Acquisitions Anonymous - #1 for business buying, selling and operating - 2 Smash My Trash Franchises for sale - Acquisitions Anonymous Episode 119

Episode Date: August 31, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley), and Mills Snell (@thegeneralmills) talk about a deal named 2 Smash my trash franchises from Hennepin County, Minnesota wherein we get to know what this is all about and whether we loved or smashed the description and financials.-----Thanks to our sponsors!* CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.Do you enjoy our content? Rate our show!Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:(00:00) - Introduction(00:25) - Deal & financials: 2 Smash My Trash Franchises(00:55) - So what kind of Deal is this?(03:34) - The first Red Flag: What is suspicious about this Deal?(04:56) - Why does the Smash Truck look so cool?(06:36) - What does the operation look like for this business?(07:12) - What are the inclusions on the Bonus Material?(08:00) - Any first impressions on the deal?(11:42) - What are the requirements for a franchisee?(12:51) - Regulatory risks & understanding of a “CYA” document(15:54) - Competition risks, lobbyists, and crossings you want to stay away from.(17:37) - Our sponsor is Cloudbookkeeping.com(19:11) - Second Red Flag in the listing: What is inconsistent with this story?(20:12) - What are the dangers of having a big competitor ready to launch lawsuits?(22:30) - Let’s discuss the unit economics of this business: Customer, value proposition & competition.(26:42) - What is going to play a big role in the performance of a Franchise? What could the overhead structure look like?(27:33) - What is the fundamental problem with franchise incentives?-----Additional episodes you might enjoy:#118 Should we get wet with a water park?#117 A Neighborhood Coffee Shop: Good or Terrible?#105 How to Make Money in the E-Commerce GamSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, what's up? Today's episode is another banger. We talked about a deal that I found for two smash my trash franchises for sale. We'll talk a bit about what that is and whether we loved it or we smashed it. So we'll see. So this episode was great. Mills and I dug into it and see what you think about it. Thanks again to Cloudbookkeeping at Cloudbooking.com for supporting today. And here is the episode. All right, good morning, Mills. I got a banger of a deal for us. I can't wait to I can't wait the poke holes in it. No, no, I'm just kidding. I'm going to bring all my excitement today.

Here it is. Okay. So here's a little backdrop for it. So I think it was probably six months ago. I heard about this new franchise system called Smash My Trash. Have you heard of this? Smash My Trash? Yes.

Okay. Okay. So for those of you don't know, I just pulled it up on YouTube. Here's how it works. If you rent a dumpster, it fills up with trash. A lot of that stuff, that trash in the dumpster, that the trash company then comes and halls away,

that is air. And you don't pay, you don't want to pay for air. So what Smash by Trash does is it has a system that shows up with a truck, with this kind of smashy crane thing on the back of it. That's the best way I could describe it, like a giant mallet, like 20 foot long. And it shows up and it smashes the crap out of your trash, right?

And so you as a customer, when they come smash your trash, get a benefit because you're paying to have your dumpster unloaded on a regular basis. You pay per unload. And if you get three times the trash in there because it's compacted, like you get more value for your money. So smash my trash is a franchise system that is putting together franchisers to go around and kind of do this. Seems like a great idea, right, Mills? Everything. I mean, what could go wrong with this?

Just you wait. The correct answer is Mills Smile says lots of things. Just you wait. Okay. So here's the deal. So I love the concept of smash my trash, but I think there's some stuff that today's dig into two of these franchises that are for sale will teach us some stuff about, well, maybe it is not all roses, rainbows, and unicorns on this. Does that sound like a good kind of thesis as we dig into this Mills? That's it. You nailed it. Okay, cool. So I found this on franchiseflippers.com, which turns out is a website that helps people sell franchises.

