Host: Michael Horowitz had been searching for a business to buy in New York, the New York City metropolitan area. He'd come close on three, but none had closed and so he returned to a job for income. Not long after, some friends approached him about buying existing franchise businesses and rolling them up. Michael said yes. Today's interview is the story of how a complete outsider to a popular franchise system, an outsider with no operational chops and gets a foot in the door and builds from there. Popular franchises don't let just anyone in. You have to sell yourself. Michael explains how he did so to acquire his first wingstops, seven of them, and then how he built and acquired 13 more. We also talk about what it's like operating almost two dozen fast food restaurants. No surprise, labor is brutal. This interview is a great story and tutorial on building a portfolio of franchise locations. Here is Michael Horowitz, owner of 20 Wingstop restaurants in Ohio. Enjoy. 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. You already know that business owners are making amazing use of virtual assistants, often based in the Philippines. And while virtual assistants are helpful, virtual professionals are transformative. More Staffing is a boutique agency that hires a players in the Philippines not for simple tasks but for deep competency work. Think operators, supply chain managers, controllers. Moor Staffing de risks your engagement with a 12 month guarantee to you and they provide coaching for six months to their talent. When an engagement begins, that means your hire is coached in the background, no additional cost to you, so that your working relationship flourishes and is as successful as it can be. Global staffing is increasingly the norm and building the muscle within your business to take advantage of it will be crucial in the years ahead. Speak with More Staffing about the pool of capable, affordable managers they can connect you with. Check out Morenow Co. That's Morenow Co. Michael Horowitz, welcome to Acquiring Minds.

Guest: Great to be here. Thanks for having me.

Host: Michael, you're the owner of 20 Wingstop locations in Ohio. You were a conventional searcher in New York to begin with. That search kind of stalled out. Then you took a job, but also a few months later circled back around to the idea of buying a portfolio of franchise locations in one fell swoop, which is what you did. And so we are going to hear the story of that early search, the progression into what you did do, and how you've now grown from that first batch that you bought of 7 to 20 and in the process learn about the business and the operations of quick service restaurants, QSRs, which of course to the lay person are fast food chains. So Michael, to start us off please, a little background on you.

[3:32] Guest: Yeah, so thanks for the intro. Background wise I started getting interested in search a couple years out of undergrad. I began my career in venture capital. I did a lot of cold calling and sourcing for venture capital investments, but learned about search somewhere along the way and started to think wait a minute, I just talked to a business that has no business model, no revenue, some users and is going to get valued at tens and tens of millions of dollars. You're telling me for that same pool of capital I could go buy several businesses worth and millions and millions of dollars of cash flow. That seems like a much better bed. So I went to grad school, got an mba, focused on doing that and launched a search out of out of the MBA program in 2015. That search was not a funded search, but I was looking for a larger business to buy that looks more like what a traditional funded searcher would probably have targeted. But I really wanted to buy that business around New York where I wanted to live. So with that geographic Constraint, searching for 18 months was pretty challenging. You couldn't really develop an industry thesis and flesh it out fully because once you added the geographic constraint on top of all of the other things you were looking for, there were just not too many businesses to to look at in any particular area. And eventually as you said, felt that that search stalled out, wanted to actually be making money, took a job in real estate investing and got approached soon after taking that job by some buddies who said we've seen some other people with our kind of investment backgrounds buying franchises and having a lot of success. We know you searched, we'd love to talk to you about what we're thinking of doing. And I ended up teaming back up with those people to search for a franchise business to buy specifically on the side while the three of us worked.

Host: That's great. Thanks Michael. I have a bunch of follow ups here. Okay, going back to the vc. So I assume if you're working in VC, you're working at and you use the word users you were working in tech as most VC is tech vc were you. You were based in New York? I was at the time as well. And

Guest: how do you.

Host: I always like to people who like to ask people who come from tech. It's usually people who have been employees within tech businesses, not necessarily on the VC side but how they see Tech now from a distance and now that they've gotten into search or small business ownership, that that kind of insight that you had, like, hold on a second, you know, the economics are terrible in VC and yet it's flush with cash. And over here in small business, less cash, but great economics. Like comment now on that insight. Stronger, weaker, same.

[6:19] Guest: So I sort of felt this would have been 2010 to 2013, that even over that three year period as a completely green, unsophisticated investor, that things were getting progressively crazier every year in terms of valuations. And even that early on sort of felt that it had shifted from an investing role to a selling and chasing momentum role because there was so much capital looking to invest in these companies. It was still a really fun job. I mean, you're meeting incredibly smart, talented people, you're learning about all sorts of new markets and products and niches. But it was much more, hey, the price is going to be the price. Can we even get them to take our money at this price? And that was a lot less appealing than studying a business on the merits and figuring out if that price actually made sense. So I think that only escalated in the past 10 years. Obviously, had I stayed in that industry, there was 10 more years of amazing boom times before the bell started to toll. But you know, still have great friends, great admiration for the firm that I was at and think it's a great space, it's just not the way I like to think about the world.

Host: And then you also, as you said, you saw the world from a real estate investing perspective. So I assume that was your, in New York kind of high finance, very large real estate investing. We're not talking about, you know, the, the loan house flipper, but, but still you started thinking about things. You started kind of probably seeing the world through real estate, the real estate lens. How, how does that inform how you see small business acquisition and ownership?

Guest: Yeah, great question. There are a lot of parallels. So the specific niche that I focused on were older residential apartment buildings around New York. And that's its whole asset class that could have its whole entire podcast dedicated to it. But it's operationally intensive. But there is certainly an investing focus. You're modeling, you're looking at cash flow, you're borrowing money, all these different elements. It's very cookie cutter. So in that way it kind of has some similarities to franchises. Every building is pretty much the same and you're going to fit it into your model of what are the rents, what are the costs to renovate what's the potential of that location and that submarket over time? Um, and so it was a, a good transitional step, maybe from venture investing to real estate investing to full on search fund operating business investing. I'd say. Okay.

[9:06] Host: And then going back to the challenges of searching in New York. Were you looking in just Manhattan, all five boroughs or the larger, what do they call it, Tri state, including what, Jersey, Connecticut and New York. What was your, what were your actual boundaries?

Guest: I thought of it as the tri State area. You know, could I live somewhere in Manhattan and commute to this business? So there are plenty of train lines going out to Connecticut, New Jersey, et cetera. That was all, all in bounds.

Host: And that seems like an enormous, I mean obviously the population of that entire metropolitan area, the Tri State area must be 15 million because, because New York itself is 8 million, right? Or is that, is that just Manhattan? New York city proper is 8 million, right?

Guest: Yeah. The five boroughs.

Host: The five boroughs are 8 million. So I, I imagine you could double that if you threw in Connecticut, the close in Connecticut, in Jersey. So 15 million metropolitan area.

Guest: Reasonable.

Host: Yeah. So it's interesting as, as we, as I was reflecting on our conversation, like it's so rare that I have had a guest on who searched in New York. In fact, I'm not sure I ever have. And it's like, why, I mean, you know, just walking down, I mean, part of the charm of, of Manhattan at least is that it feels like it still has this kind of small businessy vibe that are, you know, around on every block, you know, tucked up in the, you know, tucked up on the second and third floor are, are these little mom and pops just everywhere. And then also like the density means that, you know, you're going to be able to cut the travel times down if you're in a kind of a business that's going to require field, field work. So anyway, respond to all that, please.

Guest: Yeah. So I think most people would tell you that the ideal way to, to do a search is develop a thesis around some industry that you think has attractive characteristics, become really smart in that industry. And that'll have two effects. The first is that you'll develop an expertise in evaluating businesses in that industry. You'll know what good margins are or bad margins. You'll know what different industry dynamics are going on and ask sellers more sophisticated questions. And also you'll be plugged in if you continue down that path to people who are networked in that industry who may introduce you to the next company, the next deal. The next thing that's all much harder when you have a geographic constraint. So the three businesses that I would say I came closest to buying during my New York focused search, all completely different, all found at random, and all I thought were interesting, but I don't think there were more than one or two businesses doing that specific thing in the New York City area. There might have been another dozen doing the same thing across the country. But if I wasn't going to move to Columbus or Houston or St. Louis at the time, none of those were on my radar. And so that just made it much harder. Every business you discovered, you kind of had to start from scratch.

[12:10] Host: And that actually so what you just said there is sort of, that's intrinsic to your geographic constraint, not New York specifically. So if you had been searching in just Dallas, that you would have had the same problem is that you know the. You hit the ceiling of a particular industry if you're only willing to be in a single geographic market quickly.

