value drivers. Matter of fact, we've had other Hannah Stone's now wanting us to market our services to them in those areas.

So that's going to be an extension we're probably going to look at doing well.

[00:58:54 - 00:59:17]

Will Smith: Jeff, just since we're on the topic of both call centers and tech and offshoring, it seems like AI doing basically customer service, actual calls and even sales calls, light sales calls is now maturing to the point where it's viable. What are your thoughts on that?

[00:59:18 - 01:00:14]

Jeff Flannery: It's not there yet and someday it might be. I think on the inbound call center we're monitoring this.

It's not ready for primetime yet. I think at some point it might be right on the outbound call center. Even if it was ready for prime time, the laws are going to have to catch up on that because an AI cannot make an automated cannot make an outbound phone call legally in a lot of states. So even if the AI is perfected, government moves in two speeds, slow and stop. So I'm curious when will that happen if they'll ever allow outbound AI calls for like hey, you claim this offer, can I book you?

I don't know, maybe at some point they will. And by the way, AI I'm driving my team to use AI. I'm using AI more. My team isn't using it enough yet. I've got a few select people that are.

But we need to start really integrating this to our business. I'm starting to use it more and more myself.

[01:00:15 - 01:00:26]

Will Smith: And the when you talk about outbound calls, you run some sort of offer lead gen thing online, capture a phone number and then follow it up. That's what you mean by outbound, correct? Cold, Cold calling?

[01:00:26 - 01:00:50]

Jeff Flannery: No, no, no, not, not, not a full call. Not in our business. I used to do that back in the day, a different business but. And then you know, in our database we have a database that's super valuable that no one tackles. And our campaign is a combination of texting and phone calls and nurturing those leads because the speed the lead is important.

The quicker when we get that lead, the quicker you can get them on the phone, try to book an appointment, the higher probability you have to convert them.

[01:00:50 - 01:02:14]

Will Smith: This is all great stuff Jeff, but let's turn our attention back to franchising kind of overall in working in IT and how listeners should think about it. So a few items here and I'll start with what we're on the one of the you said you make a bad franchisee because, because you, because you push. Because you push and you innovate and you probably don't just accept all the rules. Point is, in a franchise system, there are rules.

And one thing that we don't hear talked about a lot on this podcast, when we have entrepreneurs who bought existing franchise businesses, we hear about a lot of the criteria about. Is the franchisor amenable to like a programmatic acquisition strateg, will they let you get big? And all these different criteria. One thing that we don't hear much talked about is how tight the requirements are, how, how tight the leash is. And that strikes me as a really big question in franchising land.

Like in your case, you're building all this infrastructure, you introduce the, the enrollment fee. And I imagine that in some franchise systems they would just be like, no, you can't do that. Like all, anything that touches money, you know, you, you have to accept what the franchisor is sending down to you from on high. So anyway, talk to how should people thinking about franchise systems think about like rules?

[01:02:14 - 01:02:14]

Jeff Flannery: Sure.

[01:02:14 - 01:02:16]

Will Smith: Is there a spectrum?

There must be.

[01:02:16 - 01:03:26]

Jeff Flannery: There's a huge spectrum. And so other franchisors might have a different opinion of this. I'll tell you hand in stone, because I think they're worried of price fixing.

Other stuff is that each franchisee can set their own pricing. So in regards to enrollment fee, they couldn't stop me from doing that because that, they don't want to risk that. Right. You know, I think hand stone is better than most as far as at least the past they were of listening to franchisees and ideas. Right.

So doesn't mean they're implement them. And you know, some, some systems are just going to shut down the franchisees completely because they, they think they know, you know, they have a little arrogance kind of syndrome and others are more amenable to it. I think that's that really. And that could change over time as the leadership changes of those franchises. Right.

So I do think there's a huge spectrum and I think that also how mature is the system, how complicated the system? How good is their playbook? I think they all think their playbook is awesome. Right. But in my experience, it's not awesome.

It's always room for improvement. Right. And the question is, how open is the franchise? Or when you find some compelling things, say, wow, we really, we really should be doing this because it's better not just for me, but for the system. Right?

[01:03:26 - 01:03:27]

Will Smith: Yeah. Yep.

[01:03:27 - 01:03:35]

Jeff Flannery: And so I think in some cases, I Give hands on high grades. In other cases I give them low grades. It depends on what the topic is.

Right, sure, sure.

[01:03:36 - 01:03:37]

Will Smith: Okay.

[01:03:37 - 01:04:04]

Jeff Flannery: I think it's something you need to evaluate if you're going to go into franchising is ask them. Right. But a lot of times too, a lot of people are not like me.

They just want the playbook. Right. Because, and that's one of the values of franchise is. And I, and I'm prepared by the way, I have a whole listed. If you want to talk about what, what the positive of franchising is and what's the negative is they do have a playbook and it might not be the perfect playbook, but they have a playbook and that can be very valuable, especially for someone that's never been in that business before.

[01:04:05 - 01:04:50]

Will Smith: Yes. Yeah, yeah, no good. Great point. Two of the other big themes in franchising that we hear a lot about is integration. So let's hear about that.

So, so generally the, the thought is that part of the reason why programmatic acquisition, acquiring a lot of units quickly is easier in a franchise context than outside of one is because they're running on the same or similar systems. And, and so the kind of mechanics of integrating these businesses is easier. I said that to you in the pre call and you were quick to point out, well, cultural integration is also important and the franchise doesn't really affect that. So what are your thoughts on the, on the, the big I integration always a big topic.

[01:04:50 - 01:04:55]

Jeff Flannery: So we want to talk about integration after you bought them or the ability to find and buy them when you.

[01:04:55 - 01:05:01]

Will Smith: Both are just after you bought them. Like the idea that, like that it should be easier in a franchise system once you buy one.

[01:05:01 - 01:05:07]

Jeff Flannery: Sure. There's, there's some things that are easier. Right.

It's the same point of sale system. Right. There's. There should be some same process, right?

[01:05:07 - 01:05:08]

Will Smith: Yeah.

[01:05:08 - 01:07:13]

Jeff Flannery: So from that respect, there are definitely some things that are easier. At the same time, it's my experience that every location has got a different culture and every location may or may not be following the rules. Most of them are not. Not all the rules. Right.

And my system, we follow all the franchisor rules. And so there's that also. But you know, we, you know, the other thing is a lot of places might not hold their team accountable. We hold our team accountable. Right.

People hate change. And so even if they're really good, we're going to have some things we do a little different from an operational perspective. And like for example, our sales process. So we have really dissected our membership process, sales process. It's different than corporates, but even corporates, not everybody, they have like, here's the sales process should be.

But in my experience, everybody does things differently. They either rely on their natural talent or whatever it might be. Right. But the way they actually deal with the prospect when they walk in and the sales process of the membership has all been kind of unique to each location. Right.

We have a very systemic structure, how we do it and, and, and it's world class, but we make people follow it. And a lot of times people just don't want to change. Right. You have a dress code that these locations should have been following but didn't. And now we're the big bad guy because we're, we're making people follow dress code because we want to be a professional.