So this one is listed as great deal to smash my trash franchises for sale in Hennepin. Is that they pronounce it? Hennepin County, Minnesota. And a list price of $60,000. Okay. So it seems pretty reasonable. Then they show us the annual gross revenue, $0, $0,000, zero inventory, zero assets. And it locates from whatever and it's been around for 20 years since 2020.

So it looks like, and Mills, you tell me if I'm reading this wrong, this looks like these are undeveloped franchise rights for this particular thing. Okay. All right. Yep. And when we read the description, we'll find that they're being sold at a discount. Okay. So awesome deal on two smash mice trash franchises save $30,000. North and West Twin Cities territories with corporate account revenue, rare opportunity to develop and own a part of the Twin Cities.

market, including parts of Hennepin, Anoka, Washington, and Ramsey counties. Most metro areas are all caps sold out. But normal price for two territories is $90,000. At just $60,000, they're buy one, get one half price. What is this? A carnival? This is unreal. So I guess to just put a pin in where this is, this is our first red flag here that this is somebody who bought a territory or two territories for this particular franchise system and is now selling those territories undeveloped at a discount. So is that like a red flag? They've already spent the money.

They spent $90,000 like two years ago to lock down these territories because they thought they were going to be hot and they didn't want to miss out. And now you fast forward, they probably have, my guess is they have some or one developed territory. Yeah. I would be willing to bet. So they have one of these already at least. And now there's two that they have not built out.

And they're going, I don't really want to build them out anymore. And I'm willing to take a $30,000 bath for somebody else to do it. It's a very not a good sign. So like one of the things we talk about a lot is when you're buying an established business like this, you want to understand what the rationale is for the person to be selling it. And in this case, the person is selling it because they don't think it's a good opportunity. But maybe it's a good opportunity for you. So here you go.

So they have some pictures here of how it all works. They say you can save 70% on your trash haul off if you use their service. And it shows some pictures here of the actual smasher. Dude, this thing looks cool, though. Yeah, I was going to say, you need to go to YouTube. These things look like those like battle robot things that used to be on TV, you know, where people build robots that fight in the arena. It looks like one of those.

Dude, I just want to go buy one of these and just go like, what I'm just so sick of it. I need to have an emotional breakdown. Just go buy one of these and go from house to house and hit some people's cars with it. It's got literally, for those of you can't see it, it's on the flatbed truck. There's a little cabin you sit in and then like you run it like a tonka truck. And basically it's got like this giant eight foot long smashing mallet at the end of it. How is that not cool? Maybe if this doesn't work out, Mills, somebody could bring this to a birthday party.

It looks like you just need to drive up to somebody's car and just like smash people that you get mad. So this, I mean, the other thing that I'm worried about this is, you know, what if an employee shows up drunk? And suddenly they're like powering a two-ton mallet. Like, it just seems really, it is what it is. Okay. So there's another picture here of it being used and some smashing going on, a truck happening. and has a before and after of the trash being smashed, an overflowing dumpster turned into a third full dumpster.

Really pretty cool. It's a neat idea. Then they just show how you can put three halls of trash where you're normally paying per one into one single dumpster hall and save a lot of money. So pretty cool. A bit more about the way this works. It's recurring revenue.

So in theory, you go to whoever's doing facilities at these customer bases. Your truck shows up when it's, shows up, smashes down the trash, moves on to the next spot in the route. And evidently, according to this, they've done really well in terms of the franchise or signing up a lot of people to do it. But it's questionable why this franchisee is suddenly selling. So they have a video here of how it works, the franchise system, and then bonus material here at the bottom, I think this is important. The franchise, according to the sell,

is innovative and prospects customers really like the concept. I also love the high profit margins. Reason for selling to focus on a smash my trash franchise owned in another state. Okay. So that means the red flag has suddenly gotten a bit bigger. The person selling this knows a lot about how this business works and is not that interested in expanding this one inside of Minneapolis. So very, very interesting. Yeah, so that's what I know about this. I did some more research on this as well, and I could go into that if you want, Mills. I know this is up in the game for our podcast, but I went through and looked at some of the

