Acquisitions Anonymous - #1 for business buying, selling and operating - KidStrong Franchise Deal: Smart Buy or Overpriced Risk?

Starting point is 00:00:00 Hey, everybody, welcome back to another episode of Acquisitions Anonymous. I'm Connor Gross, and Heather was with me on this episode, and we broke down a deal that was a multi-unit kid-strong franchise. It's a franchise in the youth enrichment space. They do things like kids fitness and character building and things like that. Several different units, and so we talked about the pros and cons of the industry in general. We talked about how this one's actually split between two different metro areas. So some of the challenges that can come with a business like that, as well as the multiple at which they're asking. which we broke down. So be sure to give this one a listen. We're excited to break this down with you, and we'll see on the other side. We'll set acquisitions anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% years anymore. And thumbs downing on just the plus inventory line. So many founders and operators still use their personal number to talk to customers. And sure, that works when you're just starting out, but eventually it starts costing you time and money.

Starting point is 00:00:57 That's where Open Phone comes in. It's a modern business phone system that lives in an app. You get one number and your whole team can use it like a shared inbox for calls, text, voicemails, all in one place. Somebody reaches out to you, your ops lead can reply. Your co-founder can follow up. You don't have to be the bottleneck anymore. And if you miss a call, Open Phone's AI agent picks it up, answers questions, and even logs new leads for you. It's one of those tools that makes you wonder why you didn't switch over sooner.

Starting point is 00:01:28 60,000 businesses already have. Open Phone is offering our listeners 20% off your first six months at openphone.com slash a-A-A-P-O-D. That's O-P-E-N-P-H-O-N-E dot com slash A-A-P-O-D. And if you have existing numbers with another service, Open Phone will port them over at no extra charge. Open Phone. No miscar.

Starting point is 00:01:58 calls no missed customers. Connor's back. How are you doing, Connor? Connor is back. I'm good. How are you? Must mean we're going to talk about franchises again. That's obviously what we're going to talk about.

Starting point is 00:02:11 And yeah, I've got a good one today. This one that is interesting, but have a turnkey multi-unit kid-strong franchise opportunity in Texas. We'd love to dive into that. So where's Michael? He's not here. So we'll have to talk about Texas. We're a Michael, yeah. Like I said, turnkey, multi-unit Kid Strong franchise opportunity in Texas.

Starting point is 00:02:35 Asking price is $5.1 million. They share about 4.8 of gross revenue and then just over a million of EBITDA. So, description, own a thriving portfolio of seven fully operational Kid Strong centers across the Austin and Houston metro areas. This business is backed by a proven brand, strong leadership teams, and scalable systems for recruiting. training and sales. With high member retention, recurring revenue, and immediate growth potential through expanded marketing and staffing investment, this is a rare opportunity to step into a well-structured, mission-driven business, ideal for an investor, operator, or multi-unit franchisee looking to expand in the booming children's fitness market. Financing available with conventional loan at fixed rate

Starting point is 00:03:20 with 20% down. So, yeah, we'll come back to that, but they disclose about 500K of FF&E. Yeah, that is pretty much it. So what do you think their intention was in mentioning that financing available with conventional loan at 20% down? Well, let's come back to that because before we go there, I would like to. We can come back to that. I want to just have you describe, for those of us who don't know, what is a kid's strong franchise? What did they do? Yeah.

Starting point is 00:03:51 So my understanding, I'm not as familiar with this one as I am with a lot. But my understanding is it is a youth enrichment franchise. It is brick and mortar, so they have these locations. And they have a curriculum that is built around both like, it is a gem. So like they have a curriculum built around like fitness. And then they also have more character-oriented lessons that they teach kids. And so the point is it's a membership base. I don't know the frequency that people usually bring their kids,

Starting point is 00:04:23 but it's a monthly membership where people bring their kids on an ongoing basis for both physical activity and character enrichment. I didn't know about the character. I would just assume it was all exercise. I didn't know about the other side of it, so that's kind of interesting. And it looks like a pretty big space here. Did they say how many square feet this is? They did not, but I bet we can.

Starting point is 00:04:44 A small gym in an industrial building is what it looks like to me. So fairly good-sized facility with mats and some kind of equipment. I don't think it's, I guess, Maybe there's some weights back there, maybe some balls and different apparatus that they might play games or do something around. So it looks colorful. It looks like a lot of fun. But that's, so it's some kind of membership, recurring membership revenue type system. The parents are signing the kids up for and bringing them in for all of this fun stuff.