Guest: Yeah. And also again, I was not looking for the maybe more typical self funded deal that's happening today where someone's buying a smaller business in a stable but maybe not growing industry at a really good price. So I wanted a business with some more scale and more growth potential. Not just the, hey, this is an outstanding landscaping business, but the market's mature and the only way to grow is acquisition. And that wasn't really what I was focused on.

Host: Okay, and then why were did you not do a traditional search fund where you did raise the $400,000 to fund your search?

Guest: Yeah, I felt that I could get by without that capital. And that was fairly expensive capital, given that it steps up when you make an acquisition. I also hoped, although wasn't sure and wasn't really able to figure out beforehand, that that if I found a really great deal, I could go back to that pool of investors and say, hey, this deal is so good, I'd like to get slightly better terms than the traditional search would otherwise give. And worst case scenario was I figured I could get the traditional search economics, but at least I had a shot at better. But I never got to figure out if that was true or not.

Host: That's a phenomenal kind of insider hypothetical. Is that something that you had seen other people do?

Guest: I had not seen a ton of people do that, at least with any specifics around. Oh, I know someone who didn't take self fund or didn't take traditional money, found a deal, negotiated better terms. I did anecdotally know that there were lots of people out there who maybe looked more like independent sponsors who are coming up with all sorts of different structures in terms for their deals. So that was sort of the broader universe that I figured I could play in. Maybe there's a family office that loves you and just says, great, you can have 35% carry off the top and will take your whole deal. Maybe not. I don't know.

Host: Yeah, yeah, yeah.

Guest: Okay.

Host: Well, before we move off of your search, there was an interesting business I heard you mention on another podcast and I should say that you got on my radar. Wolf of Franchise. The Wolf of Franchises was on the pod back in January, I think, and he mentioned you and then because he had actually interviewed for you for his pod, which of course I've listened to and I will put that in the show notes. It's a great listen. And in that conversation with Wolf, you mentioned one of the businesses that you looked at in New York, which ultimately you did not close on the Christmas decoration business. Just, just for fun, tell us a little bit about that business.

[15:06] Guest: Yeah, so again, found it completely by chance. I had an industry list of hospitality vendors and I thought maybe that would be a fun space to own a business in. So contacted a business that has been around for 40 years and is responsible for almost every major Christmas decoration display you see when you walk down the streets of Manhattan during Christmas time. So these aren't store window displays at retailers, but these are lobby installations and office buildings. These are huge exterior projects on Fifth Avenue retail buildings. Some of the marquee things that they're known for is Cartier wraps their entire six story mansion in a giant red bow. Saks Fifth Avenue has a light show on the entire facade of their historic building that plays music and has a whole scape across it. Rockefeller Center. They don't do the Christmas tree there, but has all sorts of stuff going on through their pedestrian plaza. And it turns out it's one company that's sort of built the reputation for doing this over many decades. And it was just a great business. You think about, well, wait, they sell everything one day a year. Isn't that the definition of a cyclical, terrible business? And my answer is, well, a Christmas comes every year. There's no weather, there's nothing else that's going to affect that. B. When you looked at the historic performance of this business, it was really durable even through tough economic times. And I think the couple reasons for that are on the retail side, retailers make a huge chunk of their annual sales during the holiday season. And so the investments they make to drive Those sales are some of the most important ones they make. And on the commercial side, if, if you're a million square feet office building and you decide to be the Grinch who literally steals Christmas and doesn't put up the Christmas tree and the wreath and the little display, maybe you save each tenant 50 cents. Like it's not a big cost amortized over the entire set of the office, but it's a huge emotional thing that you don't want to necessarily give up. And then last but not least, given that this business had been around for so long and had such a great reputation, you know, there's specialized things to install on historic building facades and shut a street down to have a crane come in. Someone can't just walk off the street and do this. They actually got their customers to pay upfront and sign up to do multi year installations. So they had a much better cash flow cycle than you might have expected.

Host: Yeah, yeah, well, and on that point as well, like a great moat, I mean this is, this is an entrenched business. I wouldn't maybe go so far as a monopoly, but I assume, you know, they're, they're kind of the, yeah, the only game in town for the, for the really big guys. That's. What a neat business. Totally. I love it.

Guest: Yeah.

Host: Okay, well, now catch us up on the story. So you looked at that business, you looked at a couple others got, got kind of close. None of them came to fruition. And so you go back to real estate and to get, get A, a W2 in real estate investing and then are approached by these buddies who, who have seen people in their world buying franchises and doing really well there. What is their pitch to you? Expand on that a little bit.

[18:21] Guest: They're two of my best friends still to this day. And the pitch was, hey, we kind of want to do something entrepreneurial and we're thinking about doing this ourselves. But we know this is an area you really like and you've spent some time in and maybe you can either team up with us or just give us some advice. And honestly, I didn't want to be a solo searcher. I would have loved to search with a partner. I think it would have given me a longer Runway and some more support and motivation through the tougher times. But none of the people I wanted to search with were ready to do that when we graduated. So I was really gung ho on, let me do this with you. I'd love to work with the two of you. We expected to do a much larger acquisition initially. So we wanted all three of us to be operators in this business. We wanted to start with many millions of dollars of EBITDA and grow it to tens of millions of dollars of ebitda. And we were talking to potential investors really as independent sponsors at that point, saying we're going to go do this. We'll all move to whatever the city is and we'll build a great big business.

Host: Listeners of Acquiring Minds know that for almost any business you acquire, its success comes down to the people and how you develop and manage them as their new leader. Thing is, in addition to management, there is also a lot of process and bureaucratic work when it comes to your new employees. Payroll, compliance, HR technology, hiring, to name but a few. These processes are crucial to get right, but at the same time distract from where you want to be putting your energy in leadership. So Aspen HR is an HR firm and PEO that takes this work off your plate and handles it with the care it demands. Aspen is owned and run by Mark Sinatra, himself a successful former searcher. So Aspen's own leadership understands the HR challenges that searchers have. Post acquisition, the firm is offering Acquiring Minds listeners a complimentary pre acquisition HR and PEO review for your target business. Check out aspenhr.com or contact Mark directly@markspenhr.com and just for those who don't know, give us a definition of independent sponsor versus versus Kind of what you're doing, what you were doing before, where you search, you find a deal and then you take it to investors and kind of negotiate terms on a one off basis. What's the difference between that and an independent sponsor?

Guest: Yeah, so I think of and use the term independent sponsor really to mean someone who is not funded by any investors to look for. A business is planning on sponsoring the acquisition of a business as the person doing the sourcing, the due diligence, the execution and then that model. Typically buying a larger company that a private equity firm might also target and getting similar compensation, the 2 and 20 or close to that, that a private equity firm would charge their LPs to do that individual deal. I would say independent sponsor probably more often is referring to someone who is buying the company but not running it. And an independent sponsor might sponsor several investments in separate vehicles. I use the term to refer to what we were doing even though we intended to run the business, just to distinguish that we weren't self funded searchers looking to buy a much smaller company, but we weren't traditionally funded searchers either.

[21:58] Host: Great, thank you. Okay, so. So what happens? Because These, these two friends of yours approach you, you love it, and yet they don't, they don't quit their job. So, so, so keep going with your story.

Guest: Yeah, so none of us quit our jobs. One of the positives of looking to acquire a franchi, once you've decided on a franchisor or a handful of franchisors that you're interested in, they publish what are called FDDs, franchise disclosure documents. And one of the required attributes of that document is a listing of all of your franchise locations and who owns that location. So all of your sourcing is done for you. If you want to try to acquire something in a brand, you know every person in every location that brand has. So it makes it a lot easier to search on the side than trying to do some. Build an outbound sourcing program and process all of the responses you get back and whatnot. You can be much, much more targeted. We got some really great advice. So one of the groups of people that we were aspiring to replicate were some classmates of ours from business school, Alex Sloan and Matt Perlman, who had bought a group of Burger King restaurants actually while we were students. And they grew that business from 20 something units in 2014 to I think close to 250 by 2019 and sold that. They now run a full fledged private equity firm. I think they just raised $900 million for their last fund. They were phenomenal. And we called them and said, hey, you know, we'd like to do what you did. What advice do you have for us? And the biggest and best advice they gave us up front is you gotta start with the brand. It's not worth your time to go find a franchise deal from a willing seller, do all of your homework, spend all of your money, and then show up on the franchisor's doorstep with them not having any idea who you are and say, hey, we have a deal to buy this business and enter your system, you got to do it the other way of introducing yourself to the brands you're interested in, explaining why you're interested in them and what your plans are, making sure they give you their blessing, and then going to hunt for acquisitions in that brand.

