Finance Friday: Could a Franchise Fuel My FIRE in 10 Years (Or Less)?

Mindy:
Hello, my dear listeners and welcome to the BiggerPockets Money Podcast. This is the Finance Friday edition where we interview Chris and talk about how he should deploy his capital, should he invest in an exciting business opportunity, and we discuss his long-term outlook on reaching FI. Hello, hello, hello, my name is Mindy Jensen and with me as always is my X co-host Scott Trench. X?

Scott:
Oh, I thought you meant X, like formerly Twitter. I’m excited to get going with you on multiple threads that Chris can follow on his journey to financial independence today, Mindy. How’s that for a convoluted tech no intro.

Mindy:
That was good. That X is just a placeholder for my new adjective for Scott every single week, but I love it. I love it being relevant, Scott. Thank you. Scott and I are here to make financial independence less scary, less just for somebody else, to bring you every money story because we truly believe financial freedom is attainable for everyone no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate or start your own franchise, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Next up is the segment of our show called The Money Moment, where we share a money hack, tip or trick to help you on your financial journey. And today’s money moment is split your direct deposit into your savings and checking accounts. If you have a hard time saving, this is a great way to automate it. Check with your HR department or online payment system to see if you can put a certain amount in each account. Do you have a money tip for us? Email [email protected]. All right. Scott, I am excited to talk to Chris today because he is a high income earner with a fun business opportunity.

Scott:
That’s right. Always love these types of discussions. Lots of good options because there’s great cashflow and lots of fun nuances to his situation that we can explore and maybe you’ll relate to a few of them.

Mindy:
Chris is a 35-year-old married father, sales professional in the medical equipment industry. He makes a great salary working there, but he also lives in a high cost-of-living area and wants to make sure that he only embarks on opportunities that drive him closer to his retirement date. I can recognize that. Scott, I bet you can, too. Chris, welcome to the BiggerPockets Money Podcast. I am super excited to talk to you today.

Chris:
Thank you. I’m so happy to be here talking with you guys.

Mindy:
Well, let’s start off with a little bit about your money history and your money background.

Chris:
Sure, yeah. My money story started when I was very young. I’m the son of two rural Midwest farmers who were the first in their family to go to college, and so they raised me up to have a strong work ethic. When I was five years old they put me to work in the backyard pulling weeds for one penny per weed that I pulled. So I was always incentivized to work hard to make my money, and very grateful that they did that.
I was able to graduate college totally debt-free, which is a huge blessing and privilege. I worked through college, I got scholarships and I had some help from my parents as well. And then I also worked my way through grad school, so I was able to graduate with an advanced degree with no college debt at all and I was able to hit the ground running. I got interested in real estate investing when I was in college, grad school to be precise. And I started with a house hack with some buddies and that totally changed the trajectory of my life, and thank you to BiggerPockets for giving me that initial nudge to make the leap.
I did that for several years until I got married and it allowed me to pay off about $150,000 worth of my wife’s student loans, as well. On our honeymoon we sat there in the hotel room and hit Pay. Still had another $150,000 worth of loans to go after that, but we chipped away at that. Yeah, I’ve been in southern California now, which is a high cost-of-living area for the last six years or so and looking to try to figure out how I can get to FI as quickly as possible and hopefully try to use some business opportunities to do so.

Mindy:
Okay. Well, you live in a high cost-of-living area. If you want to get to FI as soon as possible, is moving an option?

Chris:
If only. My wife is from this area and our family is down here now. My family moved here recently to support us as we had our kid and another one on the way here soon. So moving to a low cost-of-living area, as nice as that would be, doesn’t really seem feasible at this point.

Mindy:
Okay. Well, let’s run through your numbers really quickly. A salary of about $18,000 a month, I’m going to go with, that’s not bad, except you’re in a high cost-of-living area, so it’s not nearly as not bad as it sounds. Your monthly expenses, I’m showing about $12,000 a month, which again, at $18,000, you’ve got about $6,000 left over every month. You’re spending two thirds of what you make. That’s not bad at all. You have a house payment of $4,800 or housing costs of 4,800. Again, high cost-of-living area. I don’t know what you’re going to do to lower those.
I do see charity at 2,700, food at 1,100, auto at 1,100, definitely going to talk about that. I see a category called shopping at almost $1,200. Travel, 300, dog, 262. Subscriptions, less than 100. Life and disability insurance, less than 100. Personal care, 150, miscellaneous 102. I mean, you’re not spending more than you make, you’re not even coming close. I want to know where you’re putting that $6,000. Oh, look, here we go. You’ve got a 401k in traditional IRA totaling $234,000. Roth accounts, 97,000, you and your wife combined. After-tax brokerage, 60,000. HSA, 35. Cash, 70. I bonds, 21. Total debt, I think this is a little bit skewed, but total debt of $700,000, with a mortgage taking up most of that, 668, and the Tesla. Carl’s going to kill me if I don’t ask you which model?