Right. So you know, there's, so there's always the, the human element. There's always going to be that integration. I don't care if it's a franchise or not. And from that perspective, you're always going to have that human element.

The nice thing is I don't have to come in and change a computer system for you. Although we do have our IT platform, which we use is different, but it's very easy to use for the employees, but it's different. So I'd say the integration is just as difficult, quite frankly. Franchise or franchisee not. The one thing is they know that we understand the business and we do understand the business, but it's integration is tough now, but there's some value in the deal flow.

And I talk about that. I mean, there's a lot of advantages to being in the franchisor system.

[01:07:14 - 01:07:35]

Will Smith: Well, I actually, I did want to get you to talk about that, but I just have to push a little bit, Jeff, on the integration piece because not to say that it's easy, it ever is, but I think that it would have been much harder and you probably would have had to go slower than having 19 spas in five states if those had all been independent businesses.

[01:07:35 - 01:09:23]

Jeff Flannery: Yeah. Let me be clear of what's difficult with the integration, what's not.

Right. And it depends on the labor market. Right. So usually a lot of people quit when we buy a spa, right? Probably half of them.

And we don't want them to, but they do because they don't like change. Right. But as far as implementing our systems, processes and procedures, that's easy. Cause we got them figured out. Right.

And typically what we. And we've gotten better over the years. If we can Plan properly. We'll hire a manager two months before we buy that spa, right? Because we know 9 out of 10 times the existing manager isn't going to work out.

And oftentimes we'll actually hire a new front desk and train them because we know the new front desk 90% of the time. The new front desk does not work out because they don't, they don't want. And we want, we want to preserve the service providers, the massage therapists, the estheticians. Right. And typically what we do is when we take over a spa is we like, we tell the manager, you can stay with us, we have a lot of opportunity, but you're going to go learn our way.

We're going to put you in another location and develop you, and then we'll give you an opportunity, but we're taking you out of that location because we know that the employees are going to come back and say, suzy, we don't really need to do it this way, do we? Right. And it's that constant, like, I'm not going to buy into the change. Right. Whereas if we put one of our managers in right away and all they know is a perfect eagle way, they're going to get that implemented.

Right. Same with the front desk. So we have learned over the years and that we don't always have this luxury, but in a perfect world, we walk in with a new manager, new front desk, and what we do is we turn that existing manager, front desk. Say you have a place with us, right. But it's going to be at a different location and you're going to learn our way.

But they hardly ever do. We've had one. There's a couple of weird exceptions, right. And I love the exceptions. They're just rare.

And so. And then we, we do our best and preserve the service providers and that.

[01:09:23 - 01:09:47]

Will Smith: That's a really interesting detail there, Jeff. But talk to us also just about hiring good managers in general. Not managers that you inherit, but hiring good managers.

Because. Because this, the idea of, you know, having oper, having operators run your businesses or your locations is such a. An appealing concept. Is it hard for you to find net new good managers, people who can run your spas?

[01:09:48 - 01:11:43]

Jeff Flannery: I'd say not just spots, just in general.

It's good to find harder to find good people, period, anymore. So, yes, we put a lot of time and effort into it. I'm a big believer in personality tests. And the test that we use, the underlying test is something called disc. It's been around over a hundred years.

And what I love about it. You can't game it if you haven't taken it, we'll go take it. You're like, wait a second, it's telling me this. How did it get it from that? So we're a big believer in personality tests and so we understand what the strengths and weaknesses of the person in the process.

Right. And then you know, we put it, put them through a significant interview process. We don't just have one little small interview and we, and we invest a lot of time in them before we put them in location. And what's interesting is we've dived in this world and we see where our people come from. You know, we've had, we've had managers come from European Wax and Ulta and some of these really large companies.

And it's fascinating to me to hear all these big companies, when they hire these people, what they do, they hire them and they might give them two days training and they throw them the walls, which is flabbergasting to me. How do these people succeed where we, when we bring them in, we nurture them, we put them through a multi week process. And one of the things I've learned Will, that we're doing more of, not enough of is that when we hire people up front, if we make the wrong hire, I'd rather get by without a manager than to put a Ron manager in there. We have learned the hard way and it's cost me hundreds of thousands of dollars in instances of lost value of that location because you put a Ron manager in. So we're getting better at this.

It was hard because we were so geographically dispersed. Now we have three spas in Chicago, three in Houston, 11 in Phoenix. And we're getting better at that where we can have that luxury. And we're starting to. One of these we're starting to do is build what I call bench where it costs us more money to do this.

But we're going to have one or two managers on the bench, like develop them and then when someone quits or leaves or fired, we instantly have someone that's capable and willing.

[01:11:43 - 01:11:46]

Will Smith: And what are, what are they doing while they're on the bench?

[01:11:48 - 01:12:02]

Jeff Flannery: Yeah, doing a variety of things. Special projects, assistant managers, managers filling in spots. Right.

Oftentimes they're part of their, you know, we hire them or we're taking, we're going to, hey, we're going to onboard you for two or three months. It's a big investment but, but it's, it's paying off.

[01:12:04 - 01:12:27]

Will Smith: Great. Back to values of Franchising So the we, we certainly don't have time to go through pros and cons. But one of the let's do this last pro, which was your ability to value a new location, new business when it came a new spa, when it came up for sale. You could instantly have a pretty dialed in valuation. Why talk to us, talk us through that.

[01:12:27 - 01:14:05]

Jeff Flannery: So I think there's lots of things that are great about franchise, right? One is, so it takes me now five minutes to evaluate a franchise in the due diligence process, right. I mean like four pieces of data and one of the beauties of if you want to scale a business, this is one of the beauties of franchising because you go in, you get a beachhead, you buy one or two locations, right. If you like it, you're successful, you want to roll it up. Well, depending on how the system is, there's hundreds of locations.

Right. And the model's the same. Right. Usually there's a business intelligence tool so you can check the numbers. And so in my business intelligence tool, one thing I know, I don't even care, quite frankly.

A lot of times I don't even care what the P and L says from these franchisees as they give to me. I know what their revenue is because I can look in the business intelligence tool and I know the franchisor got their money, right. That's going to be right because they got their 6% right. I want, I want that. I want.

We have something called inner spa where let's say you're a membership of my spa, will and you go to that other spa and then you get 80% of that fee and I get 20%. So that adjusts the number. I got to get that number and I get their lease. There's a few other things I do, but if I get those three, those three pieces of information, I can tell you in five minutes what the spa's worth. Right.

And if you want to scale, there's lots of ready made things you can go get. Now you might have to be aggressive or talk to people or whatever, but you can build new locations. It's franchising. If you get in a good franchise and you want to scale, it's really hard to beat that. There's no due diligence risk, Right.

Speed to close is quick, right? Yes. You still have to integrate culture and stuff, you're always going to do that. But systems, processes and tools, the general way the business works, you have to relearn that it's all the same, right?

[01:14:05 - 01:14:06]

Will Smith: Yeah.

[01:14:07 - 01:14:52]

Jeff Flannery: From that perspective, there's a lot of great things in the franchise. The other couple things. Ansler, I'll tell you that I loved about being in a franchise that I when I ran a recruiting firm and I was really good at it, but I could never compare myself to other people. The numbers and everything. Right.

