David Barnett | Franchise Warnings — The Best Advice For Those Looking To Make The Jump To Entrepreneurship

On this week’s episode of Franchise Freedom, we speak with special guest, David Barnett. David is the author of seven books on small business transactions and local investing, hosts a YouTube channel with hundreds of videos on buying, selling, financing, and managing SMEs, and has been working with small businesses for over 20 years. David is multi-faceted, and has gained experience in franchising, brokering, and funding before ultimately moving into small business consulting full-time.

“I ended up starting this sort of side hustle, not as a business broker, but as a consultant, someone who would work on deals and help to guide and coach people through them. Eventually, I left my job at the bank with a package, and I started my full time consulting career, which is what I do today, helping people buy and sell businesses as a consultant, not a broker,” says David.

We chat about David’s career journey, as well as:

  • His formative entrepreneurial moments
  • His book, Franchise Warnings
  • His advice for those looking to make the jump to entrepreneurship
  • Shifting entrepreneurial interests post-pandemic
  • And more

Listen now…

Mentioned in this episode:

Transcript

Giuseppe Grammatico: Welcome to the Franchise Freedom Podcast. I’m your host, Giuseppe Grammatico, your franchise guide, and today we have a very special guest. Today we are speaking with David Barnett. David has been working with small businesses for over 20 years. He’s helped them grow. He’s helped entrepreneurs buy and sell them. He’s helped people finance them as well.

David is the author of seven books about small business transactions and local investing. He’s the host of a YouTube channel with hundreds of videos about buying, selling, financing and managing SMEs and can be found anytime at his blog site. www.davidcbarnett.com. And we’ll include that in the show notes. David, welcome to the Franchise Freedom Podcast.

David Barnett: Giuseppe, thanks for having me on, man. I love to come and visit on podcasts.

Giuseppe: Yes. This is great. And we had some time to chat right before the call today, and I’m excited to get started here. Yeah, for everyone listening, if you can, I always like to start if you can fill us a little bit in on your background. How did you get into this business? And what’s that journey look like?

David’s Entrepreneurial Journey

David: Yeah, sure. You know, I’ve always been interested in business ever since I was a child. And growing up in Canada, I got into, of course, you know, one of the fundamental businesses of teenage boys here, which is shoveling snow, of course off of people’s driveways and cutting grass. And by the time I was 14, I was in sales. I used to ride one of those three-wheeled ice cream carts. You know, I was selling the popsicles and things to people. And so business was an interest of mine.

And when I went to university, I decided I would go to business school, thinking that they would turn me into a business person. And it took me about three years to realize, though, that what they were trying to do is turn me into what I now call a fortune 500 bureaucrat. You know, someone who’s going to be in the middle management of a big enterprise. And that was never really where my heart was. I was always interested in small and medium-sized businesses, the kind of see when you drive around any city. You know, businesses really serve people and a lot of them are operated by owner-operators.

And that was my interest. And so I was truly fortunate when I finished university that, and this was back in the mid-90s, I was able to get a role as a sales rep for the Yellow Pages. And so I got to go out and meet with the owners and managers of the exact kinds of businesses I was interested in. And that was a really awesome opportunity for me, Giuseppe, because I was able to talk with these people, find out how their business models worked, and most importantly, find out what kind of people they wanted to reach out to them, either coming through the front door or calling them on the phone.

And so I did that for seven years always realizing in the back of my head that the Yellow Pages days were numbered. Back in those days, if you typed plumber into Google, you’d get a plumber in California, no matter where in the world you were. And I knew that they would eventually figure that out, which of course they have today. So I eventually left and I started a business.

I actually, I tried to buy a franchise with a partner. And the franchisor told us that our market was too small. So we weren’t able to buy the franchise. What we did, we got creative, we just tried to copy them as much as we could. And we started our own independent business, kind of doing the same thing that they were doing. And after a couple years, my partner and I realized our interests really were elsewhere. And we sold it. And that was the first time I was involved in the sale of a business. So I sold, we sold the business, and then I got into finance brokerage.

And so I started up a company where I was brokering commercial debt, factoring facilities, operating in capital leases for small business owners that were trying to grow their business. And in that time, I started meeting people that were trying to buy businesses that were already running. And, you know, what I saw just really shocked and surprised me because I saw a lot of people entering into these deals that were being brokered or managed by people who obviously didn’t know what they were doing.