disclosure documents and all that kind of stuff. So first impressions of this before I kind of go into some of those other things in terms of what's going on with this particular deal for sale. Well, man, there's a lot here. You hit, I think, the nail on the head, which is you have. this principal agent problem, which is, you know, the guy on the other side of the trade knows a lot more about this than you do. And, you know, there's, there's some cognitive dissonance in the post. One, he's saying it's super rare. They're fast growing. All the markets are sold out. If that's

the case, then these don't sell for a discount. They sell for a premium. Like, you know, when five guys franchise, like they sold out in record time, you can't open a new five guys anywhere. They were hot. and there was a lot of demand and not enough supply because they regulated it. I think this is probably, you know, the inverse of that. One thing I think it's a little bit misleading about this that, you know, you would figure out, I think, fairly quickly if you went down the path on looking at it is this is just the franchise rights. So the way that these, you know, franchise agreements work, you pay a fee to have the rights to a territory, but that's not all the capital outlay.

In this particular franchise model, you have to buy this. truck and it's not cheap. So you're talking about maybe and you're pulling it up. You're talking about probably over $100,000, maybe $150,000 in additional capital outlay. Maybe some of it's, you know, easy to finance and those kind of things. But still, the sticker price is just the beginning of this. And that, that you'd be in for a rude awakening, right? If you went in naive about that. Yeah. I always, you know, so in doing the research, I went and actually, and there are several states where if you're looking at buying a franchise or looking into how a franchise works, you can go look at

this thing called a franchise disclosure document. And Minnesota is one of the states that do this. I think California is the other one, maybe Utah. But they all, these guys all have to publicly file the stuff about their franchise stuff and do this franchise disclosure document. They're referred to as filing states in the franchise. Okay. So emerging franchises will avoid filing states until they, like, can't any longer, and they'll grow in non-filing states because it, you know, it's less regulatory burden and, you know, you don't have to put all your stuff out there.

Yeah. Fascinating. Yeah. So I pulled this one up from Minnesota, which was just updated like a month and a half ago. And they have some estimates of what it takes to open these things. The trucks that smash my trash truck, which you have to buy from them is a quarter million dollars or so. You have all kinds of training you have to pay for, all kinds of just basics to get open

besides the franchise fee. And I started to look at what some of those are. And I pulled them up here on the website. And it's here on YouTube. And there are stuff where the license and permits, a thousand bucks, professional fees, dues and subscription, computer systems, your initial franchise fee, rent, market introduction program. And then they have,

we haven't even talked about, they take 8% of your gross off the top. So, you know, like then you have to use their software. You have to use their brand. Like there's all this stuff where it's just like very significant. Right marketing spin.

Yeah. Mandated marketing spend in your market and maybe mandated marketing spend nationally that you have to pay into a pot. Yeah. A lot of times. These, and I've looked at a lot of these, this one actually goes further than almost any franchise system I've ever seen,

even Orange Theory, which is the most egregious one we looked at it in an early episode. This one requires you to actually send people to their national conventions. You can't be a franchisee and not go to the convention. So you have to pay, they force you as a franchisee to pay to go to their convention, even if you don't want to. You have to send somebody to keep your franchise. You know, you have to pay, if you're going to sell the thing, you got to pay $10,000 to move it to somebody else.

So the way I read this Mills is not only is this person taking a, discount off the 90 grand, they have to pay another 10 grand out of their pocket to sell it to somebody else. So this person is actually selling it for $50,000 effective. Not good. Well, and also, you know, that brings up a good point a lot of time with these franchises is that the franchisor, in this case, smash my trash, they, these agreements are assignable, but with consent.