What's great about our franchise is that especially if you get a good one, I've got 450 other people I can collaborate with. I got to see their numbers every week. Right. I used to be a big gamer Will to fill my time. So when I went to hand in stone, I don't game anymore.

My game is hand in stone. Right. Every day I get a look and see how I'm measuring up. Right. And I love that.

And that there's a location doing well. I pick up. I'm not afraid to pick. Man, you are killing that. What are you doing?

Tell me. And then people call me up. Yeah. Let me share one of the. It's great.

It's like all of us are in the boat together.

[01:14:53 - 01:14:53]

Will Smith: Yes.

[01:14:53 - 01:15:37]

Jeff Flannery: And that's insanely valuable, that community, especially when you had a rough time. You can come to a franchisee now. You got to go out and build your own relationships.

You got to do that. But like that is a fantastic benefit of a franchise. And the wealth of data, man, I'll tell you what, it's amazing. Insane. The amount of data we have access to.

That's awesome. Again, you've got this collaboration. You can work with best practice with other franchisees and the brand, they have a brand and that's valuable. They have a playbook. Now again, if you're a super anal entrepreneur like me, you always want to make the playbook better.

Okay. You might have some friction there, but a lot of people aren't like that. A lot of people like, hey, like if they have a good enough playbook, it works, right?

[01:15:37 - 01:15:55]

Will Smith: Yes, yes. So your self identity as an entrepreneur, which feels, which is not quite the same as being a franchisee, but it sounds like over the years or just seeing how valuable the model can be.

You sound very enthusiastic about the franchise model.

[01:15:55 - 01:16:13]

Jeff Flannery: Yeah. There's benefits and weaknesses. Right. So.

But yeah, I mean the ability, the fact that I've gone from we haven't talked my numbers yet, I'm assuming you're gonna ask me here soon. But you know, I don't know how many other businesses I could go in in 2019 and start with that small business and be where I am right now. Like that's.

[01:16:13 - 01:16:17]

Will Smith: Well, let's.

Let's let's.

Perfect Segue. Where are you right now, Jeff?

[01:16:17 - 01:16:41]

Jeff Flannery: All right, so in 2019, I think we did about million in sales in two locations. Right. Last year now, and by the way, in 2025, we ended up selling our California and Virginia locations and bought four more Arizona.

We're streamlining, which is awesome. Right. So I think last year we did about 25 million in revenue.

[01:16:43 - 01:16:43]

Will Smith: Wow.

[01:16:43 - 01:16:44]

Jeff Flannery: From 1 million in 2019.

[01:16:45 - 01:16:56]

Will Smith: Wow. And in six years, you 25 extra revenue. Okay. Yeah, 25 million in 2025. And you think 2026 is gonna.

Are you gonna make more acquisitions or.

[01:16:56 - 01:17:22]

Jeff Flannery: Are you just organically portfolio that included California? We actually sold California at the end of the year. So this year, I think our revenue might be flat only because we have fewer locations, but on a sequential growth. I think we're actually.

I take that back. We're going to grow even with having fewer spas. And we're always. We're on the hunt for more acquisitions. We're going to be selective on that.

And I can talk about my future here in a little bit. But yeah, so we've gone. I mean, it went from 1 million in sales to 25 million.

[01:17:23 - 01:17:31]

Will Smith: And one 1ish of those years, you were actually not being super aggressive because of what was going on in your personal life, right?

[01:17:31 - 01:17:41]

Jeff Flannery: Yeah, yeah.

We hit the pause button from the fall of 23. Matter of fact, we didn't make an acquisition for almost two years. Last one was fall 23 to summer of 25.

[01:17:42 - 01:17:50]

Will Smith: So two of those six years, you didn't even make an acquisition. Also, this was through Covid in the massage business.

In the massage and facials.

[01:17:50 - 01:17:51]

Jeff Flannery: Facial business, too?

[01:17:51 - 01:18:09]

Will Smith: Yeah, yeah, the facial business. So in six years. But with tons of kind of personal and macroeconomic friction throughout those six years, you went from a million to 25 million.

And then two other key numbers. What is the EBITDA on that 25 million?

[01:18:09 - 01:19:05]

Jeff Flannery: So the EBITDA for us is small at the moment. And I'll. I'll tell you then I'll caution this.

So I built an infrastructure that's very expensive because I'm building this business not just for today. And the 17 spas we have, I'm building a business for 50 spas or other brands. And so our EBITDA last year was like six and a half percent. So it was small. That's before debt service.

But we're currently spending. I mean, our overhead is about 7%. So, I mean. But the nice thing about our overhead now is what we built. You know, we've got smartsheets that cost me 100 grand in a license.

Right. We've got my call centers, we've got my infrastructure here. And but the nice thing is, is if for us to go from our 17 spas to 35 spas, the amount of infrastructure we'd have to add is negligible. I mean, it's like we're ready to really scale now because of all the investments we've made.

[01:19:06 - 01:19:45]

Will Smith: Okay.

Okay. So you've made a ton of investment and there's still ongoing overhead at your sort of corporate level at your, you know, you're above the four walls of each unit. And so the profitability isn't great right now. But now you, but because of all that infrastructure, you've got this incredible scale. So you could probably double volume, double your footprint, double your units, and, and, and see your margins expand a lot of.

Because you've got that capacity. And, and also say just about the, the model of hand in stone, in particular the membership model, where the profitability of each unit goes up as revenue goes up. Say a little bit about that.

[01:19:45 - 01:20:27]

Jeff Flannery: Well, yeah, and by the way, so like, this year, I think we're going to, we're going to be over 10% EBITDA this year. Just as a, as a comparison.

Right. We're really. These things scale. Once you hit a certain point and we have a lot of these spas that are. How do I frame this?

Like it's going here, like your marginal. Marginal. Then it takes off once you get your rent covered. And you know, I don't need to pay more rent. I don't need to pay more.

More manager. I have a manager. I don't need more front desk. That's when you got to hit the inflection point before it takes off. Right.

And we're. A lot of my locations are right there. But as far as the membership model, so there's, there's some value in the membership model. A lot of. First off, the nice thing is, is that it's recurring revenue and two thirds, two thirds of our revenue is recurring revenue.

Right.

[01:20:28 - 01:20:41]

Will Smith: So you have that, what's the retention like that? Because that's, that's a membership model, recurring model for consumers. So while, you know, yet we all like recurring revenue, but when it's consumer recurring revenue, I mean, what is the real retention?

[01:20:41 - 01:20:46]

Jeff Flannery: I don't, I mean, I mean, I think we lose 25 to 30% of our member base every year.

Right.

[01:20:46 - 01:20:46]

Will Smith: Okay.

[01:20:46 - 01:20:47]

Jeff Flannery: That's pretty.

[01:20:47 - 01:20:47]

Will Smith: Is that good in your world?

[01:20:47 - 01:21:03]

Jeff Flannery: Yeah, that's pretty.

I Mean, it's pretty standard, but. And you know, it's like a leaky bucket. Right. And so you kind of got to feel more of the leaky bucket. Right.