And so I saw a lot of awful things. I saw people lose deposits. I saw businesses that were sold without any concern to operating capital requirements where the buyers got into trouble right away as soon as they took possession. And the financial crisis of 08 hit, and about half the businesses I was using as a source of capital went under for my debt brokerage business. And I realized that I had to make a pivot. And so I decided to pivot into business brokerage because I knew I could do a better job serving those people.

And I signed up with, and here’s where I cross paths with a franchise again, I signed up with Sunbelt Business Brokers, which was based out of South Carolina at the time. And I joined with them because they gave me access to training. At the time, they had about 300 offices around the world. And I was able to use their training as well as, you know, through membership in the IBBA. And I eventually became certified as someone to help people buy and sell businesses. And I operated as a business broker for a few years. I sold 35 companies in about three years.

And it was very exciting and it was very interesting because it’s all about solving big problems and helping two parties come to a common ground and figuring out how you’re going to make it palatable to all the other parties, the bankers, the lawyers, the, you know, accountants, etc. And I know you probably know some business brokers, Giuseppe. What is really awful about being a business broker is that the cash flow is often a crazy roller coaster because you can work on a file for many months before you make a deal happen and then it’s only when the deal happens that the broker gets paid. And so while I sold a lot of companies over a three year period.

I also went through several periods of no deals closing, where I would go for months and months, having all of my personal expenses and overheads with no commission checks coming in. And so, at the end of 2011, I decided to get out of that. And I got into banking and regular paycheck. Everything seemed great but my phone just didn’t stop ringing. And they were people who I’d either dealt with before or people who had been given my name as someone who could help them do a deal. And, you know, just like in, what was it, Scarface, they keep pulling me in, you know, the famous line there.

I ended up starting this sort of side hustle, not as a business broker, nut as a consultant, someone who would work on these deals and helped guide and coach people through them. And eventually, the bank wanted to do some reorganization and I left with a package and I started my full time consulting career, which is what I do today helping people buy and sell businesses as a consultant, not a broker. And then in the meantime, I also came and wrote some of those books that you mentioned earlier.

Giuseppe: So you were, so as a consultant, is it fair to say you work with the, directly with the buyer and seller and the broker? Is that, you know, how does that work?

David: Most of the time, I work with the buyer or the seller, and usually, my client does not want the other parties to know that they’re working with me. Most likely, because if one of those other parties googled my name, they would, you know, find out my background and experience. So buyers will help, will come for my help looking to evaluate the information that the broker or the sellers giving them.

Sellers will sometimes contact me if they want to try to sell their business on their own without a broker, or to second, you know, get a second opinion on what the brokers put together for them and say, look, this is what the broker has put together and this is what he thinks it’s worth. I’d like a second opinion. And so some of that work as well.

Giuseppe: That’s interesting. So it sounds like you’ve been, you’ve kind of covered all angles. Broker, you’ve looked at franchises, you know, work on the funding side now on the consultant side. And it’s funny how you mentioned that going to school, yes, it seems like they prepare you for middle management. I know when I went to school, they had an entrepreneur class and the first question I asked the professor was, have you ever owned a business and he came back and said no.

And I just kind of shrugged my shoulders and actually I dropped the class immediately because I just found it difficult how a non-entrepreneur could teach a class on entrepreneurship. It’s not something that could be taught from a textbook. There’s a lot of moving parts and unfortunately, even graduating with an MBA from graduate school, I probably learned 99 percent of it right on the, owning my first company.

So it’s unfortunate and I wish there was a better learning process and I feel this type of show is a great way to educate maybe someone listening is in college thinking about becoming a business owner or just someone that’s always thought about it. So this is some really good input. Definitely, you know, it definitely gives people options. So I appreciate that.

A Formative Entrepreneurial Moment

David: You know, Giuseppe, I always say that one of the most formative entrepreneurial moments I’ve ever had is when I was laying in bed the night before payroll was due in my brokerage office and there wasn’t enough money to pay my assistant. And then I realized I could probably pay her by taking a cash advance on my personal credit card.

And when I tell that story to people who’ve been in business, I get a lot of nods. You know, people often have that moment of crisis, when all kinds of things are going wrong and they’re forced to do something that probably every single business school professor would tell you not to do in order to try to live and fight another day.