[24:11] Host: Mm. So you get an explicit blessing you needed. It wasn't just kind of a, you know, I want you to know who I am and, you know, let me talk to you a little bit. It's actually like you get a clear green light, red light, and you say, please. If I bring you a deal, will you, will you let me into the

Guest: system in an ideal world, you get that very clear light. I'd say the first thing you're doing is just saving yourself the time on the ones who will give you an upfront red light. There are a couple brands who are notoriously very selective, if not exclusive, and have criteria for new franchisees that are just going to be impossible to meet. So the two examples would be McDonald's and Domino's are not going to take any new franchisees just walking in off the street, regardless of how much financial sophistication they have. You don't necessarily get a green light from every brand in that meeting, but hopefully you can at least leave the meeting with the. Yeah, that sounds interesting. It looks like you fit our criteria. You know, when you find a deal, we'd love to dig in and really hear more about your plans. And that I think is good enough, but you just want to make sure you don't leave the meeting with the feeling of they're not sold on us. We're going to waste a lot of time if we have to try to convince these people to take us a few months from now when we find a deal.

Host: Yeah, yeah. And so just to really distill kind of the pro and the con of, of quote unquote, searching within a, within franchise networks, the very strong pro is, as you said, you have your contact list just, just spoon fed to you. And all the ftds, you can see all the owners, you can just dump them into your CRM and start reaching out. Like no gritty search work really on the other. And then the big con, of course is that there is the, there is a gatekeeper in the form of the franchisor who will give you a thumbs up or thumbs down. And if it's McDonald's and Domino's will simply just not let you in. Okay, and give us a little bit Michael, on so you. So you were quite pedigreed, went to great schools, you'd worked in, you know, VC and real estate investing in New York. So you had kind of great pedigree from that perspective, but no operational experience. I guess I'm trying to understand from the franchiser's perspective what are they looking for? What are you up against when they're evaluating? Maybe you versus other interested would be franchisees. Obviously I know the ideal would be like somebody with, you know, 20 years of experience operating fast, fast food restaurants. But short of that, I assume a lot of people come to them who don't have direct industry experience because that's kind of part of the pitch of being a franchisee is, you know, hey, person who's always wanted to be an entrepreneur, come be a franchisee. And you know, and it may be your first time being a small business owner. So what are they looking for and how, how did, how do you think you measured up versus, versus who? You know, the franchisee, the ideal franchisee that they would want.

[27:19] Guest: Yeah, every franchisor is looking for something different and figuring that out is a key part of it. So on one end of the spectrum, Chick fil a, they really are not a franchisor, but they're looking for someone to take one unit, be in that business as the owner every day, share some religious values, all of these other things. If you look at Pizza Hut for example, they've been a struggling system. A lot of their franchisees were quite large. They were much more interested in franchisees who are going to come in and help them kind of get from the older casual dining, big dining room model to more of a domino's like small box delivery focused. And so they needed more private equity or financially sophisticated capital who could do large deals and make those kinds of transitions on the real estate side. So each brand is looking for something different and figuring that out is important. Wingstop, when we first approach them, and still to this day, the majority of Wingstop franchisees own one, two or three units. There were very few people who own double digit numbers. But Wingstop has over time been looking to increase the number of people who are multi unit operators and decrease the number of people who own one, two or three. So I don't know what year it changed officially, but let's say 10 years ago you could have walked in off the street and said I want to open one Wingstop in my neighborhood. And they would have said great. Today I don't think you can get a development agreement with Wingstop unless you're willing to open at least three. And they're probably looking for someone who will continue on past that. So that's a huge piece of the puzzle. The other thing I'll say on selling yourself is the franchisee base in each group is different and how they evaluate franchisees is different. So two ends of the spectrum that we experienced during the search, you had Burger King, which had been purchased by a firm called RBI, which is owned by a private equity firm called 3G Capital. The whole culture of Burger King had shifted to young post mba, aggressively incentivized employees and all really, really sharp. So the Burger King attitude was very numbers driven of we're going to evaluate this deal you're proposing to do, we're going to see what the returns are for us as a franchise system and if you can help deliver value on our end, we're good to approve you in pretty much any scenario. Wendy's on the other end felt much more like you were dating somebody and trying to like become a member of the family. So they wanted to spend time with you, just getting to know you, they wanted to visit your existing operations. Like they never said this, but it kind of felt like they wanted to meet my wife and my dog. Like that kind of vibe. And so everyone is different and you got to kind of feel like whether that fits for you and adjust your, your sales pitch to whatever that vibe is if, if it's the brand you're going to go for.

[30:35] Host: Well, I'm glad you keep emphasizing your sales pitch because searchers all, almost all searchers eventually realize that it's a selling process to get an owner to be, you know, not only to find the business, but once you found a good business, getting the owner to choose you to be the successor. And in that's much more, that's even more explicit in this world of franchising because the franchisor, as we keep saying, is kind of a gatekeeper who's going to give you the thumbs up or thumb. So it's, it's, it's very clearly a sales process from the beginning. So, so anybody who, who might be entertaining this path got to get good at selling themselves. And, and a big part of selling of course is empathy and figuring out what the person across the table from you, what they want and you packaging yourself to be the puzzle piece that fits that. Let's, let's back up just a little bit, Michael, because we didn't. So why QSRs and not any of the other myriad franchise concepts that are out there?

Guest: Yeah, we started the conversation around we want to buy and start with a decently scaled business that we can grow to much larger scale. And so that necessitated entering a franchise system that already had a lot of scale. So we really didn't look at any brands that didn't already have 500 plus units across the country. And that pretty much quickly pushes you into qsr. There aren't a ton of other super scaled franchisors of that level in other industries there some. And second was the trends to us of QSR were really attractive. So there's been a multi decade trend of gradually dining out, taking share from dining in. So that was providing a tailwind on sales growth. In restaurants. And you also had a bunch of potential levers that were continuing to accelerate that. And delivery, third party delivery from DoorDash and Uber was still a very new thing. Online ordering was picking up a lot. So there were some more trends we thought would accelerate that. And then the second point is that restaurant brands have performed super well in the QSR industry during recession times because they're lower priced and so people trade down into them when times get tough. So looking at it from a, hey, we want to build a firm that we own, you know, when we're 60 and our kids maybe take over one day kind of thing, having a business that we knew was going to be durable for a really long time was very important. So those were the two things that led us into qsr.

[33:16] Host: You had said that in across all these industries where franchises play that it's very, very few industries where a franchise might have 500 units or more. But there are a couple of others outside fast food. What are those others?

Guest: I'm not remembering off the top of my head. We didn't really dig into those so much. I'd say the other ones, I don't know unit counts, but that we kind of considered for time periods were some of the auto chains, so Midas, Beinecke, those kinds of places. And then some of the fitness concepts. I don't think there are 500 Planet Fitnesses, but Planet Fitnesses are also much larger volume boxes than a, than a QSR is. Orange Theory was a decently scaled one. Things like that.

Host: Okay, we'll just do some of this stuff quickly because you did cover it with Wolf. As I said, I'll link to that, that interview as well. But getting in front of these brands. So you guys basically, you know, had this pretty tight criteria. QSR is only the best mature, lots of units. So that narrowed the list down to I think it was like 20 brands.

Guest: Yeah, I don't know that we ever had like a actual piece of paper list with, with 20. But you know, maybe more broadly there was like a universe of, let's call it 50 that we probably would have looked at. Not all of those were appealing to us. You know, Subway is a huge system, but we had no interest in Subway as an example. So 20 might have realistically been like the, the number of ones that we were particularly interested in, but we didn't have it quite that systematic.

Host: Okay, but you had some sort of loose list that you were basically working your way through.

Guest: Exactly, yeah.

Host: And. And what did it look like to reach out to these to people to, to get a conversation. Yeah.

Guest: So we, all the companies will have franchising contact stuff on their website. That's the, the worst to go in because you're just dumping some information into an email inbox. Who knows who's picking it up. So every time we could, we tried to get introductions to somebody a little more senior on the sales or franchise development side, and we got those from a couple different sources. Sometimes it was just mining LinkedIn and connection of a connection or somebody who could make an intro for us. My two partners, like I mentioned, were both hedge fund investors and one of them actually covered the restaurant industry among other areas. So he in some cases reached out to his contacts on like the investor relations side and said, hey, can you tell me who's the head of development or whatnot? We did go to one conference in New York, a franchise conference where franchisors will send sales representatives and you can kind of meet them in person, walk in the floor and they'll be getting the pitches for their brands. And then even just doing cold direct email outreach sometimes once you found the name of the person that you want to talk to, as opposed to cold emailing in through the website, I still think is a. As a step better because it lets you kind of capture their attention a little more clearly than just showing up in this massive inbox.