But we probably lose, like I said, you know, 25, 30% of our member base on an annual basis, which is in the industry. It's way better than fitness. Fitness is like 100%.

[01:21:03 - 01:21:05]

Will Smith: Okay, okay.

[01:21:05 - 01:21:12]

Jeff Flannery: And it's, it's very.

In the whole membership model that actually a pretty sticky number. That's a pretty sticky number if you, like, compare it to other membership models.

[01:21:13 - 01:21:24]

Will Smith: Okay. Okay, great. Okay, great, Jeff.

And so really appreciate you sharing these numbers with us and including the fact that maybe not super profitable last year, but looking forward, that profitability is going up.

[01:21:24 - 01:21:27]

Jeff Flannery: So the problem is, by the way, the profit's gone up every year. Every year has gone up.

[01:21:28 - 01:21:44]

Will Smith: Okay, so 10% on 25, 27 million this year is a nice two and a half, 2.7 million. Now, that's all before debt service, because this is EBITDA we're talking about.

But now tell us, the other number I wanted to hear was you're all in, like, how much cash have you put into this whole project?

[01:21:45 - 01:22:10]

Jeff Flannery: Okay, well, let's see here. So I made a loan in 2020. I'm probably in probably for four or five hundred grand. And of course, that doesn't count the opportunity cost of me giving up my.

My salary and working for free for two years. Right. Yeah, but I probably four to five hundred thousand dollars in my guess. Yeah, I'm all in on.

[01:22:11 - 01:22:20]

Will Smith: Yeah.

And so I don't know what your debt service looks like, but you're probably close to paying that money back to yourself every single year.

[01:22:20 - 01:22:57]

Jeff Flannery: Yeah, well, we refinance it. We're always growing. I'm always. Cash is king.

So it's like I just refinanced the debt and, you know, I put a little more debt out. But we're sitting with some pretty large cash reserves, which is where I want to be. That way acquisitions come, I can pull the trigger. Right. Our debt service is very manageable.

We still, we have, you know, still significant debt, but relatively speaking, it's very manageable. Right now I think we have 6 million in debt, but, like, okay, but we have like 2 million in cash. So. Yeah, you know, so our net debt is 4 million. So it's actually, our ratios are really, really good.

So.

[01:22:57 - 01:23:30]

Will Smith: Yeah, yeah. Right. And okay. And just the point, too, on how much cash you put into this is that 4 or $500,000, the return on that equity is going to be already good.

But as in the years ahead, it's just going to be just a phenomenal return. Now to your very important point, this is also, there's opportunity costs in the unearned salary and it's what you've devoted your life to. So yeah, you would. So this, it's, it's not like this is a passive investment by any means. You worked a hundred hour weeks for the first few years, you said.

[01:23:30 - 01:23:34]

Jeff Flannery: I did. Yeah, yeah, I've scaled that back. But yeah, I did for a few years.

[01:23:35 - 01:23:54]

Will Smith: Well, and so, so where. Talk, talk to us about your lifestyle today and where you're going with this.

So because it does feel like you're at an inflection point, you're working less hard, your profitability is about to expand beautifully and you're just get, you know, it feels like a flywheel is kind of starting to, to spin.

[01:23:54 - 01:25:28]

Jeff Flannery: It's funny you say that because that's the word I was going to use to you today was flywheel. So, you know, we are, I've talked to my team. I have a great team. I built a, just a fantastic leadership team.

And, and so where we're growing, our original goal was to just do hand in stone and get to 50 spas. Right? That was our goal. And we still might get there and do that. But what we're going to do now is, you know, I used to be like, hey, I'm going to take over the world.

And I learned the hard way that there's certain states you shouldn't do business in. By the way, anybody is thinking of doing business in California in a high labor intensive kind of industry. 80 to 90% of my lawsuits came from my four spas in California. 80 to 90%. And I just got out of California and I've been sued three times since I've been out of California.

I'm still happy. Well, there's this thing called a PAGA lawsuit, which is ridiculous. It's these trial lawyers that, I mean, the labor laws in California are just, I mean, I can dive in there if you want. It's a cautionary tale. And, but like, for example, I had a spouse in Virginia.

I didn't realize in Virginia, you know, you need a master esthetician license to do facials. And there's political reasons why that. And so we couldn't get estheticians in Virginia. So there's certain nuances in certain states that like it's more, it's either it's harder to operate a business with labor or, you know, Our skilled labor is massage therapists and estheticians. And there might be reasons, not enough massage schools or legislative reasons why I might not be able to get the talent I want, which makes the operating environment much more difficult.

So I shouldn't be in those states. Right? I learned that the hard way. Right?

[01:25:28 - 01:25:29]

Will Smith: Yeah, yeah.

[01:25:29 - 01:26:02]

Jeff Flannery: But as far as our flywheel now, I mean we, we have an incredibly valuable asset which is our infrastructure. Right. And our knowledge. And so how do we leverage that? And so we're going to start leveraging that by a.

Obviously we're going to build or buy more Handstones. We might build some and then also we're going to start into some other concepts. And my team doesn't even know this yet. They're going to find out when they hear this podcast probably that we're going to go into another concept and there's other franchises in that concept, but I'm going to do it myself. We're going to build our own.

[01:26:03 - 01:26:05]

Will Smith: And you're going to start a business from scratch.

[01:26:05 - 01:26:07]

Jeff Flannery: Correct. And we're either going to.

[01:26:07 - 01:26:08]

Will Smith: That is a franchisor.

[01:26:08 - 01:27:05]

Jeff Flannery: It could be.

We're going to build the concept first and we're going to do company owned stores and then we're going to contemplate and then that point we'll make an inflection point to say do we just keep these company owned stores or do we become a franchisor of this concept? And because a lot of people have told me, Jeff, why are you a franchisee? You have, my systems and tools are a lot of times better than a franchisor and that's one of our strengths. So we're going to leverage because I mean, I think of all these assets I've built now, the infrastructure of the system, our HR department, we know how to deal with leases, our inbound and outbound call center are huge assets. Right.

We know how to sell memberships, our development training program, like, because this other concept, by the way, like all my current staff, now my managers and stuff, I don't want to say the concept is yet, but they could easily transition this concept and manage them. So now I'm creating other career opportunities for my team. Like there's a lot of synergies with that. So we're actually going to look at that and watch that probably in the next 12 months. And we're going to continue to acquire Handstones.

[01:27:06 - 01:27:14]

Will Smith: Is the new concept a new idea on the market or. It's a, it's a, it's an idea that already exists and you're Just going to create a new brand and business around.

[01:27:15 - 01:27:49]

Jeff Flannery: I say it definitely exists, but I'll say the penetration isn't large yet. There's a couple players in there that have 30 to 50 locations nationwide. To give you idea, Hanson has 650 chiropractic chiropractors.

The joint already has way more than 50. They have hundreds. So not going to tell you. Well, sorry. I don't want anybody out there stealing my thunder.

Just pay attention to what I open. But there's that and quite frankly there's two other cons I want to do. So I could, I can see us now turning this into a franchise or concept and other other concepts and as well as continue to do our handstone stuff, right?