Starting point is 00:05:18 Yeah, let's go to this financing point that they made. It's a million dollars. Well, they actually said a million dollars of SDE and the exact same amount of EBITDA. So which one is it? It's SDE should not be the same thing, Heather? No, they're not the same thing. And I'm just going to assume that it's probably a million dollars of SDE, which, you know, means we have to subtract out the owner's salary to come up with what really EBITDA would be.

Starting point is 00:05:48 But maybe in Texas, that's only $100,000. You can live, you know, fairly inexpensive. It is Austin, however. so maybe it needs to be more than 100,000 there. Yeah. So maybe you have, you know, $900,000, $850,000 of EBITDA to work with here, which is great. I think that sounds really good. Sounds like a nice margin as well.

Starting point is 00:06:09 So you could, you could, when you're paying $5.1 million, absolutely, that fits in SBA. So there's a reason they want you to not use SBA. I don't know what it is. It could be as simple as the broker had a bad experience, and they decided that that bad experience was because it's SBA. It could be that they know this franchise concept is not eligible, which, by the way, if you're ever looking at franchises to buy, you've got to go to the SBA franchise registry.

Starting point is 00:06:40 It's back. They took it away for a couple years. They brought it back as of June 1st, and you've got to look it up, and you've got to look up this concept and see if it's on there. So it could just be as simple as it's not approved by SBA. And by the way, the reason SBA doesn't approve some concepts is because the concept doesn't give the owner enough discretion.

Starting point is 00:07:02 They feel like they're not really running their own business. They're being controlled too much by the franchise. Or if the SBA sees those kinds of conditions, they won't add it to the franchise registry, and it's not eligible. So could be that it's just not eligible. Could be the broker doesn't like it. could be like the darker side that they know SBA loans are underwritten to tax returns and maybe the tax returns aren't pretty. And when I say not pretty, I mean not, you know, maybe reporting

Starting point is 00:07:31 higher expenses or not all the income or something like that. But it's curious because this is not, this doesn't have to go non-SBA because it's too large. It's perfectly fine to go SBA based on the size. Yeah. The other thing I wonder is, you know, because I, I know a couple of kids-strong franchisees, and they do not work in the business full-time. One owns other businesses, the other one has a job. And that's something that they call out here, like ideal for an investor, which I have my own thoughts about, but setting those aside, is that something that would mitigate somebody's ability to get an SBA loan if they're not going to run the business full-time?

Starting point is 00:08:10 Yeah, I mean, if you're if that's the reason, but they could have said that. If you're an investor, you don't get an SBA loan, you get a conventional loan. But yes, that's correct. If you wanted to buy this and run it passively slash as an investor and not quit your job and not be there full-time, an SBA lender would not go for that. And incidentally, that's not in the SBA rule book. It's really just that every bank sees it that way, that they just, they want to make sure when you buy a business. Pattern recognition. Yeah, that you get in there and you're quitting your job. You're not distracted with anything else. You're looking at this every day, full-time, you know, for the foreseeable future.

Starting point is 00:08:50 So maybe that's the reason. They said go for non-SBA debt. But I will tell you my two cents on going for conventional debt for something like this. There aren't really very many programs out there. I have heard of one for franchises, though, recently. That is non-SBA. It's kind of SBA look-alike. It's called Apple Pie Capital.

Starting point is 00:09:10 I'm giving them free press. I think that if you are buying a franchise and you are personally, strongly strong enough, you can get something that looks very much like an SBA loan but doesn't have all the same conditions. So maybe they're trying to steer towards that. Yeah, they, I think Apple Pie started that program, or part of the reason they did was mainly oriented around salon suites, because that's an example of a lane that SBA will not lend into, as we've talked about before. And so they kind of created this program that's somewhat of a look-alike program. be I am familiar with them and they become highly recommended overall. So, I mean, as far as the business is concerned, I like the industry. If Michael were here, he would tell us we shouldn't get into this because people aren't having kids. I am not, he literally said that in a webinar. We did a couple weeks ago that he's concerned about the youth enrichment industry.