[36:28] Host: Yeah, you know, this, this sounds like basically doing a job search in a savvier way than just like applying on the web, you know, like don't go

Guest: to the careers page. Yeah.

Host: Try to work your connections. Warm intros. Okay, so, so that's really helpful. But essentially it boils down to like all of the, all of the many ways you might get a warm intro in any context. Same thing here. Get the. Get, get something. The warmer the better. So work your network if you got it. A cold email as worst case scenario, but still better than just a form on a website.

Guest: Yeah, great.

Host: And then these meetings, I assume were basically virtual zoom meetings.

Guest: A lot of times even phone calls. This was pre Covid where I feel like the zoom meeting was a level up of engagement. So yeah, a lot of times it was just slipping out at a coffee break and standing on the sidewalk in New York trying to keep my phone muted as traffic came by and make it sound like we were really working from a prestigious office or something. Something.

Host: So I, I want to work in here. Kind of some contrasts to your first search, which was like a conventional search. We've already kind of touched on it. Like the, the list of of your targets is, is. Is very well defined in, in, in the second version of your search and, and to the point where you're able to do it on the side while you basically as a side thing while you have a W2. Any other like reflecting back any other thoughts, differences on, on that search? Like is it. Were you just like, oh, this is so much easier than my first search sort of thing or, or I don't know anything?

Guest: Yeah, I think the two things that pop into mind back to the point about how hard it is to search in a geography and get multiple reps at a particular type of business. I got a lot of wasted time for people who responded to my outreach, which made it clear that I was looking for businesses of a certain size and said, Yep, we make 2 million bucks a year. And then you met with them and oh well, we don't make any money right now, but we could make 2 million bucks a year. If you just come in and it's like, okay, well you've wasted a bunch of both of our time now. So with franchises you have a general sense of what a typical unit should do in sales. And so if somebody's got three units, you have a pretty good idea where their size is and you can kind of filter pretty quickly on whether you want to talk to those people or not. Second would be you get the pattern recognition. So if you look at three deals in a brand, the P&Ls are all buying the exact same stuff. They're all staffing for the same type of business. They're all having the same controllable and non controllable expenses. And so you can get a pretty quick sense of, hey, wait a minute. This group was doing a million seven in average unit volumes at a 15% margin and this group was doing a million five at a 18% margin. Like, which is one of them overperforming, is one of them underperforming. And the more reps you get, the quicker you can kind of come to a viewpoint on where that should be. So that's enormously helpful for making a good investment and not a big mistake.

[39:38] Host: Sounds like it's better in every way.

Guest: It's better in every way on the search side. I think honestly, you know, once you get into the system, then there's all the kind of downsides that we can get into of running a franchise business versus running a more independent business. I guess I should caveat. The better than every way the franchisor approval process is a big deal. It can work certainly in your favor. If the franchisor calls the seller and says, hey, all else equal, we'd love to see these guys become part of our system. And if you decide to sell to them, we'll make it a super quick and easy process. That's a big positive. If the franchisor says, hey, sorry, we really want you to sell to the guy in the market next to you, we will approve them, but they're not our favorites, well, that's much worse for everybody. So that's definitely a challenging element at close, but up until then, it's much smoother sailing, I felt.

Host: Yeah, yeah. Well, and also that's giving you an early taste of what it's going to be like to have this, if you buy into a network, to have this third partner effectively in the franchisor, that can kind of, you know, veto anything, anything you want to do, which is, of course, you know, one of the really big risks. And, and I would, I would probably say downsides of, of being in a franchise network. Although, of course, in a good, healthy franchise network, the franchisor also provides a lot of value.

Guest: Yeah, and I'll. I'll just throw in on that real quick. You know, companies at the end of the day are collections of people, and franchisors are no different. And so the culture of the franchisor is largely set by the executives and the people who are running that business. And those people change. So you may experience it in a good way. If you join a brand and the CEO changes out and the new people you have a better relationship with and things are great, but you could experience it also in the bad way. A new person comes in and wants to put their stamp on the business, and it's not what you kind of signed up for or wanted to get out of it. And you clash. And, you know, there, there are ups and downs in that.

Host: Yeah, right. And of course, you know, kind of trends change. Like you were saying about Pizza Hut, it's a, it's a, it's a struggling network. And, you know, used to, you know, in my youth was, I assume, a very healthy network. I mean, it was where every kid wanted to go. Although you could say that about any business. Trends change and your business is going to be.

[42:01] Guest: Yeah.

Host: Caught up in that no matter what. I'm actually, I'm reminded of James Temple, who bought Night, who acquired and started a few math nasium in the Mathemasium network here in, in Virginia and in Maryland. And as we talked last fall, he. That math nasium, the franchisor had had somewhat recently been sold, been acquired by a PE firm. And so franchisor is now going to have all, all new people at the top. And he was optimistic, but it represented risk and change and, you know, who knew, who knew what that meant?

Guest: Absolutely. Great point.

Host: Okay, well, so that's a, that this is all a great segue into now. So, so, well, let, let's hear about the, the deal itself. So you. Yeah, to basically take us through the story, finding the seven win Wingstops that you start with, including any numbers that you can share.

Guest: Yeah, so the Wingstop deal WE were actually connected to by Wingstop's development team. We said, you know, we'd love to start with an acquisition and we'll sign a development agreement to build more in that market. And they said, well, there's a guy in Columbus who's willing to sell his restaurants. Why don't you reach out to him? So we spoke, we negotiated for a while, we made an offer and he actually took somebody else's offer. So we were back at the drawing board and a couple months later we kept in touch with him on how things were going. He reached back out and said, actually turns out the person I was going to sell it to did not end up getting approved by corporate. Are two guys still interested? And we said absolutely, and managed to work out a deal from there. So we bought seven restaurants that at the time were doing about 5.6 million of revenue and somewhere around 700,000 of EBITDA. We paid in the low 4 millions for it, used a lot of debt, managed to do it without taking outside equity because the three of us were able to fill the equity portion together. And off to the races. We signed a five unit agreement to develop more restaurants that gave us exclusivity for Columbus. And we started doing that within the first year we had the business.

Host: The lots of debt. Was that an SBA deal?

Guest: It actually was not. We thought we were going to have an SBA loan for the longest time and we had just shopped around not really knowing who or what banks would be the right fit. And it just so happened that another lender came in on terms of almost identical to the SBA loan with the trade off of no upfront fees or much smaller upfront fees for the loan origination, but a couple seemingly quite light covenants on the back end. And we thought that was a worthwhile trade. The interest rate was the same, term was the same, personal guarantee was the same. So we ended up going with them partly for the lower fees and partly because they were a lender that we felt if we quickly found another 10 or 20 units that we wanted to buy would be all over that. Whereas we'd have run out of limit on the SBA cap.

[45:02] Host: The SBA cap of 5 million total, and just a little bit more on the covenants. What do you mean by that? And contrast that with the SBA loan.

Guest: Yeah. So SBA loans don't have any covenants as far as your financial performance of the business. The loan that we took out had two covenants. The first is a debt service coverage. So just measuring, hey, each year you have to pay X amount of money on your loans. The business needs to be making x times 1.2, 1.15, 1.25, whatever the numbers are. That was the first one. And then the second one is called lease adjusted leverage. It's a common covenant for restaurant industries. So it's basically looking at treating your rent payments as debt and saying, okay, you're obligated to pay back X million dollars of debt, plus you're obligated to pay X millions or hundreds of thousands of dollars in rent over the next several years. Compare that to the income the business is generating and make sure that it doesn't exceed five times, five and a half times, something like that debt to EBITDA after adjusting for your leases.

Host: And by contrast. So these covenants are basically stipulations that post getting the loan, you still have to adhere to. And if you do not, it's a tripwire. And, and what happens, you're. You're basically in violation of the loan. And your bankers say, hey, fix this or else sort of thing.

Guest: Correct? Yeah. If you miss either of those covenants, which are tested every quarter, then you're technically in default. The bank doesn't necessarily jump down your throat right away and say, oh, my God, you know, we're going to go claim your house or use our personal guarantee. They don't want to do that. Yeah. But it does give them some leverage to say, okay, you know, we're going to get a little more hands on with you. Why did this happen? What are you doing to fix it? We're going to check in with you more frequently to make sure our loan is still looking okay. And we felt that that was a really reasonable trade off both of those covenants. We would never have wanted to take so much debt that we felt that either of those was going to be in danger for us.

Host: And again, contrasting to SBA loans, so SBA loans don't have covenants, so for the listeners who are probably do know what debt service coverage ratio is, all of that talk in SBA land is just about the business. Like when you buy it and kind of historically and, and it needs, you know, there needs to. That needs to be maintained when you get the loan. But then after you've bought the business and gotten a loan, you don't have to adhere to that, although you're, you know, you would hope that you would.