Giuseppe: That’s exactly it. And the world has changed. I, you know, we put some of our franchise candidates, you know, we send them over to a funding company just to do an analysis of their options. And believe it or not, one of the biggest funding options, or popular options is utilizing retirement assets. And when I came from the investment world, we said once the money’s in retirement, never touch it. But looking back at those years, yes, you know, that money is put aside for you.

But, you know, you’re stuck in mutual funds that depending on the type of 401k, if you’re an employee, you’re stuck in funds or bonds, you know, equities and things like that. Now it’s like, alright, there’s a way to maybe not liquidate all of it but a portion of it and invest in myself. Invest in a business where I have much more control over my investment options in return. So I know my thought process has changed and people to this day say, is that even legal? Are there fines and fees for that? And I said no, as long as you follow the rules, there are companies that facilitate that process.

So, and to your point, yes, entrepreneurship for everyone listening, whether it’s a franchise non-franchise, being a business owner, there’s that risk and I’ve had those similar thoughts of meeting payroll. Maybe it was my first year or, you know, when I purchased my second franchise, there’s a lot of expense. So you need to make sure you’re capitalizing and have that funding and always have a backup. I think if anyone’s listening, always have a backup plan just in case the original loan may not come through. So

David: And the other thing too, is not to invest your last nickel because as you know, we don’t exactly know what’s going to happen when you get into business. There’s no way to know for sure. And especially if somebody were to open a new business or a new franchise location, right now, in any given market, let’s say you’re going to open a new breakfast restaurant, right now in that city, everybody. having breakfast already.

And so even though you come to town with a franchise brand that may be recognized, you still have to go through a period of convincing people that whatever it is they’re doing now they should stop and come to your restaurant. And so there’s that normalization period when you build up your clientele and you need to have the resources to get you across that gulf until you get to the point where you’re breaking even and actually making money.

Giuseppe: Yes, absolutely. And that is, you know, being in the franchise world and I could speak specifically in the franchising world, that’s something when they talk about the item seven your total investment, they are factoring all those expenses in. So they’ll say, you know, six months living expense, factor that in. Franchise fee, you know, if it’s a retail location, build-out leases, things like that. So it’s a very important point. You know, if you have 50,000 in the bank and that’s your franchise fee, that’s not going to cut it. You need to have additional funds. There are going to be some things unexpected expense as I know, you probably have experienced.

I know I have myself, not realizing and not maybe calculating it. Depending where you are in the country leases are going to be more expensive in certain areas like New York City versus somewhere in the Midwest. So, yes, definitely have to factor all that in. And, you know, with that being said, and, you know, we were talking before the show, you had wrote a book back in 2015 called Franchise Warnings, and people are probably thinking, Well, why, you know, why would I even bring that up on the show.

But, you know, we were talking about it prior to the show, and it’s a very good point. And you can talk obviously a lot more on the book than I could. But you know, not all franchises are built the same. You know, freight franchising is not, I don’t call it necessarily an industry, it’s a proven business model, but they are by far not all built the same with 4000 options just in the US alone. So can you talk a little bit more about Franchise Warnings, maybe some things to be aware of?

Things to be Aware of Before Delving Into a Franchise

David: Yeah, no. And, you know, in 2015, when I wrote that book, I was already out of my business brokerage. I had started doing the consulting on the side. And what really instigated me writing that book is a good friend of mine who eventually wrote the foreword. He got into a conflict with his franchise, or he was the owner of some franchise restaurants and he signed an opportunity to open a coffee shop. And spoke with the franchisor about it, and was told by a vice president, yeah, no, that’s, you know, it’s not a competing business, you know, go ahead, you can do that. You won’t be in violation of the agreement.

And then that executive changed. And then the new person that took their role had a different opinion. And so he ended up, you know, going through a whole bunch of hassle, he ended up losing money through the whole debacle. But it just started to bring to mind some of the things that I had encountered as a business broker because I was, of course, helping people resell existing franchises, and I also brokered the sale of a couple of new franchises too, Giuseppe.

So I was able to make those connections between people and franchisors and I saw a couple of things that didn’t leave very good taste in my mouth over the years. And when I went and looked on Amazon, you know, I looked at books on franchising, I found dozens upon dozens of books about how to choose the right franchise and all this kind of thing. But hardly any talking about some of the dangers of the franchise business model.