[01:27:50 - 01:28:11]

Will Smith: Yeah. And just a capital allocation question, Jeff, why not?

You're so dialed in on hand in stone. I know you said you are going to continue in hand stone, but that, that new concept is going to be a lot of energy, a lot of distraction. Why not just double and triple down in the system in the formula, you know, works.

[01:28:11 - 01:29:18]

Jeff Flannery: I'm chuckling because this is the, this is the speech I've given to other people in the past. Right.

And I, and I, I've wrestled with that because I don't want to be distracted from hand and stone. At the same time. I've learned, you know, especially when you're dealing with a franchise, there's things out of your control and you need to diversify. And I just got back. I, I just spoke at the multi unit franchise conference.

It's every year, it's really great and there's lots of owners out there. And the theme I always take away from is these guys and gals that they own like four concepts or five concepts. They might have, I don't know, I'm making stuff up and they might have 20 Jersey Mike's and 10. I don't pick a different concept. Right.

And they then like I'm fascinated. They've got like four different concepts and so part of it is diversification, right. It's like I don't want to have all my eggs in one franchise or buy bucket. The second thing is, is, you know, I'm dying myself to create my own thing. Like I'm, I don't want to keep fighting to change their playbook when I know what I want my playbook to be.

And so I need that canvas to paint and, and make it mine.

[01:29:18 - 01:29:28]

Will Smith: Okay, well, circling back to my question about how an entrepreneur, a pure entrepreneur feels about franchising. In fact, that that's Very revealing. You are chafing a little bit.

[01:29:28 - 01:29:41]

Jeff Flannery: Yeah.

Oh, I definitely am. And I definitely am. And there's things I would do different and I'm not going to beat him. I mean, any franchisor, you could substitute the name of the. And I probably say the same thing, right?

[01:29:41 - 01:29:42]

Will Smith: Yeah.

[01:29:42 - 01:31:20]

Jeff Flannery: But there's times, I mean, there's been some challenges lately that I'm frustrated with and I'm like, okay, well, we should fix these things. And gosh, if you just give me 10 minutes, I'd fix them. And so I want to be able to fix those things. Right.

And I've always wanted to create my own experience. And what I will tell you, the concept I'm doing is I'm going to go a little upper brand. Upper, upper level, because I'd rather be more premium and. And I want to make it my own and, and do it in my vision. And I'm excited to do that.

So, you know, being with a franchise, there's a lot of great things. I'll tell you a couple of negative things if you want. Sure. So I already talked about the good things, the negative things, and people need to understand this. There's an inherent conflict of interest, risk in a franchisor and franchisee, and there always will be.

I'll give you an example. Let's say you're a company and you own two locations. Right. And they're, they're 10 miles apart and they're both insanely profitable. Right.

And you know what you could do? You say, well, let me put a. If I put another location in there in the middle of those two, I can increase my revenue a little bit. Right. But I would dramatically reduce the profitability of those two locations.

And now this third location would be only mildly profitable. So if you add all those three locations together, the net profit would be way less than just keeping the two. So if I was a company, I'd be like, I'm not going to do that. That's not a good idea. However, if you're a franchise or they don't care about the profit of the franchise.

I know they say that, but that's not how they get paid. They get 8% of revenue. Right. So they're going to. There.

You know, there, there's a whole thing like, you know, people are going to do what they're incented to do.

[01:31:21 - 01:31:21]

Will Smith: Sure.

[01:31:21 - 01:31:45]

Jeff Flannery: You know, there's a great article out there called the Folly of Hoping for AWA Rewarding B. Right. And I highly recommend reading.

It's great. But anyways, so there's always going to be these inherent things where ultimately, if you think about the end of the day, the franchisor wants to maximize revenue, the franchisee wants to maximize profit. So you're always going to have that conflict. And then the question is, is, you know, what could a part kind of partner is your franchisor? And there's, there's a whole range of them out there, right?

[01:31:46 - 01:31:54]

Will Smith: Yeah, that's such a good distillation of, of the slightly misaligned incentives there. You guys are profit, they are revenue,.

[01:31:54 - 01:32:12]

Jeff Flannery: They are anything else. I mean, the other thing too is like, you know, obviously you can't, there's certain things, if they're making mistakes that you think are just catastrophic, you can't change them. Right.

So, you know, you really have to rely on them for your success or failure. And as a control freak, I don't like that. Right. So.

[01:32:13 - 01:33:04]

Will Smith: Well, on this podcast we're always talking about the risks of acquiring existing business.

It's a big part of the art and science of this whole thing. And when you do franchising, though, franchising and entrepreneurship through acquisition work very well together, especially if you're acquisitive by nature. The programmatic acquisition strategy that you used,.

You are introducing this whole other big.

Risk element of the franchisor.

It's almost like you're going into business with a, a partner in some ways. I mean, they have a lot of control over your destiny. And in an exercise of buying a business where you're trying to mitigate, mitigate, mitigate risk to do a franchise where you're introducing willingly all this risk of, of the franchisor and, and their incentives and the decisions they make, it, it is not to be understated.

[01:33:04 - 01:34:29]

Jeff Flannery: And I think, listen, especially for, if you're coming the first time, the franchise can be great. Like, you know, because they gave you the playbook, right?

And, and there's lots of other great things too. Like we talked about buying, we haven't talked about selling, right. And there's a ready market when you want to sell. Right. And you know, the whole concept behind this, meaning the other franchisees, that's one route, right?

The other route is if you want to roll this up and sell to private equity. Right. Private equity is salivating at franchisees now. They are, I mean they're all over the place. They like the franchisors, but there's only so many of those and they're going after franchisees.

They love the roll up strategy, right. And so if you've done the roll up and here's by the way, here's the way you work the roll up on franchisees, okay. If you get in the right system, right. You buy them at three to four times cash flow. And then when you get to a certain size, let's say you get to $5 million EBITDA, you can sell for seven plus EBITDA times EBITDA.

And if you're using debt for this, you know, okay, that leverage starts to work pretty nice. So they don't want to just buy jobs. Right. That's why you got to get to the certain scale where private equity finds that interesting. Right.

But then when you get to a certain point, you've done a lot of things. You've you finance debt with this, a lot of it. And then you also get multiple expansion. You know, it can be a nice way down the road to exit.

[01:34:31 - 01:34:36]

Will Smith: And you're clearly at that size now that you could exit.

You would be big enough to be interesting to private equity.

[01:34:36 - 01:36:04]

Jeff Flannery: Easily I could 3 million EBITDA. Well they, they say for my, by the way my four wall EBITDA is going to be about $4 million before overhead. Right. So I'm definitely there of where, where people are interested in and if that's a route I wanted to go.

You know, in our pre interview I told you I have a love hate relationship with private equity because I think they, a lot of times they, I've seen too many times that they bought a franchisee and they destroyed it because they want to manage it like a spreadsheet. And like for example, everyone in my company is eligible for an incentive trip to Cabo San Lucas. Now only 10 to 15% of them make it and it costs us a bunch of money. Right. And the private equity firm be like well that's just an expense item and get rid of.