Guest: Yeah, you got to pay your loans, but they don't care. You have to pay your loan.

Host: Yeah, it's. It's all right. So it's. The only criteria is that you're paying your loan and on an SBA loan.

Guest: Okay, great.

Host: So $700,000 in EBITDA for these seven. These seven wing stops. So that's roughly 100, you know, average 100 per location. That's smaller than what you said you three had kind of ideally wanted to get. Which was something which was a. Which was a pool of. Of locations in a franchise that were doing millions in EBITDA to grow to then to hopefully tens of millions. So how did you. Why were you willing to buy something smaller than you'd set out to do?

[48:23] Guest: Yeah, good question. I really skipped over that. So that was the biggest challenge for us on whether we wanted to do the Wingstop deal. Like I mentioned, Wingstop has a lot of one, two and three unit franchisees, not very many large multi units. So we knew going in that the opportunity to buy 50 or 100 of these in the next couple years is not really there like it is in other brands. But what we did like is that Wingstop at the time had maybe 1100 units. They're closer to 1600 now, so they were growing at a really, really good rate. And part of that was because the development opportunity, both in just white space across the country where there are not Wingstops and should be, as well as the financial opportunity of what it costs to open a Wingstop versus what you should expect that location to make, were both really best in class. So we felt that if you just got into Wingstop, you could grow pretty quickly by building units, and then all of the ones that you could purchase along the way would just sort of be gravy. The biggest downside to starting small was obviously it was going to be a longer path to getting the scale and the potential dollar opportunity that we were hoping for. But it also meant that all three of us were not going to quit and run this business. We bought it with a single area manager who kind of Oversaw the day to day operations in the restaurants. He worked with the managers on schedules, he helped do repairs, he helped train people. Didn't do any of the sort of office administrative stuff of scheduling vendors, paying bills, running payroll, checking bank statements, et cetera. But all of that work for seven restaurants does not require three NBA hedge fund guys. It doesn't really even require one once you know what you're doing. So I, all three of us actually sat down and basically said, look who's going to go run this? Which one of the three of us is it that's going to go out to Columbus and be the CEO of this thing? And each of us made a proposal to the other two. Hey, if I do it, I want a guaranteed salary of X. I want to charge Carrie to you on the money until you come and do this or whatever it may be. And for better or worse, I thought of myself as the low bidder in that I didn't ask for much in terms of financial compensation, but I asked that if my two buddies did not quit their jobs in two years and come join me in the business full time, I had the right to buy their shares back and I could truly own this thing myself. And we all agreed with that because we really hoped that in two years I would grow it really fast and my two buddies would get to a point where they were ready to quit and come do it no matter what the amount we could pay them was. And that's kind of what we went in expecting. That's not how it turned out. They ended up staying at their jobs and I did buy them out. But yeah, that was a tricky part of the equation. Whether we wanted to start so small and not have that big company with the three of us running it together. But the opportunity and Wingstop outweighed it.

[51:28] Host: Yeah, really interesting. And can I ask what you propose that you would make?

Guest: I basically said I want to sweep all of the excess cash. So if the business is generating 300,000 bucks a year after debt service, I get that. But I'll also take the risk that if the business, you know, isn't working out the way we expected and makes 20k, I get 20mm.

Host: But wait, wouldn't you be incentivized to have the business underperform by taking all as a dividend, all of the profit rather than reinvesting and then have the business not grow so you can buy them out at a cheap, cheap rate and then kickstart growth at one day after two years?

Guest: Yeah, we, we negotiated an insanely and unnecessarily complex operating agreement to, like, address all of these potential conflicts that could come up. In retrospect, it was probably far, far too much that we specified all of these. Corner. If Michael opens a restaurant and it does X, but Michael didn't do Y, blah, blah, blah. You know, I think you need contracts. They're super important. But at the end of the day, like, you shouldn't go into business with someone where you feel the need to document all stuff so granularly and you don't just trust them to do the right thing. And. And we all trusted each other. We did the contract anyway because we were newbies and. And being silly. But that's kind of how I ended up viewing it. Like, either you trust me to do this or you don't. And, you know, I trust you to do it or I don't.

Host: Yeah. And. And so basically, the sweep structure of just taking out as a dividend your salary was effectively going to be whatever was left over was incentivizing you to make it as profitable as possible.

Guest: Exactly. The amount that I had to buy them out on was. Was not based at all on. It was based on the pre. Distributions to me. Of course, there was no fixed amount that I got to charge.

Host: Fascinating. And then just going back to one other thing you said, Michael, the in how in Wingstop, where there are a lot of 1, 2, and 3 unit owners and that makes it a less hospitable system to roll up. Did I hear you, first of all? Was that correct?

Guest: No, I would say it makes it a less hospitable. Like, that actually was a positive in our mind because. Yeah, because a lot of these. What. What I think made it a more challenging space was just doing it 1, 2, and 3 units at a time. When your goal is to be at 50 or 100 units is a long slog like that, that takes a lot of work, a lot of time. You know, there are people who got into Pizza Hut with similar kind of young finance professional backgrounds, and we're at 200 units in a couple years because you do three deals in Pizza Hut at 70 units each, and boom, you're there. So we didn't have that kind of opportunity in front of us, but we liked the brand a lot more.

[54:22] Host: Yeah. Well, I would just have thought that in the example you just gave with Pizza Hut, that if there are these other owners who own dozens and dozens of units, that you can't assume you can just buy them out because they're kind of your competition within the system. And they're probably doing very well, thank you very much. And if they have the maturity and expertise to get to 70 units, they probably want to get to 250 units. So I don't know, it feels like the more fragmented, actually, very similar to independent small business land. Like, the more fragmented, the better.

Guest: Yeah, maybe, yes. But also, a lot of these QSR brands have been around for a long time. And so the franchisees who have gotten to 50 plus units have probably been in it for a really long time. And so a lot of those people are getting into their 50s, 60s, 70s, their kids don't want to run that business. And so it's the same, you know, baby boomer generation selling trend. Maybe in the last 10 years or even five years, there's been a lot more private equity capital behind the platforms that have grown really big and they still want to grow. But at the time, there wasn't quite as much of that. And we specifically thought within Wingstop, when you looked at the largest franchisees, there was only one that had private equity backing. All of the others were just individual entrepreneurs who had been doing it for however long they'd been doing it. And while some of them were absolutely still growing by acquisition, you know, an individual entrepreneur in the restaurant industry, by and large, is not going and raising outside capital to, to take down deals. They're waiting until they build up a certain amount of cash and deploy that into their next acquisition, wait a few years, buy some more. They're not opportunistically responding to, oh my God, this unit's for sale. Let me figure out where I can raise 10 million bucks to buy it.

Host: Great. Just to the point about the franchisor and them being a gatekeeper and also putting certain requirements on you. So you had said that they would let you in, but. But I guess you had to agree. One of the stipulations was that you would also develop 5 units. Seems like that didn't bother you at all. In fact, that was kind of going to be part of your playbook anyway. But still, it does introduce risk because you have now agreed to do this, to build out five locations. And oh, by the way, like, you are somebody who came at this from eta, so, like starting a business from scratch, even though it's a franchise and there's a system and so on, is something that you kind of had decided you, you kind of didn't want to do at least a few years ago. So. Care to comment on that?

[57:00] Guest: Yeah. Two thoughts. So, signing a development agreement to open more units is kind of table stakes to make an acquisition and enter a brand. If you show up on the door of a franchisor and say, hey, I want to buy these 20 units, but I'm not interested in building anymore, they're kind of going to look at you and say, what does that do for us? Why would we want you in the system if you're not interested in helping to grow it? We'd rather see these get acquired by somebody who thinks that there's opportunity to build another 20. So if you are to the the idea of selling yourself to the franchisor, if you're not showing up on their doorstep saying, hey, we want to grow, both by new unit builds and acquisition, your odds of them being interested in working with you plummet. So fortunately, with Wingstop, we thought the development opportunity was best in class, and we were truly excited to sign that agreement and build more units. There were other brands where we would have been willing, if not excited to build more units, but some of them were asking for more, way more units to be built than we felt were reasonable. And that was a really good signal to us of, hey, they're not as balanced on the what's in it for us, what's in it for them equation. They're too far to the side of the we just care what's in it for us. And, you know, if you don't make money on these, it's your problem. So that was a good signal to stay away from a brand that said, hey, we want you to buy 25 units and build 45 more. Which one brand did? So as far as the idea of, like, opening a franchise as starting a new business, I really didn't look at it that way because our development territory was the broader Columbus area where the existing restaurants were. And so you've got a playbook with the franchise for how to build the thing. In fact, they have architectural teams that are going to review your plans and potentially argue with you about the way you might want to do it versus how they want to see it done. But from day one, we had a hundred something employees that if we needed to run somebody over to train a new team member or fill in a shift or whatnot, we could hop in an Uber or drive over a bus over or whatever. We had product at all the other restaurants. So if we misordered on the first restaurant and we're running out of food, somebody could drive over some extra chicken or extra french fries or whatever. And we had a whole infrastructure of vendors, so we knew who we Wanted to hire to deliver our bar towels and our mops. We knew who we were going to use to do our repairs and maintenance. We knew who was going to do our grease, recycling, all these different things. So it was a really plug and play. You know, within two weeks of opening, you forget that it's your new restaurant and it's just another one of your existing ones. That's.