So you can't just, you know, go in and you and this other franchisee, strike a deal and smash my trash has to live with it. They could say we don't like you or you don't have the balance sheet or you're not going to, you know, you don't fit our culture, you're not going to grow fast enough, whatever the reason. They don't have to allow you to take this on. And these kind of things come up a lot of times in these franchise transfers, especially like big ones like John Deere franchise dealership models, Caterpillar, like they will squash you and they will not allow, you know, private equity firms to own them. They will not allow, you know, independent investors to own them. It's got to be like families or family offices. It's the regulatory

hurdle inside the system is kind of interesting. Yeah. Here, I pulled out some of the stuff. You have to pay to use their software and CRM. And that could be between $700 and $2,000 per month. Like, heesh, which is smart for the franchisor, right? They want to track everything. They want to see your analytics and they're also going to have a profit center based on it. Yeah. Well, I think it's important to note that this franchise disclosure document does not mean that's how it works in practice because this is the thing they put out to say it will not be worse than this. So it is designed to be really bad because this is a CYA document. The real thing to understand in terms of when you're looking at a franchise like this is go talk to other franchisees, especially ones that you go to directly and ask to see what worked out in practice, right? and understand that kind of stuff rather than rely upon this, which, I mean, no offense,

I look at this and I'm like, why would I do this? This looks terrible. But it's in reality, it's not this bad. Let's talk about the business itself for a minute. I mean, the unit economics of this, you know, I'm fairly familiar with. I think it's a really tricky business model, both in where you sit in the value chain if you're operating this service. the customer for you at the end of the day is the person who owns the rents the building and they have a container sitting outside. The problem is that that customer doesn't own the container. There's, you know, a big red box or ARDS container service or whatever, you know, PASCON, all these different providers that own construction roll-off containers. And by the way, these only work for, you know, 15, 20, 30-yard dumpsters.

They don't work for like the upright dumpsters that are just behind a small. office building. It's construction dumpsters that really make this worthwhile. But the container company, you're going to be at odds with them because you're eating into their margin. They get a fat profit when the container is only partially full because when they take it to the dump, they pay by weight. So if you have a bunch of air in your container, it's good for them because they're paying less at the dump and also they get to bring you back a new container. And that might be $350, $450 each time you do a swap and replace. So you're at odds with that person.

They're not going to like that you're eating into their margin. And also, you're banging this big metal drum with spikes on it around in their containers. They've going to have more wear and tear on their most expensive asset that they are trying to protect. And then the other side of the equation is the customer. That brings up something else I saw in the actual disclosures. And so this is, it turns out there's a lot of spammers. putting out stuff on Google where they just cut and paste out of the franchise disclosure document, but I pulled this up.

Republic Services, which is, I think they're the biggest, right? Yes, they're a huge container hauler. Yeah, so they're Wayne Hizenga rolled up all the trash haulers a bazillion years ago, and Republic services came out of that if I have my, if I have my math right on which one that is. But Republic is running around doing this, and basically, like, they have sued multiple times the smash by trash franchisor claiming that their business inherently damages the dumpsters.

So it's this kind of thing where you're dealing with this franchise where you have this huge headwind where this other business wants you not to exist. And they're very powerful. They pay a lot of money for lobbyists and they have a great market position.

They're publicly traded. They will just beat that crap out of you as a startup. So there is a chance that you are getting litigated to death as part of this whole thing, which I believe I saw on the franchisized disclosure document. There's like a legal fee you have to pay into their defense fund. So there is a reason that that exists.

It's because of this stuff. And then here, according to the filing, I'll read from it. Republic said, smash my trash is creating distrust between Republic and its business customers by falsely stating that they have the right to smash their trash, while also suggesting they are trapped by a one-sided contract with their race removal company. and being ripped off by endless fees and overage charges. Like, whoa, they do not want you to live. Hey, Michael here.

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I know many of you have and see if he can help you make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast, it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Not the kind of thing you want to step in between, right?

Yeah. You don't want to be in those crosshairs. But I think that's the second thing. It's like if I'm Republic, I'm going to try to bleed you to death on suing you. I will probably figure out a way to change the design of my dumpsters to where you can't do your service. And then if then none of that works, I'm going to become a smasher of myself. I'm going to go, I'm going to get into this. Or they'll just start writing into their new contracts, right?