Starting point is 00:10:04 I wish you were here to talk about that because I, I'm not at the point where I'm like going to, where I'm like shaping investment decisions around the impact of declining birth rates. I'm curious. Do you think I'm overlooking that, or is that an actual concern? I think it depends on where you are. I mean, I think that, yes, broadly, the declining birth rates is something to think about a lot of different industries and different products and things like that. But I think when you're running a child-oriented businesses, I think it depends on where you are

Starting point is 00:10:33 and how many competitors you, like what's the density per child of this kind of service in that space? And even if the curves, you know, goes a little bit lower, there are fewer children over the next 10 years of that age range. You know, a business of this size, you probably should be okay if you're in the right place without too many competitors. But broadly, if I was the franchisor, maybe that's a different thought process. You know, how aggressively do you expand when the number of kids is shrinking? Yeah, I agree. And yeah, but as far as like the service is concerned, I really like it. And this is kind of the, like, this is the lane in the youth space that I, that I really like, which is something where it's not like it's daycare where you're, you know, keeping kids for all day long and, you know, time for all different things to happen. It's like it's quick. It leaves an impact on the child. It's, yeah, it has to be somewhat sticky in that regard. And I would want to hear it, because they mentioned high member retention.

Starting point is 00:11:39 I would want to dig into that a little bit or a lot, rather, and understand that. But provided that that shakes out, I like the overall modality. Yeah. Now, they do have $4 million of expenses. So I think that probably a good chunk of that is rent and the facility itself. And staff, of course, because they've probably got to have a ratio of staff to student or to kids. but there's probably some marketing expense in here too. That it's, you know, you've got to have the,

Starting point is 00:12:12 you've got to have the brand out there. You know, the franchisor is probably, you know, making them, you know, pay in for that. But, you know, it is $4 million of expenses. And so it's not, I think there's probably a break-even. I'd want to know, like, how many kids do I have to have enrolled to be at break-even? How far above that am I, has, you know,

Starting point is 00:12:33 how long did it take this business to get to break-even? be curious about all those things. Yeah, I completely agree. Hey, everyone, it's Bill, and I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad, and it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So CapitalPad is a marketplace for acquisition entrepreneurs that is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals. So if you want to back somebody buying a small business, CapitalPad is a place to do it.

Starting point is 00:13:16 And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing, too, from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They hand standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses, and the returns can be really, really good. I'm so stoked that they exist. It's founded by my friend Travis, who is a phenomenal entrepreneur in his own right.

Starting point is 00:13:51 So if this sounds like something that is appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out Capitalpad.com. and tell them that acquisitions anonymous sent you. So I just looked at, so Kid Strong's Item 19, which is the part of the FDD, where they show the financial performance. I love when franchisors do this when they disclose the top quartile, right? Like this is the average for the top quartile. So their average revenue for the top quartile is just over a million dollars. It's a million, yeah, a million 19,000 dollars.

Starting point is 00:14:29 So obviously we don't, oh, no, it shows, okay. average gross revenue, yes. And it does show average overall, average gross sales. I missed it initially, but average gross sales overall is about 720,000. So they have seven locations, 4.7-ish in gross revenue. So what is that? That's about on par with average, right? Yeah, yeah, but now you're running seven locations. And I guess this is one of those franchise concepts where you don't really get the economies of scale because you still have to have the same number of people staffing each of those locations.

Starting point is 00:15:09 You know, maybe I'm thinking about that wrong, but I feel like that you may not get that here. I think the economies of scale come over and above the location, over at the four walls, meaning like you can hire, you know, one director of operations that can manage all the managers. And, you know, you can probably afford to pay them, you know, a reasonable salary for,

Starting point is 00:15:31 a director here when you wouldn't be able to, you know, if you pay somebody 150K to run this business, it's going to be fine, but not if you have one or two. It would just kill you. Okay, gotcha. So you can afford the of management because you are running seven locations, but does it really get you a benefit margin to have seven locations in something like this? Probably not, I don't think. So, and yeah, I always tell people if you're, if that's your goal is to scale, is to, yeah, you'd want to understand what the capacity is for one area manager, like how many units does an area manager typically manage? And if you're really trying to optimize things, it's like you want to have goals that are in increments of that number. So that, so the point here

Starting point is 00:16:17 is, is it possible for one area manager to manage seven units? And if not, how do you, how do you structure that? Yeah. And if you've got to keep growing, now you need to afford two managers and you've got to grow even faster to afford that. So yeah, I think someone worked really hard to get to this level, to get to seven locations. Yes. And this is the kind of franchise where it's not to say it's, it's certainly not easy to run. But I do think that a lot of the hassle in something like this is on the front of the buildout. Like, you know, site selection, going through the process of building it out and stuff. And so it's, yeah, we can talk about the multiple, but they have done a lot of the hard work that the buyer would avoid. So on the multiple, it seems high to me, but at the same