Host: That's really valuable to understand. Yeah.

Guest: Okay.

Host: Well, Michael, I want to get into what it has been like to operate these businesses, but we haven't finished the story. So can we do an accelerated. You buy the seven and then you're now at 20. Take us up to 20. And then of course, tell us what happened with your then partners.

[1:00:07] Guest: Yeah, so had that five unit development agreement. I opened two restaurants within the first, like 14 months after we bought the seven, those went well. We were working on development for our next two locations. You know, you have a couple months of lead time to find the lease, sign the lease, get the permits approved, get the construction done. So in the two year mark came up, May 2020. So Covid has been raging for two months now. The restaurant industry is in chaos. And I call my partners and say, hey, do you want to quit your hedge fund jobs and come work with me in the restaurant industry? Understandably, they say, thanks, but no thanks. So bought them out, had the next two units open later in 2020. And between buying my partners out, opening a couple more units, and really fortunately for us, Wingstop was maybe one of the biggest beneficiaries of COVID and that our sales volumes were going through the roof as people were increasingly ordering delivery and pickup since they couldn't dine out. And so those factors combined with interest rates have been cut, massively, stimulus money flowing out there, all this sort of stuff. We got a really attractive offer to refinance our loans and take some more debt to pay for the restaurants reflect that the business was larger, buy out my partners, et cetera. So did that open two more units the next year, one of which was a ghost kitchen. It was an experiment. It did not go great. I closed it after a year and then in late 2021, bought seven restaurants in Cincinnati, which was our big acquisition. And then last year in July 22, bought a single restaurant in Dayton, which is geographically kind of in between Columbus and Cincinnati. So it fit nicely into our footprint.

Host: The. So I was laughing about your. Your then partners not wanting to jump in during the peak of COVID but was it not? But then you proceeded to say how you Were. It was very. A very Covid friendly business. You were thriving. Did they not see that? They were still kind of risk averse about the whole Covid question.

Guest: I think they saw it, but it was still, even though the sales were crazy, it was still a tremendously stressful and scary time. I mean, we were trying to adjust our operations to socially distance. We had health inspectors threatening to close us because people were standing too close to each other on the cooking line. We closed restaurants fairly aggressively to stop the spread of COVID If somebody tested positive, sent everybody home for a week, and restaurants making no money. So there was a lot of stuff going on that was frightening at the same time.

Host: Yeah, for sure. Yeah. Right. Of course, now we look and have the hindsight of retrospect. It's like, oh, you know, the classic, you know, this was a classic Covid bump business. But it wasn't clear that the COVID bump would be a thing yet in May 2020. So Ghost Kitchen, just a little bit on that because that sounds like an experiment and tying it into like the franchise and how, like what, what the franchisor will allow or not allow. This seems like, you know, way off of the outside of the parameters of what a franchisor would allow. So tell. Tell us that.

[1:03:30] Guest: Yeah. So Ghost Kitchen is basically a restaurant that doesn't have a storefront where someone can walk up and order from it. So it works really well for a brand like Wingstop, where the majority of your customers are placing their order online anyway, either on Wingstop.com or through a delivery app. So a facility had opened up in Columbus. They were going to have 50 little kitchens for all sorts of different brands. The kitchen would just receive an order on the computer. They'd make it, they'd set it outside, somebody would come grab it, bring it up to a central hub, and a delivery driver for a customer. But in this case, almost all delivery drivers would swing by this warehouse kind of in the middle of industrial Columbus, pick up the food and deliver it. So it was interesting because almost all the construction work was done already. Each little kitchen facility had a sink, had a hood, had electric hookups. You just touch a roll in your equipment and bring in your food and start cooking. So it's considered a non traditional restaurant. Which means my development agreement didn't explicitly give me the rights to experiment with something like this. But Wingstop, as a delivery heavy brand, was very interested in seeing how this model would work. Gave me a call and said, hey, there's a place open in Columbus if you wanted to open one of your restaurants as one of these models, we'd be interested in having you do that. And the general 62nd on the experience was that it works really well for delivery focused brands. The sales were decent and I think could have improved. The operations were insanely difficult because the kitchen was super small and we just didn't have enough space to operate effectively. And the amount that the ghost kitchen was charging us for that space was really disproportionately high. So my feeling was for the amount of money, just the total dollar opportunity of what we could make at a slightly lower volume but lower cost location with a really high rent was just not worth it. And we should just open a traditional location because it's not that much more money, it's much easier to operate in. And so we closed it, we rolled all our equipment back out and we weren't out very much money at all.

Host: And given that experience and your one time experience in In V as a VC or a VC analyst, what would you say? How do you feel about ghost kitchens as a category? Bullish? Bearish.

Guest: I'm fairly bearish on it from an operator perspective in that I don't know what the profit margins this business was making on our rent were, but if they weren't astronomical, then I wouldn't be very excited because I think those rents were just not sustainable. And what I would assume most people would do is similar to me. You open in that space for a very low upfront investment. You find out if that general area has enough demand to support a restaurant. And if it does, you just go and open your own restaurant in that area at a much lower cost. And you've already kind of de risked it by finding out what the demand is like. If you could run a ghost kitchen operation and charge a much more reasonable rent and still have a profitable business, then it's great because it does make it pretty easy to get open and get started. But I'm not sure what the numbers look like on their end.

[1:06:44] Host: Great, thank you. And Mike, we haven't really touched on your move from NYC to Ohio. So you guys had agreed one of the three of you was going to go do it. You did it. But just talk to me a little bit about that. Did you completely uproot yourself from New York or were you back and forth or what?

Guest: Yeah, I got rid of my apartment in New York. I moved out to Ohio. I ended up the first week there meeting my now wife, which was great. So that solved all of my social problems fairly quickly of moving to a city where you didn't know anyone. So we lived there for a while and then when Covid hit and we quarantined for longer than we expected to down with my folks in Florida. We expected to be there for two weeks and stayed a lot longer than that. I realized, you know, hey, I've built an infrastructure with this company that can actually manage the business on the ground without me having to be in the stores every day. Maybe this frees me up now to spend a little bit more time going back and forth. My wife's family's from New Jersey, so a lot of friends in the New York area as well. And that freed us up to start taking some trips back to New York over the last couple years for longer periods.

Host: So are you kind of back and forth now? Great. Okay, so let's talk about just operationally these businesses. You said that first seven, you came with a manager, not somebody doing back office administrative stuff, but somebody the really hard operational stuff, you know, the in the field operational stuff. But just an open ended question. What would you tell people who about the operations of a business like this Both at the 7 unit size and now at your 20 unit size?

Guest: I would say the easiest size business to run is the biggest that you can possibly do and the hardest to run is five to 20 units and then the next easiest to run is one. So at one unit, you as the owner, let's say you're not the operator, you have a gm, there's not a whole lot going on. You could handle that individually pretty well. You could also hire an overqualified GM who maybe can help do some of those administrative tasks as well and be pretty hands off. At 50 plus units you can have a huge team. You can have a maintenance guy, you can have a construction guy, you can have an HR person, maybe two HR people. You can afford a lot of infrastructure. Again, you could take yourself out of that business pretty significantly. At 5 to 20, 25 you can afford some really great people, but you can't afford every single role that you might otherwise want. And so you're still going to be pretty involved as an owner operator in certain aspects of the business. And so that's kind of where we are like I am super lucky that we have an awesome VP Ops who's came from running 40, 60, something like that, restaurants before, before he came and joined us and I was able to get him to join a much smaller business because he knew that we wanted to grow to that size and we were hiring him as someone who was ahead of the curve on enabling us to have that growth. And I also got super fortunate in hiring a controller slash HR person who had worked at a larger network, had moved to Columbus for some family reasons and just fit really nicely into our brand and operations based on her experience. So both of them take an extraordinary amount off my plate, but both of them are probably doing things every day that ideally wouldn't be part of their core job description. But we just don't have another person able to handle right now.