And so I thought maybe I should be taking some of these stories and examples and put them together. And that’s what gave me the idea of writing Franchise Warnings. And Franchise Warnings is not a book that tells you not to buy a franchise. It’s a book that talks to you about some of the things I’ve seen so that people are examining these opportunities can make a little more of an informed decision. And to your point about not all franchises being the same, you know, I can highlight a couple of stories from the book, but one, in particular, was for a commercial landscape franchise.

And the buyer actually asked them in a meeting that their head office, you know, can I see the operations manual. And they showed him a binder, but they said that it was full of trade secrets and he couldn’t really look into it until after he became a franchisee. It was only later he realized that they had well overpromised the systematization that they talked about in their pricing model and their quoting model and all this kind of thing, and he ended up building his own using tools provided by other franchisees that they had developed on their own.

And so his experience was really awful, but he wouldn’t have had that happen if, during his due diligence, he had gone and talked to some of those other franchisees, which is one of the things that I mention in the book. And not just to call those people up, but to actually get in your car and go visit them. You know, when somebody meets us stranger over the phone, even though you want to be helpful, you don’t really have that same level of connection as you do if you meet someone face to face.

And what I’ve discovered over the years is that if someone, you know, is a current franchisee and they’re not having a good time, or they’re having difficulty in the relationship with the franchisor, it’s often something they don’t want to put in writing, or even talk about on the phone. But if you meet with them in person, they’ll be much more willing to be open and transparent about their experience, which can lead to some really vital information in your decision-making process.

Giuseppe: Yes, you nailed it. You nailed it right there. I just recently wrote a book called Franchise Freedom, same as the podcast, and I talked about that as well. First off, I tell people, you know, business ownership, you have to decide between a franchise or non-franchise and that’s a whole nother conversation. But to your point, read that franchise disclosure document. You need to have everything in writing.

If there’s a lot of promises and not written down, I’d be a little bit wary. But the other thing is validation. And one thing I’ve learned personally the hard way is the key to validation is jotting down your questions before being respectful of their time. But don’t just, if you’re in, you know, I’m in the New Jersey market and the mistake I made was I called for this one particular franchise, people in my local market. And it was negative, negative negative. Yet, years later, the company, you know, they’re doing really well, franchisees are happy.

And what the mistake I made and I wish someone had informed me of this was the territory I was looking at was wide open so the surrounding franchisees were dipping into that territory. So by me coming on board, I was essentially taking away a piece of that open territory. I did not realize this and no one had prepared me for it. And, you know, the company’s still around today. I know, I don’t know the franchisees personally, but through other acquaintances, they’re doing it extremely well. So, as part of validation, you need to call. And to your point, specifically, if it’s retail, visit with the owner, we have concepts where they go home to home, travel with them.

And yes, when you have that face to face, people are wary about putting things in writing or complaining about a company, but just ask them. Is the investment level, is this accurate information? Did you go over or less? How much are you truly making? Would you do it all over again? I mean, it’s not, it really isn’t rocket science, but for the person looking to invest in their first business, you know, look at my younger self at 27, 28 years old, you know, whatever age I was at the time, I didn’t know what questions to ask. I’d work with a consultant, but, and he did a good job at a different company.

But I wish he prepared me with, you know, like, for example, validation. Speak with people and in California across the country. So really good advice and it’s very basic advice, but it’s something that’s, you know, it’s overlooked, just having a cup of coffee with a business owner. They don’t all mind it unless they’re getting a call every single day about it. But yeah, definitely going to your local business owner and hanging out for breakfast or lunch. Place an order, make up the time or, you know, whatever you have to do. So, great advice there.

Sometimes the Royalty Fees Can Save You Money in the Long Run

David: Well, some of the other things that come up the most frequently are that people will say, you know, if I’m going to be in this business, I have to pay a franchise royalty, for example. And won’t that give me a disadvantage over my independent competitors? And it’s an interesting question. One of the other topics that I talk about in the book is that you can have certainly a higher cost structure with the royalty fee, but if the brand brings more traffic and brings more sales, you can still end up earning more money.