Chris:
It’s a Model 3.

Mindy:
Model 3 Tesla at 28,000. So, I see a mortgage at 2.625%. I can’t tell you to sell that house because you’re not going to save any money on your mortgage if you sell that and downsize because all you’re doing is getting a smaller house for more money. Overall, I think you have a fairly decent financial position. What is your age?

Chris:
35.

Mindy:
35. Okay. And what is your current job? You are medical sales, did I-

Chris:
Medical sales, yes.

Scott:
Is that a stable income? We’ve listed a salary here. Can you walk us through how that compensation works?

Chris:
Sure. Yeah. Well, up until last week it was a base salary. Yeah, I just started a new job this week here, so things will be a little bit different but better, hopefully. At my prior position, the salary was $67,000 and then about $170,000 of it was variable compensation. That would vary between $8,000 and $12,000 a month in commissions. And then we had these quarterly bonuses that would come out, as well, and those could range anywhere from 3,000 all the way up to 20,000 per quarter. At my new position, the salary is 175,000 and there’s an additional $100,000 worth of variable compensation, which is paid out in quarterly bonuses of about $25,000 each.

Scott:
Can we just go through at a high level net worth and total assets here and breakdown of that? Mindy went through a little bit of it, but am I right in understanding that about two thirds of your equity that you own, the net worth, is in your home right now?

Chris:
That sounds right, with just kind of back-of-the-napkin math. My home equity right now is about $750,000-ish and I’ve got a net worth of probably around 1.4, 1.5 million of total net worth. So I think it’s about half.

Scott:
Awesome. And would you mind telling us the goal? What’s the outcome you’re looking for?

Chris:
Yes, my goal is to be able to retire out of medical sales and move into a job that maybe is in ministry, where I’m not relying on a salary to support my family. My wife wants to keep working for a long time because she loves her job. She’s in mental health For me, I think ideally by the time I’m 45 I’d like to have hit my FIRE number.

Scott:
And the FIRE number is what?

Chris:
Well, that’s a great question. If you look at current expenses and use the 25, like the 4% rule, it’s probably in the low threes, like three and a quarter million. But if you take into account Social Security and the fact that by the time I’m of full retirement age my house will be paid off, then that drops our expenses and whatnot by quite a bit. I think I would only need a FIRE number of somewhere in the $700,000 to $1 million range.

Scott:
So the goal is to go from here to FIRE in the shortest period of time?

Chris:
Yeah, exactly.

Scott:
Okay. And play with those variables, understanding it. Can you walk us through your house situation? You had a $4,800 payment and you’ve got the equity. Can you tell us what you bought this thing for and what’s in that payment?

Chris:
Yeah, yeah, absolutely. We bought this house in February of 2021, kind of in the midst of the pandemic and the craziness that was going on. We bought the house for basically 1.25, 1.262 million, and I put $500,000 down on the house. We got a mortgage rate of 2.625%. And so our mortgage payment itself is, I think, $2,800 a month. 2,816 I think is the exact number. And then I have home insurance and property taxes. The home insurance is, I think, about $1,800 a year, so not horrible, but the property taxes are pretty killer. It’s somewhere in the ballpark of between $15,000 and $17,000 a year.

Scott:
Okay. So, 15 and 17, that’s how we’re getting to $4,800 in monthly housing cost.

Chris:
Mm-hmm.

Scott:
I just want to make a first observation here. We have lots more to talk about and go through, but your strategy, if one’s going back a couple of years and looking at it, to building wealth, is, “Oh, I’m going to put $500,000 into a house and we’re going to pour,” I would say, “a third of my after-tax take-home pay into the payment each month on a go-forward basis.” That’s something we have to just understand and work around here because that’s a big barrier. That’s the biggest impediment to moving you towards that FI number. It’s going to keep the expense profile that you need to achieve FI very high and it’s going to also inhibit our ability to generate cash, which then could be deployed to the next investment there. So, with that interpretation, is this a fixed part of the position that we’re not going to touch or is it something that we can work with as we get into the rest of the discussion?