Like, where you sit in the value chain is so weak. They could start writing into their new contracts, no smashing loud, you know? That's super genius. Yeah, you're totally screwed here if they write that in. Now, are you going to sue back if you're smashed by trash? Like, but by the time you get to like this kind of figuring out, like, are you going to go do this? Like, wouldn't you rather just open a chick, you know, like a chicken wing franchise? It seems a lot easier than being involved in this mess.

Which, you know, I mean, thinking about this, and I've been thinking about also, we've talked about the service that's come out recently that goes and washes your trash bins, you know, like I think there's a lot of danger to being in a nice to have kind of like franchise like this. Like, you know, would I rather be selling somebody this or would I rather be in something that, like, you really need food and I'm going to sell you food? or you really need this and I'm going to be in the, you really must have this thing type business. And this is really a nice to have type situation that has me scared, right?

It's just relatively fragile. Yeah, if you think about that value chain, like almost the business's hierarchy of needs, like you have shelter, right? They have to pay their rent, power. They have to pay their utilities, right? Yeah. Security system, like things that they have to have and they're not going to go without.

All the way down at the end of this is, hey, I is the general manager of like a distributor or something, right, some generic business. Do I want to bear the risk and the cost of, you know, hey, $75, $100, something like that for you to come smash my trash so that I can maybe save what I think will ultimately amount to kind of a nominal amount of money on a monthly basis? Or, you know, do I just kind of maintain the status quo? There's a huge education component for the end user here that I think is an uphill battle and you have. have an uphill battle with the people who actually own the cans, just very, very tenuous. Yeah. You know, and I think also Republic could take this further.

Like, if I was them and this actually started to eat it in my business, I would keep suing smash, but I would also start suing Smash's customers. And the second Smash's customers see that they're getting sued, it's kind of like, I don't know if you're around for this, but when the recording industry association started suing Napster users, do you remember that? Were you around? They would sue these teenagers. They get like $12 million judgments for them downloading like the latest, you know,

song from Jay-Z. And it's like, okay, well, so a kid gets a $12 million judgment against them. You know, but I'll tell you what, when that started happening, I didn't use Napster anymore. They just had to set an example, even if they don't actually collect, right? Just have to set an example. Yeah, it's just not worth it. So very tenuous, very tenuous revenue stream here, I think,

is a thing we're worried about in terms of this. So you were moving on to a second point. So let's go back to that. Well, no, it was just the customer thing, but that brings up another interesting point. I had Chick-fil-A for lunch, which I do most days. And, you know, I'm always interested in the kind of insider versus outsider dynamics of a business transaction. And so if you talk to anybody who owns and operates a Chick-fil-A, if they do have decent, they get an opportunity to own a second.

And those don't like hit the market, so to speak, right? It's not like a new guy can enter a new territory. If they're going to open a new one here in Columbia, one of the existing operators gets first shot. And then it may make its way into kind of the public sphere. This is kind of another example of that to me. If these things were so good and if they were so lucrative and if everybody was, you know, making the money that they thought they were going to make, my guess is this thing doesn't ever see the light of day. and somebody who owns other territories nearby scoops this thing up and it doesn't hit the street. Yeah.