However, what many people don’t appreciate is that often there are franchises that can actually bring a reduced cost structure. So I’ll give you the example when I had my business brokerage office open, nationally the Sunbelt Business Brokers were all buying as a group access to certain online business for sale portals. And the net cost to me for these things that came bundled in my franchise fee was lower than if I had gone out as an independent business broker and bought them myself. So the franchise arrangement actually saved on my overhead when I was doing the business brokerage.

Giuseppe: Right and that’s exactly it. You know, what am I getting from my franchise? You don’t want that, all that support up in the beginning, I opened up, we’re excited and I’ll pay whatever the royalty is, and then your two hits and you’re like, Alright, I got it figured out. What else am I getting? And those are some great questions. I always use the example a trend I’ve seen is, and this is over and beyond the royalty, it’s a percentage, but call centers.

Not having to have a big office and people manning the phones and having a corporate having, not outsourcing but actually building out their own call center to handle every call for every franchisee so you don’t need the extra build-out costs and the employees. And it’s saving them, you know, in some cases and, you know, 20, 30 50% versus having, you know, those additional costs in house and being available in many cases 24 seven, which is hard to do. So, yes.

In many cases, I’ve heard stories that you get your first year of support and it kind of dies off after you get the system. Others I’ve heard it’s worth every penny because they continually check-in, train if things are not going well. They come back, you know, what are they doing for COVID-19? Franchisors are stepping up, helping with leases, reducing royalties, you know, going the virtual model. So, you know, what’s, this is a perfect example. What have you done with the recent pandemic? That’s a pretty bold question.

But if you don’t like the answer to that question maybe it’s time to move on to the next franchise company. So absolutely, some very good points. You know, what advice, you’ve been around the block. You’ve kind of done it all. You know, what advice, what would be your top one, two pieces of advice for that corporate executive that either has thought about owning a business, they’re either, you know, about to be laid off, currently laid off or furloughed, looking to make the jump into entrepreneurship, what one or two pieces of advice would you give that person?

Don’t Buy the Company Because You Like the Shaver

David: Yeah, I think the first thing that I would have to say is don’t let yourself be drawn into any kind of business category because you like the product. I’ll give you an example. You know, my buddy who owned the breakfast restaurants, he was very successful in operating those breakfast restaurants. And eventually, he sold them. But while he was owning them in neighboring cities, people with exactly the same Franchise were going under, failing and having problems. A lot of those people got into it because they liked eating there. You know, we, you know, what’s that expression, you know, that I like the shaver so much I bought the company?

You know, that’s a TV commercial, it’s not real. You shouldn’t buy a business because you really like the product. You have to understand and learn about the business and make sure that it makes sense for you. And because most businesses that, you know, whether independent or franchise, most businesses are going to be owner-managed, at least in the beginning. And so if you don’t have some sort of interest, or, you know, excitement about that space, then it will create a problem.

Because if you’re totally disinterested and you don’t care and you’re not motivated or excited to be there every day, the owner’s attitude will trickle down to every facet of the business. And I’ve seen it happen many times where some very successful businesses purchased by someone who doesn’t give it the care and attention that it once had. And all of a sudden, employees that used to be described as star employees start to have reductions in their performance because the attitude of the owner starts to permeate the whole organization.

Giuseppe: Right. I agree. That’s, you know, it’s a famous question and you’ve probably heard it as well, you know, what’s the best franchise? Or what business can I make the most money in? And I say, it depends. You can make money in any business. There’s no such thing as a hot business or industry. Some obviously industries are doing a little bit better than others right now. But what’s sustainable? What do you enjoy? But, you know, what is the what’s going to meet the characteristics? You like food and you like the food at this Subway franchise, but that doesn’t mean you should buy a Subway franchise.

You could still eat there and make all the money you wanted at a different business. But what’s your true passion? To find that, oh, I want a home-based business. Well, why would you want to work at a, you know, a food restaurant when you want to work from home? You know, I go there’s no right or wrong answers. What do you truly want? And we’ll find something that fits the model that, you know, a basically all the characteristics and attributes you’re looking for. So, yeah, we’re saying the same thing. It’s very refreshing to hear someone else say the exact same thing. So it’s not just me.

David: Guiseppe, have you seen the interests of your clients change with the onset of the pandemic and the types of businesses they’re willing to consider?