Chris:
Yeah, it’s pretty fixed because we are so close to family here to help with the childcare, which has been absolutely huge. That allows my wife to work two days a week and she earns $100,000 a year working those two days. So, even though our housing is expensive, the opportunity cost of moving, I think, would increase our other costs for childcare and the opportunity cost of the amount that she could earn. So, in a sense, even though it is expensive, it’s also, I think, about as low and optimized as I can possibly get it, aside from renting out some storage space under our house or something like that to strangers, which I’ve floated the idea of doing something like that to my wife and she’s not down.

Scott:
Okay, got it. And now, one other question here. You said your wife works two days a week and makes $100,000 a year. How does that work? And there sounds like a path to being WIFI pretty quick here.

Chris:
Yeah, yeah, absolutely. She works in the mental health field and it’s wonderful because she gets to have pretty flexible hours and she chooses her schedule. Right now she’s working two days a week and, because of the nature and the niche of what she does, she’s able to make a healthy hourly salary from that. Once our kids are older and in school and the need for childcare goes down a bit, we can up her hours to maybe four days a week and probably see income around $150,000 a year, I would think. So, yeah, that definitely is helpful.

Scott:
Okay. Just again, zooming back out here, we’ve discussed the house issue. Total household income, you expect to be $18,000 over the next 12 months, is that right?

Chris:
Well, I would say it’s probably actually going to be higher than that. I am not great at thinking about things in monthly expenses. I tend to think of things in yearly expenses so-

Scott:
Annual is fine, too. Let’s work it through it annually. What do you think you’re going to bring home? How much cash can you generate on this $12,000 expense burden that you have here over the next 12 months?

Chris:
Between my salary with my new job, bringing in 275 a year and my wife bringing in about 100 a year, that works out to be about $31,000 a month or 375 a year. So when we think about the total annual housing costs that I have of about 52,000 a year, that works out to be only about 14% of my gross income. Now, taxes take a big chunk out of that and stuff, too.

Scott:
So, 31,000. Let’s say after tax, that’s going to be closer to 20,000, I’ll peg it at. That’s going to give you $8,000 a month that you’ll generate on your current expense profile after all of your expenses. And I’ll also point out that 2,700 of that is charitable giving, which is awesome, but it’s totally discretionary. It could be 100. I’m sorry, it could be $11,000 a month, give or take. So you have $96,000 to $120,000 in cash that your family will generate per year on a go-forward basis. There probably could be more if you paused 401k and other types of contributions.

Chris:
Right. And that’s actually something that I wanted to bring up with you is, with the amount of money that I have in my retirement accounts right now, I’d always, I guess… Let me back up. I’d always thought that the way that you save is just purely in retirement accounts. I never really knew that saving in a brokerage account was a thing until fairly recently. And so I thought, okay, well it’s not going to do me a whole lot of good to have $10 million saved up in my Roth IRA and my 401k that I can’t touch until I’m 59 and a half, but if I want to retire at 45, I’ve got a 15-year gap of unfunded time. And so that’s when I started to put money into my brokerage account, which now I’m at 62,000 in that and that’s a pretty recent change for me. So I wanted to hear your thoughts on how to attack that problem.

Mindy:
Okay. So, you can access your retirement accounts early. And we’ve had the mad scientist on episode, I think 18, talking about how to access your retirement accounts early. It’s an older episode. The information has been updated when the laws changed on his article, How to Access Your Retirement Accounts Early, but there are multiple ways. There’s the 72t, which is-

Chris:
That’s the Substantially Equal Payments Program or something?

Mindy:
Yeah, there’s Substantially Equal Payments. Let’s see, there’s an early withdrawal penalty. The Roth Conversion Ladder, 72t Substantially Equal Periodic Payments and just pay the penalty. But the Roth Conversion Ladder is one of the best ones. You can just convert over. You do that typically when you don’t have any other income or very low income. He goes into it in his article. It’s fantastic. If you just Google “Mad Scientist and how to access retirement funds early,” it’s the first thing that pops up and it’s very, very well written and very in depth. And you can also listen to him on our episode 18 because they haven’t changed that much, the laws surrounding this.
But yeah, there’s several ways to access your retirement funds early. However, you’re not wrong to also save in after-tax brokerage accounts, which is just another way to save, you put your money into the 401k, especially if you have a company match program. Scott, do you have any ideas or any information about the traditional IRA and the Roth IRA and the Conversion Ladder stuff for when you start taking money out? I need to look into this. I know there’s something about that where they start pulling from the traditional IRA and the Roth IRA and the percentages that you own, but I don’t have a traditional IRA, so I don’t know all the rules about that.