But they don't understand is the ROI on that. They just look at it as an expense. They don't think about the fact that I can put that in every advertisement for every job that I have. And when I recruit you, will I get to talk about our Cabo trip and show you pictures that doesn't talk about how everybody in the organization might add more hours to make because the criteria is that for massage therapist is the number of massages of the year and I think average ticket and so well if you're not, if you're only working 25 hours now you're gonna give me 30, 35 hours so you can make that trip, right? And you're gonna try a little harder And a lot of people maybe don't get there, but they get close, they keep trying.

And then, and what happens when all those people that went on the ship go back to the spas? I mean, the ROI is insane. But like, you know, private equipment, like, well, there's, there's a couple hundred grand off that trip. Let's just, let's just cut that. Not realizing all the ancillary benefits of that stuff.

[01:36:05 - 01:36:39]

Will Smith: Yep, yep, yep. And, and so this idea, we, we hear this a lot. This, you know, these small businesses can't be run from spreadsheets. And people in our world are kind of sometimes have, have that tendency to think about this as a spreadsheet exercise. But they're people, businesses.

You are bouncing around. You know, you've got this empire now of all these units. They're across four different states. So. And you said you don't actually, you know, you're in the businesses sometimes in the location sometimes, but oftentimes you're at your corporate, which is, I guess, where you're sitting now.

[01:36:39 - 01:36:39]

Jeff Flannery: Yeah.

[01:36:40 - 01:36:47]

Will Smith: So how, how do you, how much like direct management are you actually doing at this point in your journey?

[01:36:48 - 01:38:33]

Jeff Flannery: So not as much my, I'll tell you my structure. So I have my managers, and then we have either area managers or senior managers. An area manager will be taken out of the spot and they'll run five.

A senior manager might be. They're running one location and they're overseeing two. It's like a stepstone to an area manager. And like Chicago and Houston. Right now we're going with this.

We're going to, we're not there. We're going to senior manager because there's only three locations there. Right. But that, that gives us career paths. And then I have, I have one person that's, that's the head of all those area managers and managers.

They report up to one person. And then I also have, I have a matrix organization. So she reports, he has that and then I have another person. I have three levels, three kind of centers of excellence in our organization. We have the front desks, sales associates.

We have a massage therapists and restheticians. And so what I have is like I have a director for each of those. Director of front desk, director of massage, director of aesthetics. And so that way I'm driving functional excellence in the organization. We're always of the belief like, hey, I'm only one bad manager.

Could kill us. So how can I manage around that? So if I have these functional excellence people. Touching, touching. With those three things, we can Find out when we have a bad manager and still manage around it.

So I have those three directors and they report into someone that controls all that. So I have two key main reports. Right. And they run the operations. I'm there, I'm heavily, still heavily involved.

Like I know what's going on, but I let them drive those decisions for the most part. And then I have a controller, you know, and then. And then each of those people, they manage other stuff too. One of them manages the HR department, the other one manages the call center and then the recruiting department. And so I only have personally now I have like four or five direct reports.

But I really try to take myself out of the day to day, and I'm running the business now.

[01:38:34 - 01:38:41]

Will Smith: And Jeff, you talked about, aside from your new idea, continuing the hand in stone system up to 50 units, is that still the goal?

[01:38:41 - 01:39:31]

Jeff Flannery: Yeah, I mean, I don't have an arbitrary number like we're going to acquire where it makes sense. So right now, I mean, Phoenix is a very critical market for us. We have 11 of the 18 spas now.

Hey, the other seven, call me. I'm waiting. Like, we'll take the other seven. And there's other markets. Like Tucson hasn't been developed yet.

Maybe we'll build Tucson at some point. And then Houston is another market that's very attractive. We have three. And we're in the process right now of maybe doing something there. Stay tuned.

And Chicago, we're either gonna grow or stay steady there. We're not sure we're doing Chicago yet, but we have some good spots there. And then as far as the markets go, like Texas is a market we love to stay in. I mean, there's other, other areas in Texas that we go and there's a couple other states that we have our eyes on. We're just waiting for the right deal.

We're not going to go with one or two spas. It's got to be like three or four that we can get scale. That makes sense.

[01:39:31 - 01:39:45]

Will Smith: Yeah. Yeah.

Well, so let's say you acquire another 10 over the next couple of years. Then you're at 38. Total is 17.

[01:39:45 - 01:39:46]

Jeff Flannery: Now 10 would more be 27.

[01:39:46 - 01:39:53]

Will Smith: 17.

You'd be a 27. And these things can do 2 million that. 2 million in riv.

[01:39:53 - 01:40:03]

Jeff Flannery: All that kind of outlier. So like my, my average.

My average unit volume right now is about 1.4, 1.5 is what my average spot is there. There are spas in the system that do three and a half, $4 million.

[01:40:04 - 01:40:05]

Will Smith: Okay.

[01:40:05 - 01:40:10]

Jeff Flannery: So I have currently, right now, I have two or three that already do 2 million, so. And I should.

[01:40:10 - 01:40:12]

Will Smith: Can everyone get to 2?

[01:40:12 - 01:40:14]

Jeff Flannery: Oh, yeah. Yeah, they can. Over time, they might.

[01:40:15 - 01:40:19]

Will Smith: You could get to 40, 54 million dollars.

You could get to that 50 million number.

[01:40:19 - 01:40:19]

Jeff Flannery: Yes.

[01:40:19 - 01:40:42]

Will Smith: Pretty realistically, yes. In the next, you know, with another acquiring 10 more and then paying down. Paying down your debt, then you're taking home all of that ebitda.

So you could be taking home a few million bucks a year if you wanted to just pay down debt, stop, Exp. Just kind of stop and. And preside over your empire. This would be an incredible outcome, and you would have done it in about eight years.

[01:40:42 - 01:41:14]

Jeff Flannery: Yeah, you could.

We could. I mean, depending on how quickly I want to go. I mean, like now, quite frankly. Well, like, I got six spots right now I could buy if I want them. And, you know, it take a while to get that $2 million average unit volume, but three or four more years, you get there.

It's conceivable to easily get. See a path to $50 million in revenue and say, 6, $7 million EBITDA. That's. That's totally realistic to see and maybe even higher than that, because you do get margin expansion as you start to get these spas at a higher revenue number. So.

And then go ahead.

[01:41:15 - 01:41:39]

Will Smith: Well, so then you're at, let's say. Let's call it. Let's say $6 million to be a little bit conservative. Let's say five to be even more conservative is really nice round number.

Okay, okay, okay. So that's super conservative. $5 million a year at EBITDA, and you're paying down your loan, your debt. You don't have a lot of debt service on that necessarily. And then your valuation at that point for the private equity acquirers is 7 or 8x.

[01:41:40 - 01:42:28]

Jeff Flannery: Well, it's a $64,000 question. The interesting thing about Hannah Stone is especially the size. We don't have any private equity in Hanneston yet. Now, I heard they're kicking the tires. I've had people reach out to me.

There's one person in our system that owns 10% of our locations. He's got 65 locations. I'm second with 17. Just to show that the, like, there's him and then there's the rest of us. I have several right behind me with 12 and 13 and that kind of stuff.