Giuseppe: Yes, and I always kind of let them speak. So yes, the retail people, I’ve heard people getting a little bit nervous about retail in general. People, you know, with social distancing, especially here in New Jersey, we’ve been hit pretty hard. So I may want to go home-based or service-based, and that’s fine. But I always challenge it. I’m not just Okay, let’s look at something else. I always say, we are speaking right now. This is our first conversation. Just say for an example, by the time you have to wait the mandatory 14 days, which is the bare minimum and never happens that quickly and get funding and find site selection, everything.

And maybe six to 12 months before you even open up. Some sooner, some later. So obviously, we don’t know what the new norm is, but take that into consideration. You’re not going to be opening up, today’s, you know, we’re in May so you’re not going to be opening up in June or July. It’s going to be possibly next year. So I always like to inform them and if they’re still not certain I say okay, your first franchise is not your end all be all.

So if it is a home-based business, maybe it’s a business coaching franchise, down the road, if you really want to take a second look at a retail, you know, like a food, something in the food and beverage, we can take a look at that as well. There’s no issue with owning two different franchises in two different industries. But definitely a little bit of panic as we’re seeing here. It’s, today’s May 14, so by the time this airs will be later in June. But a little bit of concern, but I like to just educate everyone and try to put them a little bit more at ease.

David: I’ve been really amazed at the level of creativity that I’m starting to see in this morning’s newspaper. There is a hotel near where I live and they have a big parking area. And as you can imagine, a hotel isn’t very busy right now. People just aren’t traveling. And they just invested in a brand new barbecue-style restaurant in the hotel lobby.

So what they’re doing is they’ve got their custodians building a movie screen in their parking lot because they’re going to start to do dinner and a movie on weekends where people buy tickets in advance and they get boxed barbecue dinner and a parking spot, you know, to watch the film. And I was reading that going wow, are people ever stretching their imaginations to try and keep the cash flow flowing to stay alive with all the different challenges especially in a hospitality business right now?

Giuseppe: That’s, what a great idea. Utilizing Hey, you have your expense, your payment, you’re, either if you’re owning or leasing so why not maximize? That’s a great idea. And as you mentioned, you had a pivot in your career and just in pivoting. If you own a gym, gyms are hurting right now. There’s no secret behind that. Yet, they are still, you know, as far as business, they’re offering virtual training.

And sometimes that works out a little bit better. I’m home and they are going to customize it as if you don’t have any equipment because they realize you’re not gonna have all the equipment of a gym. Some people do. So they’ll customize it. They’re selling gift cards and franchisors are sometimes reducing royalties. There’s a lot of stuff going on. It’s in the best interest of everyone to get through this and be successful, but there are other options.

And if you just don’t pivot or don’t improvise and don’t make change, those are the businesses that are going to die, unfortunately. So it’s refreshing to see a lot of these companies kind of adapt to what’s going on over here. David, this has been great. It’s been nice to, you know, have another person in another country. This is our third international podcast. So we had New Zealand, Mexico and now Canada. So this is great. And I know you essentially cover the entire world. So is there anything else you’d like to bring up on our call today?

David: No, just that most of the time whenever I run into someone who’s made some kind of mistake in buying a business or doing a deal, it almost always ends up being because they didn’t know something important. And in today’s day and age with the internet, there is really no limitation anymore on access to information. It’s just a matter of doing the work to go out and read and watch videos or to learn from people who can help fill in those dark spaces in your own knowledge. It’s always the things that people didn’t even realize they didn’t know are the things that get them.

Giuseppe: Right. Really good advice. So I appreciate that. What if someone is interested in speaking with you or they want, you know, additional information, what is the best route? Is it looking, taking a look at your book? Your website? Can you give the audience just a best way to reach you?

David: Yeah. The central place to reach me is on my blog site, davidcbarnett.com. And from there, you get access to videos, recordings, the books, everything is on there, my contact info, etc. And the book that we mentioned, Franchise Warnings, that’s available on Amazon and it’s paperback, Kindle as well as audio. And the other books that I have on there, they’re all related in one way or another to buying, selling or investing in businesses. That’s kind of the space that I operate in.

Giuseppe: That sounds great. We will add all that into the show notes. So we’ll have the website and if any interest, contact David direct, contact me. David, it’s been a pleasure having you on the show and I look forward to speaking with you in the near future here.

David: Thanks, Giuseppe. Stay safe.