[1:10:24] Host: And when you said that the kind of strata that you're at 5 to 20 units is the not good place to be. But I assume there was also a difference between when you were just at seven units that first year versus 20 that you were had to be much more in the business when you first moved out there and first bought those first seven, what was that like?

Guest: Yeah, so this is where like I think ETA is great because I show up on day one. I've never managed a single employee before. I've never run a payroll, I've never had to do bank reconciliation. What the heck do I know? And so I told the district manager, look, whatever you did for the previous owner, just keep doing exactly that and I will figure out what I want to change over time. And what the previous owner did, he lived in Columbus, was he had each restaurant create a manual paper packet every week with printouts of all of the time clock punches from the team signed by the manager that had been reviewed, all of the weekly sales information, all of the deposit slips from their trips to the bank with cash, all of the vendor invoices from that week, and that's it. So the district manager would drive around and pick those up, or I'd pick them up when I was at the restaurants and I would get home on the weekend and I would spread them out on the floor and I would open up the bank account and I would say, okay, yep, I see the credit card deposit came in for this restaurant. It matches this report. Next, Next. All the cash deposits match. Yep, this vendor invoice is approved. And I would just go through them for a couple hours. That process didn't really scale our work at seven restaurants. It definitely didn't work as we expanded. So pretty quickly started thinking about, okay, you know, how do we improve this process? Well, could we get the payroll information imported into a payroll system so I'm not fat, fingering and under or overpaying someone massively when I enter their hours wrong, which I've done, and just piece by piece chipped away at it, figured out what person you needed to cover that role, whether you could afford for that person, and built up the infrastructure. So over 20 restaurants today we have five district managers, each oversees four restaurants. And we have a VP OPS who oversees those district managers. We have a controller, she has an admin based in the Philippines who does a lot of the manual data entry tasks and me.

[1:12:45] Host: And so that sounds pretty great, Michael. And it sounds like it was stress tested during COVID and has been even more stress tested subsequently with you back and forth from New York. So is it pretty great or do you want to disabuse me that life is easy and you're sitting pretty?

Guest: It's both. You know, the, the team that I've got is awesome and is able to do all of the day to day, week to week stuff without me. So I got married last year, I went on a honeymoon for a little over two weeks and I called the team the second I landed. We went to Asia, said how's everything going? And they said, Michael, don't call us for two weeks. We've got this, don't worry. And it was really stressful to do and listen to, but I said okay. And I didn't talk to them for two and a half weeks and got home and everything was cruising. It was awesome. So you know, that piece is great. That said, I own this business, I don't do anything else at the moment, although I'm trying to do some other search ETA investing activity right now. But I have a lot of money tied up in this business and I want it to do really well. So when I am not on a honeymoon, I'm calling and I'm following up on data and I'm negotiating with vendors and I'm doing whatever I can to support the people in the field. I'm visiting the restaurants, I'm sending back notes on what I've seen, all this other stuff. And I'd say the most frustrating aspect is that the labor market in restaurants is enormously challenging. And it's been enormously challenging for a long time, but much worse since COVID And while I'm no longer maybe the day to day person who's going to talk to an employee who didn't show up for work or failed to do some basic essential tasks that we require of them, when I talk to any of the above store leadership about what's going on or what problems they have and what we are doing about it, that's the subject of all those conversations. We failed this inspection because of this we are struggling to get this manager to do that. And so you don't really escape those kinds of labor challenges. You just interact with them in a different way. And there's definitely a lot of time where those issues are quite frustrating. And I've seen otherwise great managers who work for us actually leave our company and say, it's nothing against you guys, it's nothing against Wingstop. I am burnt out on managing this workforce and I'm leaving the industry. And these are people who had done it for decades. So it takes a lot of perseverance, a lot of grit, a lot of humility, a lot of things to be a good manager in this space. And so finding the people that can manage that labor force and come to work energized to do it every day is hard.

[1:15:37] Host: And to be clear, because of the labor shortage now, it's gotten harder, which, because the, the supply of folks to work in these jobs is less and therefore kind of the, the, the overall quality, the average quality of people working the cash register or the fryer or whatever in a business like this has gone down. Because I guess, I mean, your guy with 40 years of experience, I mean, he's, he, he'd been in this for 40 years, so I guess. But now things are much worse because of the labor shortage, to be clear.

Guest: Yeah, that's, that's my sense, is that it's been more challenging every year. I pull that back a little bit. It's gotten a little bit easier in the last six months in terms of the volume of applicants. There were periods more in 2021, early 22, where just nobody was applying. But certainly I think the labor force just gets more challenging each year as other opportunities open up and wage pressures go up and all this other stuff.

Host: And one kind of maybe simplistic question to people who have any operational experience, you know, I, we haven't talked about how profitable you are now, but I assume there's a lot more EBITDA going around than there was when you just had the seven? And why is the answer to attracting more talent or retain or better talent or retaining the talent you do have not simply, you know, throwing more money at the problem, paying people $2 an hour more? Yes, it's a less profitable business to you, and maybe that's the answer. Maybe it's a trade off, like more profitable, more headache, or less profitable, less headache. So why can't you pay people more to get them to perform better? Or can you?

Guest: There's certainly an element of that, but I think an underappreciated aspect is there. The amount that you may need to pay somebody more is not maybe commensurate. Commensurate with what you think it takes to attract the people. And maybe to put an example around it, there's a lot of warehouse jobs in Columbus, and we'll lose employees to those jobs because oftentimes they pay significantly more than we do. But we'll also, a lot of times see those same employees come back to us after two, four weeks, something like that, and say, hey, can I come back and work here? Because warehouse jobs are really fricking hard. You're, you know, doing manual labor. A lot of the warehouses are very. You think of Amazon like performance tracking on every individual and how productive they are. And frankly, in a restaurant industry, like, it is a hard job in a lot of ways, but you might have an easier time than working in a warehouse in most restaurant concepts. And so there are some people for whom I'd rather make 14 an hour at a restaurant than 1850 an hour in a warehouse just because I don't like the work. But I think there are also a lot of people who don't want to work in a restaurant environment at even a much higher wage because they don't like the work. Two other examples. You know, we fortunately get most of our orders through digital channels, but we still get a decent chunk of orders over the phone. And millennials, who our restaurant workforce tends to be younger, don't like talking on the phone. And one of the things I found out is they don't like taking orders on the phone either. And we have a lot of issues with employees who forget or turn the phone on mute or figure out other ways to not pick up phone calls and not take orders. And so there's some aspects of, like, people just don't want to do certain parts of what it means to work in a restaurant. They'd rather do something else. And so unless you're willing to pay them dramatically more, it's just an industry that's. That's off their list.

[1:19:24] Host: Yeah. Oh, that sounds really difficult. And have you learned now that you're an experienced operator? I realize, kind of at this point, certainly one step removed from all of that, but have you learned anything about how to motivate people who don't want to be there or would rather be somewhere else, or is there no silver. Silver bullet? I mean, there's no silver bullet, but is there, you know, have you learned anything? Have you gotten better at it?

Guest: Yeah, I think a lot of times Again, it's not about money. It's about other aspects of the job. So, hey, can we help this job fit your personal life. You have childcare obligations, you have a church thing that's meaningful to you on Sundays, whatever it might be. And can we help craft a schedule that lets you fulfill that part of your life? Maybe it's that, you know, a lot of people in restaurants are used to not being treated very well. And so if we can do little things to just say, hey, you know, this restaurant had a great month, like, we're going to send pizza over or throw a, you know, donut party in the morning, let people know that they're appreciated. You know, one of the best parts of the job for me is I'll have a manager call me and say, you know, this new employee has been just doing amazing and they stepped up and covered this shift and worked a double. When somebody was going to go home because they felt ownership of the restaurant and didn't want to see the doors have to close early. And you can show up and say, you know, hey, here's a handwritten thank you note and a gift card for a nice dinner. Like, thank you for doing that. It meant a lot to us. Like, those moments are great. And the more you can find opportunities to identify and reward that stuff, the better. And then also growth opportunities. So if you get somebody who comes in at whatever level they come in, but is ambitious and wants to grow and develop in their career, you got to figure that out right away and make sure you're presenting them with those opportunities as quickly as you can. Because if they don't feel like they're getting them with your company, they're going to go look somewhere else to get it. And I've seen instances where, you know, we'll get an employee and they're good, and after two or three weeks, they're saying, hey, like, I want to be an assistant manager now. And you've got to figure out how to balance between. Hold on. Three weeks of being a great cashier or cook does not set you up to be a great assistant manager. But we want to recognize that you've been doing what we've asked you and you've shown that potential. So let us tell you what a reasonable timeline would be to get you to that role, what the check ins we're going to have along the way look like to make sure you're on track for it, what the potential compensation increases are as you move up those tiers and sell you on this is what you can achieve in this amount of time and not just say, well, you're not ready yet, but we like you stay in that job for a while, they're gone. They're not staying under that situation.