So I do think at some point, private equity will come in here. And that's one of the things we're all trying to find out is what's the what value is going to be established on a multiple and obviously, you know, interest rate, environment, all these other things matter a lot. But I think 7 is absolutely realistic and that, I think that would be the floor. You know, in the right economic environment, you could get upwards of 10. In the right economic environment.

Right. So it's.

[01:42:31 - 01:42:57]

Will Smith: Pretty crazy and pretty hopeful. Well, Jeff, maybe you should just focus on that outcome before you go and launch another business. Just get as many units as you can, get them as close to 2 million in revenue as you can. Get that EBITDA number up. Be sitting pretty when private equity comes knocking.

Have your exit, then go do your new concept. But here I am running a podcast, so what do I know?

[01:42:57 - 01:44:05]

Jeff Flannery: Well, we can recircle back this new location. We're doing it, you know, the whole process. It won't even be open for nine months to a year.

So I have to hire a design consultant with design it and then we have to get, you know, an architect and then we have the lease and then we got to the build out. Like this first location isn't even going to be open for nine months to a year. So we're going to still execute the business while that happens. And. But I think this other deal might be even bigger, Will.

So. But we can, we can chew gum and walk at the same time now. Two or three years ago, we couldn't. We can do that now. And like, you know, it's funny, I spoke at a conf on a panel at the multi unit franchise Conference a couple weeks ago in Vegas and they talked about leadership and have you made your business not about you and can they run without you?

And I said, I have a simple test that I couldn't do with my recruiting firm. I can do now. Can you go on vacation for two weeks and not pick up the phone, not look at the phone? And the answer for me is yes. Like I have that good team now.

When I get back, there's going to be a lot of stuff. Jeff, we didn't tell you about this. We didn't see about that. You got to tackle these things. But I have that now, which tells me that we do have the capability and the infrastructure and the capacity to take on another big project.

[01:44:06 - 01:44:20]

Will Smith: Well, it's interesting, Jeff, because you were, I'm sorry, forgive me for how this sounds, but you were so not good at that.

For 18 years you were stuck in,.

You were stuck in your.

Do you say 18 years, you were stuck in your executive search business.

[01:44:20 - 01:44:23]

Jeff Flannery: Too big a golden handcuffs.

Well, they're Too big of golden.

[01:44:23 - 01:44:23]

Will Smith: Yeah.

[01:44:23 - 01:44:23]

Jeff Flannery: Yeah.

[01:44:24 - 01:44:39]

Will Smith: But then you just came out swinging on this next chapter where you have just been systems and capacity, and it's a real business that's saleable. Anything more to contrast those two, or is it speak for itself, your executive search biz or practice in this?

[01:44:39 - 01:45:30]

Jeff Flannery: They did. It's the thing is, I built the systems, process and tools and recruiting firm, too. I came from strategic consulting. Right. Like, I have that mindset, but it just like, again, it's like the problem was, is like, it's like, what was my risk?

What was my risk profile? Right. Making this good money. And I know that, okay, any business I was going to go into, I knew that I was probably going to build that business, and I was trying to take a huge pay cut, and I was going to risk a lot of money, and I think I just got comfortable, and I wasn't willing to take the Cortez approach of burning your ships. And I think I just got to the point.

I'm like, you know what I mean? And I'd done that in the past. Right. And so I just got the point. I wasn't going to live the way I was living.

I'm like, I was going to go build a business, and if I failed, I failed, and I. And I start over, and I'd be comfortable with that.

[01:45:31 - 01:45:35]

Will Smith: And how old were you when you made that decision, when you started over, as you put it?

[01:45:35 - 01:45:44]

Jeff Flannery: Well, see, I made the decision to purchase this in, like, basically the end of 2018, early 2019. So I said I was 50.

50.

[01:45:45 - 01:45:45]

Will Smith: That's.

[01:45:45 - 01:45:47]

Jeff Flannery: No, 49. I was 49.

[01:45:47 - 01:45:48]

Will Smith: 49, yeah.

[01:45:48 - 01:45:51]

Jeff Flannery: Yeah. And, you know, and I get.

[01:45:51 - 01:45:57]

Will Smith: I just like, we. We all love to Hear that at 49, you can start over and then just be wildly successful.

[01:45:57 - 01:46:06]

Jeff Flannery: Just.

Failure was not an option, though. There was no plan B, Bill. There was no plan B. If it didn't work, I would have lost. I lost everything.

I would have rebuilt from ground zero.

[01:46:07 - 01:46:30]

Will Smith: Yeah. Yeah. Well, good. That's an important point also to underline.

All right, Jeff, last question for you. I've kept you well over any advice or kind of key. It doesn't have to be grand advice, even a little something. You've given a lot, given us a lot of tips so far. But for people, people in the audience listening who might be saying to themselves, let me try to do what Jeff.

[01:46:30 - 01:47:25]

Jeff Flannery: Has done, well, I think that you're going to. A franchise could be a great. If you've never started a business, it might be the best way to start a Business. Right. And then you can find out if franchising is for you or not.

And, you know, one of the great things that we talked about earlier is like, if you want to build one, that's the availability of financing is so much easier in franchising than almost anything else. Especially you want to start from scratch, they'll lend you the money, which is crazy to me. Right. Or you can buy some existing locations. And if you put your head down and you're successful and you're either a going to find that you love franchising and you can build more of those that said franchises or buy them, or you can go to another concept and add that, or you can decide franchising is not for you and you want to build your own boss.

Well, a lot of the fear and the things you didn't know what to do, you learned. And there's probably, if you're successful with that franchise, there's a ready market to sell that.

[01:47:25 - 01:47:26]

Will Smith: Yeah.

[01:47:26 - 01:49:06]

Jeff Flannery: And you can go and do it. It's like, it's like training wheels to begin with.

And like, I'll tell you some of the biggest things that I just didn't know, like, how do I get a retail lease and what do I need to look at? Right. And what about these different business licenses? I have to go apply. And it's like all these scary things I didn't know how to do that aren't that scary once you put into it.

Right. And once you get to that process, you get like, that wasn't that hard. Okay, I stubbed my toe. That wasn't that hard. I think you get confidence on what the unknown is and you feel much.

That's one of the reasons I'm more confident to do this other thing. Like, wait a second, I can, I can negotiate leases and I can build it out and I can get all these licenses. I know how to find all that stuff. And I can get labor and I can build the marketing program. I mean, like, okay, I have this confidence now.

So if you're on the fence, you're watching this podcast, wanting, wanting to dream and build. Well, I mean, I know it's not acquiring, but you could acquire too. And if you do do franchising, try to find an existing one for sale, even if you don't intend to buy it. Right. Because you can get a lot more information about the franchise.

But if you can buy one to begin with, I mean, that's even easier. The one challenge is the one thing I'll caution you, the difference in building and buying when you build a franchise, you might not have the cash flow that an existing one might have to begin with, but you also don't have to inherit all the bad culture. Right. And every single location, without exception of one, we inherited a bad culture. Right.