Starting point is 00:17:10 time, it's going to depend on, to your point, Heather, that SDE, EBITDA ratio, what that ends up being. But if that truly were EBIT seems high, but like a notch too high, not like egregious. Would you agree with that? Yeah, I mean, a five, yeah, to me a five, you know, a franchise system feels way too high, but a four wouldn't. And maybe if this has got some great characteristics, maybe over a four wouldn't. So yeah, somewhere between a four and a five is probably okay, especially when you're really getting a million dollars of STE. And if that's, you know, you feel like that can be pretty consistent. I feel like that is a fair, that is a fair price. So maybe they're just going to go for just a touch under what they're asking, which is nice to see.

Starting point is 00:17:55 is priced fairly. Let's see who's the broker here. Boutique. Kristen Abel? Fitness broker. So interesting, it's one of those brokers that this is on a particular industry, which is a fitness, not necessarily child enrichment, but I think this probably fits her category pretty well. And, you know, perhaps she knows how to price the deals

Starting point is 00:18:16 and bring them to market, you know, at a reasonable valuation. So I think that's kind of, that's always good to see. And maybe you can own this somewhat passively. You know, if they've got that area manager, maybe there's not a whole lot of work. And maybe that's why they said STE is the same as EBITDAQ is the same as EBITDAQ as you're not going to take a salary. I don't know. But, yeah, I think that it's a good sign that the multiple doesn't feel too high or extreme. I'm interested or I would be interested to know.

Starting point is 00:18:44 So they're across Austin and Houston, which what is? It's three hours apart maybe, something like that. Yeah. They're not close. So I wonder, I'm curious how they got to that point. I feel very confident that there are more than seven Kid Strong locations in Austin and more than seven in Houston. So I'm just curious how they ended up splitting that, which is definitely inconvenient, but maybe a reasonable answer to that. Yeah, good point. Good point. Why does one person own seven, but they're sprinkled in these two places that aren't really next to each other?

Starting point is 00:19:19 So that would be interesting to know, and that does create a little more hassle factor for an owner, because once and while you're going to have to get in your car and drive a spur of the moment between those two places because something needs to be handled. So that's a little less appealing. And also I would mark some off the multiple for that as well. I agree. And I think that the other thing that would be, one of the other things that would be interesting to figure out is once you look at the P&Ls by units, or even if it's just the revenue by units and figuring out if they have any dogs, like any, they may have one or two units that are completely sucking wind. And in some cases, that can actually be attractive because if you have a line of sight

Starting point is 00:20:04 on turning that around and filling that hole, that can be a shorter path to growing your aggregate, Ibadah. But that can also be a huge liability, because if there isn't a line of sight on turning that around, then you've just got this hole there that you have to continue to feed for this foreseeable future, which isn't fun. So, but we don't know that. Well, I think I like it at a lower price. Like personally me, I would, I would not pay more than a four.

Starting point is 00:20:38 But that's just because, you know, if I'm going to be in this business where I have to drive between three hours apart, you know, and I've got to manage, you know, seven separate locations and all that goes with that, you know, I've got to make more money than I would be at a five, so I'd be at more like a four. But I otherwise like it. It feels like a good space to be in. It feels like something also you can be proud of and feel good about what you're doing for your community. And I think there would probably be a really nice, just kind of bonus for anyone to be owning a business like this, especially if you have kids, even if they're grown up, it makes you feel good that you're doing something positive for the world and your community and kids.

Starting point is 00:21:18 I think that's really nice. I can completely agree with everything. I think that, yeah, this would make sense for somebody who is local, who obviously has the capital, but has kids, is just immersed in the circle where, you know, owning this business is going to be, is going to fit neatly into their life. And, yeah, I don't love being split across two different metro areas. I do think that it's priced too high. but if, yeah, if the geographic dispersion was reflected in the multiple, this is something that, yeah, I would be interested in. Yeah, I like it.

Starting point is 00:21:56 Well, you brought some good ones today, Connor. Thank you for doing that. That's a refreshing, yeah, it's refreshing for me to bring deals that people actually like. So thank you for, thanks for being agreeable, Heather, as always. Absolutely. All right. Well, it's great seeing you again and hope to see you soon, Connor. You too.

Acquisitions Anonymous - #1 for business buying, selling and operating - KidStrong Franchise Deal: Smart Buy or Overpriced Risk?

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.