[1:22:07] Host: Michael, here's the question. Would you do that all over again? Like, do you like this path as an acquisition entrepreneur? And let me just sprinkle that with. One of the things that you and I had talked about in our pre call was operational complexity or as you put it, return on effort. So Roe, yeah, these are heavy, heavy, heavy human businesses. We just finished talking about all the challenges therein. So reflect back now on the fact that this was the opportunity that you took.

Guest: Yeah. So the answer is 100% I do it again. You know, the inertia to get out of your W2 seat or get out of your search and actually close the deal, buy the business and start running. It is really hard to get or get past. And you know, just once you start doing it, things start to happen. Acquisition opportunities come in front of you, expansion opportunities, industry connections, all this other stuff. And so there's a lot of value. I mean, don't do a terrible deal, but waiting for perfect is not necessarily the best way to go. And on the return on effort idea, you know, yes, if, if I could have started with 20 wing stops and spent the last five years growing it to 50, I would have much preferred to do that. But you know, in retrospect, like this got me into the kind of seat that I wanted to have. It was a great financial investment from, from then to now. And you know, I couldn't ask for, for more reasonably. And on the return on effort point, I think that's when we were talking about some other franchise concepts that I'd considered. And I look at it as, there was another franchise brand that I liked a lot that I found out after Wingstop, but thought maybe I could get into this brand as a franchisee as well. And maybe this is the way one of my two partners could come work with us because he'll work on this new brand. But it was a much smaller brand with no opportunities for existing acquisitions. And so when we looked at it, we thought, hey, over five years, maybe we could build five to 10 of these. Credibly, where would we be in five years on that? Well, five to 10 of them, we'd be somewhere between probably a million and 2 million of EBITDA across the system. And like, look, there's nothing wrong. It's pretty damn amazing to build a $1 or $2 million EBITDA business in five years. But when you're also comparing it against, we think we could buy a 2 million EBITDA business and grow it to 5 or 10. Like that return on effort of how hard you're going to work to get from 0 to 1 versus 1 to 5 is a meaningful calculation. And for me, that was the overwhelming reason not to pursue that brand is the amount of growth I could get in Wingstop or in another bigger brand for starting in that brand from scratch felt like a better return on effort.

[1:25:08] Host: And just what about fast food as an industry, quick service restaurants as an industry versus some of the other industries that you looked at? There will be a lot of searchers listening to this who are right in the middle of their search. What would you tell them about, like directly about being in the quick service restaurant industry and whether or not they should consider it?

Guest: Yeah. So I would say restaurants are on the higher effort side of operating for sure. There are just a lot of different things that you got to do, and you got to do it with a tough labor force. Most franchises are employing people at that lower wage end of the workforce. And that inherently comes with its own challenges of people not showing up on time and people not acting in the professional way you might expect or hope them to with customers or vendors or what have you. You know, restaurants are great as far as the stuff we talked about before, the historical trends, the financial opportunity, the scale you can have all these other things. I think there's a lot of merit to, as a searcher, thinking about what do you want to be doing every day, where do you want to be going into an office or do you want to be out in the field? Do you want to be managing a dispersed labor force? Do you want to be managing a concentrated labor force? Do you want to be managing a white collar, a blue collar, all these different things. And even within franchises, there's a lot of room for you to kind of tailor what you do to that interest. So the franchise that I was thinking about, that we were just talking about was a doggy daycare franchise. And while they absolutely have the same issues around, you know, finding qualified people and getting them to do the things that they want them to do, show up on time, et cetera, you know, your average doggy daycare worker is highly likely to be more educated than your average fast food worker because, you know, it's much more likely you're going to find a college student who wants to make some part time income and go work at a doggy daycare. Than a college student who wants to work at a fry station at Burger King. So there are all sorts of different elements in that. I would absolutely tell people, go into the restaurant industry if it excites you, but go in eyes wide open, understanding that, you know you're going to get a phone call that one employee sprayed another with the soda hose. And what do you do about it?

[1:27:32] Host: Yeah, yeah, maybe. Maybe get a job at your local Burger King for two months, you know, in the kitchen and just. And just really see what it's like to close us out. Michael, just two questions again, asking you to reflect on how far you've come. Indie versus franchise. So I think we've kind of beat the franchisor kind of over your shoulder concept to death. But if there's more you want to say there, please. But just. Just the feel of working within a system versus working in an independent business, because that is kind of one of the qualitative differences in. In those two paths is just, you know. Yeah, the one. One is very playbooky, guardrails, brand, national brand, kind of cookie cutter, and the other is a little more swashbuckly, maybe. I won't put words in your mouth. So reflect on that, please. And then. And then I'll. I'll close with a question just about search, reflecting all the way back on your first search. So go ahead on Indie versus franchise.

Guest: Pros and cons for sure, on either side. I would say for a franchisor, thinking about the things, or for franchisee, thinking about the things that you control and don't control. So we control all of our hiring, all of our training, all of our onboarding. The people in our restaurants are 100% ours. We control our pricing, we control our site selection, where we decide to open new restaurants. We do not control the menu. We do not control any of the cooking procedures. We do not control any of the brand standards for decor, cleanliness, service, etc. And so there are times where you disagree and want to do things another way and can't, you know, it could be as granular as the brand tells you. You've got to use tongs to transfer this product from one vessel to another. And we think it's better to use, you know, tissue paper like you would at a bakery. And you say, hey, this is the process we want to do. We think it works better. And they say, tough. You know, we're telling you how to do it our way, and you got to do that. So that stuff can be grading, but it also takes a lot of stress and headaches out of your head. I don't have to worry about if the prices on one of my supplies goes up, you know, do I go find a new supplier and do I negotiate? That kind of. Wingstop's got it all handled. I just get a product, I pay the price and I don't have to worry about it. And I know that there's a team of people who are out there sourcing and negotiating the best deal that they can, so. Takes a lot of stress off your hands.

[1:30:03] Host: Yeah.

Guest: So I would say maybe the biggest question is there are some areas where you can't be creative in franchises, but it takes a lot of things off your plate. And so if you really want to focus on like how do you scale systems and processes? Franchises can be great because that's the majority of what you do. Attract people, fit them into your systems and processes and try to scale. If you want to tinker with menus and tinker with different service things and run little experiments and do all this kind of a B testing, not at all for you. You can't do any of that. Really.

Host: That was great. And then lastly, Michael, looking back at, you know, you were doing a conventional search, looking at independent small businesses back in New York and then went this path. How do you feel about search overall these days? And you know, the path you started down and then ultimately didn't do, how do you reflect back on that now that you've gone down this other path? Really far down this other path.

Guest: Still super bullish and excited about entrepreneurship through acquisition and search and think that all the different forms of it that have cropped up are great and help make it more accessible and better for people. Because not everybody wants to buy and run a 3 million dollar EBITDA business and try to get it to 5 or 8 or 10. Some people really want to run the $700,000 landscaper in their hometown and make hundreds of thousands of dollars a year and have a great lifestyle. And like all of those things are valid, awesome and can be super financially rewarding. I'm actually trying to spend more of my time investing in ETA stuff as a way of getting a little bit more variety in my day to day life. So I get really energized talking to searchers and learning about the new businesses they discover and what they think they can do with them and all these other things. And my life for five years has been the exact same process just across more and more and more restaurants. So I find all the different things people are doing in Search really fun and think it's still super early innings for it as a an asset class for investors and for operators.

Host: Beautiful. Well, perfect segue to ask you how people can how you prefer to be reached out to LinkedIn, Twitter.

Guest: Both are great. LinkedIn Michael Horowitz Twitter @MA Horowitz. H O R O W I T

Host: Z okay, so if somebody's got a deal, they. They should feel free to reach out to you.

Guest: Absolutely.

Host: Okay. Michael, thank you very much for sharing this story. What a successful one and an interesting one. Love talking to somebody who looked at search. Still loves it. Didn't go that path and now has kind of like the benefit of seeing really deep into a different path and understanding search from a different new perspective. So thank you very much for coming on. People are going to love this episode. I'll put all your contact information in the show notes and we'll have to check in with you in 2024 and see where things are at then.

[1:33:15] Guest: Sounds great. Thanks so much for having me. Your podcast is awesome. You've had such cool and different people coming on, doing all sorts of things. So keep doing what you're doing because it's really an awesome contribution to the community.

Host: Appreciate that, Michael. All right. Thank you, sir.

Guest: Take. Sa.