And so, oh, that's great. I get all this, all this cash flow right away and it's cheaper relative to the building and that's so much better. But then you have to undo a lot of stuff, right? So it's like be careful what you wish for. But you know, you can, if you build one, you can build your culture from scratch when you, when you, you know, put the money and time into doing that and devotion to doing that to your people.

[01:49:06 - 01:50:17]

Will Smith: Jeff, I, I do want to highlight something you just said in there that was great, by the way. Thank you. A great concluding bunch of advice in there. But your point about the ready made buyers of a franchise. So one of the big risks of buying a business, this path, entrepreneurship through acquisition, is that it's, it's a, what are they?

This is a Jeff Bezos ism. It's like a one way door, I think is what it is. You can't go back through the door. Once you buy a business, let's say you buy an independent business with an SBA loan, you can't change your mind at that point, but it does, it does feel a little bit like you can, a little bit more in the context of buying a franchise, resale and existing franchise business because there's so much infrastructure there. All the other franchisees, you're more likely to be able to find a buyer if, if after a year you just decide this just isn't for you, you can probably, much more likely, I don't want to say it's just like flipping a switch, but much more likely to be able to turn back around and sell it, probably at a loss.

But it's not, it's not just all consuming like buying an independent business where you know, if you think you can just sell it on a dime, you're, you're diluting yourself.

[01:50:18 - 01:50:30]

Jeff Flannery: Yes. And I, I'm wanting, I want to be very clear what I tell people on this because I don't want them to come back and misread this. Like Jeff, you said this. So if you were going to buy an existing franchisee with existing castle and everything.

[01:50:30 - 01:50:31]

Will Smith: Yes.

[01:50:31 - 01:51:31]

Jeff Flannery: And you were able to do that and then you turn, then you turn on, sell it. Well, if you kept the cash flow stable, you probably can get close to what you paid for it, right? Now, if you got in there and you deteriorated the cash flow 50%, then you're going to take a big pay cut. Right.

When you sell it, when you build an existing location, this is probably not just unique to Hannah Stone, but other ones. You understand. It's like a brand new shiny car that you spent $300,000 or you take that off the lot, it depreciated tremendously, instantly. We take it off the lot because now it goes from concept to cash flow. Right?

So if you want to build a franchise and if you ever get 12 months in, well, you're stuck. You're stuck for at least a few years until you can get that franchise where it needs to be and then you can sell and get your money back. Right. Just understand that there's, there's definitely a lot less risk to buy an existing one, assuming you don't deteriorate the heck out of the cash flow and then you want to sell it and get your money back. Right.

But there's a market.

[01:51:31 - 01:52:09]

Will Smith: I want to highlight this point. You just said the. Let's say you buy an existing, an existing franchise, a franchise Resale, it does $100,000 in earnings. It probably sells for 3X, call it.

So that's $300,000. Okay. That's its value versus your point here by starting one up from scratch, where maybe it takes 6, 7, $800,000, an SBA loan to spin one up from scratch. And then from day one it's got no ebitda. So you've just invested in something, you've just taken a loan finance something for $700,000 and day one it's worth zero because it's got zero EBITDA.

[01:52:09 - 01:52:09]

Jeff Flannery: Yeah.

[01:52:10 - 01:52:12]

Will Smith: I mean, what a stark comparison it is.

[01:52:12 - 01:52:22]

Jeff Flannery: Now, keep in mind, there's a difference between different concepts. We're a membership model, right? So because it's a membership model, it takes longer to ramp up, to get, to break even.

[01:52:22 - 01:52:23]

Will Smith: Okay, Right.

[01:52:23 - 01:52:38]

Jeff Flannery: I will tell you, we're doing things to change that to start with, like pre sales memberships when you open to try to get that break even point quicker. Right. Versus food. If you had a food concept, I think it depends on how successful it is, you might get the cash a little quicker with a food concept, Right?

[01:52:38 - 01:52:39]

Will Smith: Fair. Yes.

[01:52:39 - 01:53:40]

Jeff Flannery: But there's two, two sides of that sword. Because, yes, it might take you longer to ramp up to get to cash flow positive in a membership model, but once it's there, two thirds of your revenue is recurring. So there's a warm blanket about you when you get there.

Do you know what I mean? It takes a while to undo that. But that being said, a lot of times, now keep in mind too, and we have, we're diving hands down in the massage model for a minute. When you buy these businesses, you're not actually paying 3x for them. Okay.

You're also inheriting all the unpaid gift cards and membership liabilities have not been redeemed yet. So people don't talk about this. They keep talking about cash flows three, four times. And these membership, if you're assuming those liabilities, you gotta add that to the equation. You're really paying seven or eight times.

If you really pull that number together right now when you go to sell. But just the way this business works, it sells at three to four times cash flow. It just does. Right. But you are inheriting a crap ton of liabilities because that's just the way.

[01:53:40 - 01:53:42]

Will Smith: And you can't negotiate that.

[01:53:42 - 01:54:08]

Jeff Flannery: You can try down the market dictates with the value that is will. If you're not going to pay it, someone else will. I will tell them to call me. Right.

So you know, listen, you can, you can try to do whatever you want. The market, the, what it's worth, whatever the market's willing to buy it for. Right. So that's one of the things you got to remember. If you're buying it for the cash flow, you're also inheriting a crap ton of liabilities that's on your books.

I could.

[01:54:09 - 01:54:14]

Will Smith: This is the deferred liabilities that your underwriters chewed up and spit out or whatever.

[01:54:14 - 01:54:35]

Jeff Flannery: Yes. With the bankers all of a sudden, you know, like have, have a, like aneurysm and say, I don't know how to value this. Right.

At the end of the day, back to my MBA accounting class, they. I would argue that those are always going to be there and you shouldn't care because it's always going to be there. As long as you are going concerned, you're always going to have it. Right. So.

But it's hard for people to get their, their brain wrapped around that concept.

[01:54:36 - 01:54:51]

Will Smith: All right, Jeff, we're over. I've kept you. You're such a good sport. We could keep going.

Lot of fun. This is a very rich conversation. Congratulations on what you built. This is going to be an inspiration people to people. We'll put your LinkedIn.

Is that the best way to reach out?

[01:54:51 - 01:55:00]

Jeff Flannery: I guess I better update my LinkedIn profile. I actually was the first one of the first million people on LinkedIn back in the day when I ran recruiting. Oh, wow. But I. I need to update my LinkedIn profile.

Yeah.

[01:55:00 - 01:55:03]

Will Smith: And then you never went back again to update your profile.

[01:55:03 - 01:55:06]

Jeff Flannery: I haven't been on it for seven years. I want every year for 18 years.

[01:55:08 - 01:55:10]

Will Smith: Well, is there a better way to come up?

[01:55:10 - 01:55:11]

Jeff Flannery: Email address? I mean, you tell me.

[01:55:11 - 01:55:16]

Will Smith: Sure, sure. Yeah, yeah. Which we have.

And we can just put it in there. So what's the email?

[01:55:16 - 01:55:20]

Jeff Flannery: It's a jflantrypleaglespas.com Hope you enjoyed that interview.

[01:55:20 - 01:56:03]

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