So do you think, so I pulled up in the franchise disclosure document what their 2021 numbers were, and I can read these out. They're on YouTube if anybody's interested in that. So for franchises that are established, so 16 months or more, as of the end of 2021, they had 28, 28 franchisees open. on average they were doing 566,000 in sales with a high of 2 million and a low of 165,000. So it looks like, if I'm reading this right, they have a percentage that met or exceeded the average. So what I'm seeing here is there are a handful of extremely profitable franchises,

and then there's a bunch of them that are just me. That's what it looks like to me. Because they have a high, they have one franchisee doing $2 million. and generating $800,000 a year in adjusted EBITA, where they have a bunch of other folks kind of barely getting by, doing $165, $250,000 in revenue and potentially losing money when all is said and done. You know, Michael, when you look at this, it's kind of interesting. So the header of this is the top one is franchisees open between 12 and 15 months as of 12, 3,

21, 21. The bottom is franchisees open 16 months or more as of the same period. The way I'm reading this, there were more that were open. It almost seems like the number of franchisees is declining. There's 21 that are 15 months old or less or younger than that. Well, only 12 to 15. Yeah. Yeah, 12 to 15.

I wonder if there's another. Well, they probably don't report. They probably don't report people's numbers for the first year. And then there's ones that are established, 16 months or more. There's 20. So that means they open 21 franchisees in a three-month period. That's basically, what that means. Wow, what an explosion. That to me makes sense with the pace that they're kind of

broadcasting and their kind of PR machine is saying, hey, look, these are hot. You need to get them while you can before they sell out. Yeah. It's very interesting. I mean, I think I would ask a round. Like, in the end, it may be that what this franchisor knows is that like many things, there's a handful of territories where you can make money and do really, really well. And most everywhere else is going to be okay or a loser. It is interesting. I don't know if we've talked about this before, but I had a friend who was very in deep and worked at a franchisor, and it was a restaurant franchisor.

And they did an analysis once and discovered that 90% of their profits came from 20% of the locations. They were actually running a lot of locations that after all the costs were figured out were not profitable, but the handful that they had identified that were doing really well were driving all their margins. And it sounds like that's what's going on here. I mean, you have, for the established franchises, you have one that's over $2 million, and then you have one that's doing $165 grand in sales for an established franchise.

And I think that just comes down to just like anything else. It's location, location, location. Well, and you know, like anything, there's good operators here and there's probably bad operators. Route density is going to play a big role in this because you have the fixed cost of the truck, you have the fixed cost of the driver. You actually don't, one of the weird things about this business is it doesn't require a Class A CDL. I'm pretty sure if I remember right. So, you know, the guy you're looking for is maybe slightly easier to find without having to have that. But you have like maybe a dispatcher, a salesperson, and a driver.

It's kind of low overhead. But if you can get that route density very tight, then you know, you're spreading your fixed cost over a nice kind of slug of revenue each day or each week. Yeah. One thing they did talk about in the listing, which I haven't seen here, was that corporate is actually seems like they have some sales that they're doing and signing national contracts with folks to then have franchisees take care of it. So I would be curious because that creates a challenge, right? Are you forced as a franchisee to take those routes? What if they sign a contract that's unprofitable for you? How does that get allocated and split?

Because it's the fundamental problem with franchises, especially when they take a royalty off the top, is they are not incentivized as a franchisor to actually care if you're profitable or not. They are just incentivized for you to maximize the amount of revenue because they're taking a cut of that. So if a franchisor wants you to do $2 million dollars and make 100 grand or do a million dollars and make 200 grand, they choose the two million

because that's better for them, which ultimately creates kind of part of the tension for franchises. And like, there's a lot of complexity to this one. I don't know. Why do I keep talking to myself out of this one, Mills? This looks terrible. For good reason. Yeah. So, yeah.

Well, good news is, you know, I always say you need to go look at like 100 or 200 deals before you pull the trigger on. I guess this is one of those. Yeah, yeah, I agree. I agree. I've never liked this, but, you know, kudos to the people who are making it work. Yeah, super cool. All right. Well, cool.

On that note, you know, check YouTube for this stuff. Go to cloudbookkeeping.com. Check them out. Please shop with them. They have been a huge supporter of ours, and they're amazing. And we do have an ask today, which is we're trying to get more reviews. So if you've listened to this far, please open up whatever podcast app you're on and try to leave us a review. All right.

Well, cool. Well, we'll finish it up here and see you guys at the next one.