Scott:
Well, look, I think, Chris, being or expecting to be in the top 1%, even in California, in terms of household income, with your income, the Conversion Ladder is not the meat of your… You’ll put less than 20% of your discretionary spending, less than maybe 15% of your discretionary spending. Even if you max out both yours and your wife’s 401k every year in there and do a Roth Conversion Ladder. The question has to be, what am I going to do with this additional $80,000 to $100,000 that I’m going to generate after tax every year for the next 10, ideally expanding, in order to achieve my goal of financial freedom?
And right now, your asset column is not conducive to financial independence. It’s all home equity and retirement accounts with $60,000 in after-tax accounts and $70,000 in cash. So there needs to be a plan there. Because you’re such a high income earner, I think you’d be silly, frankly, to do a very active approach to managing your investments. It’s got to be something passive there and that leaves you with after-tax brokerage stocks like you’ve been starting. It leaves you with real estate, probably lightly levered real estate somewhere potentially out of state. It leaves you with syndication investments, it leaves you with lending, which would be highly taxed and efficient in your situation, for example.
And so I think that’s where we’ve got to go. But before we go there, into where the extra cash is going to go, I think we need to dive into the career opportunity here because I think that there’s opportunity to unlock with this franchise concept that you’re alluding to. Can you describe what this franchise is? Is that a way to park the cash? Is it an investment? Is it a job? Is it a hybrid?

Chris:
That’s a great question. Yeah, there’s an opportunity that myself and one of my good friends is investigating. We’re looking to become partners in investing in a franchise or a series of franchises in the physical therapy space. And the passivity level, I guess you could say, would be probably fairly low, to be honest. It’s going to be a fair amount of work to do. I would be operating pretty remotely, so I wouldn’t have as much to do as my business partner who’d be more boots on the ground. But, that being said, it’s expensive. It’s pretty capital intensive, but assuming that our projections that we’ve built out are accurate, I think it could be pretty lucrative as well. And so we can dive into that right now if you’d like.

Mindy:
Yes. What is the capital that you personally are going to allocate to this and how is this partnership going to be split up?

Chris:
Yeah, we’re looking at doing a 50-50 split on everything, all the expenses and all of the revenues and profits. So, to come to the table, it would be about $50,000 per person just to enter into the franchise agreement. And then, to build out each individual franchise location would be somewhere in the ballpark of around about $215,000 per person. And we’d be looking at building out several of these over the course of three to five years perhaps. So one of my questions is, well, if I have to outlay about $265,000 in the first year, is the best way to fund this via tapping my home equity since I have so much of it, or is it better off funding it through maybe an SBA loan or is there other forms of financing that I’m not even thinking about that might be better? I’m curious to hear your thoughts on this.

Scott:
So, 215 per person, 430 total purchase price. Is that unlevered?

Chris:
Yes.

Scott:
Okay. So any debt on the business could be shared between you and the partner on this?

Chris:
Correct.

Scott:
Okay. And then, what is the expected income from this $430,000 business?

Chris:
Yeah. According to our projections, it looks like it would be basically breaking even by the end of year one. So after considering debt service, we’d probably be at about $25,000 per person after the first year, but then after that it would be profitable. So we’d be looking at about 150,000 per person in year two and about $180,000 per person in year three and moving forward.

Scott:
So, let’s go through this. The business is going to not produce any income. What is revenue and expense in year one?

Chris:
Give me a moment here I can pull up my model.

Scott:
While he’s pulling up that model, we’ll just define a couple of terms here. An SBA loan is a Small Business Association loan. It’s a government-backed program that allows entrepreneurs or aspiring entrepreneurs like Chris here to purchase small businesses. It often has much more competitive terms than what you can get from other types of lenders. It’s a great option designed to promote small business ownership like this.

Mindy:
That’s okay. And while you are looking those up, I am going to ask you. You said, “According to our projections,” and I’m just wondering where you got the data for those projections. You said this is a franchise. I’m assuming that the main guy at the franchise has given you information that would help with those projections?

Chris:
Yes. The model that we have is basically populated via assumptions such as average number of visits and the average reimbursement that you’ll get per visit, et cetera. And then we built out the model of how many patients we anticipate seeing on a weekly basis. The assumptions that we populated are based on talking with other franchise owners. We asked them, “How often do you see your patients? How much do you get in reimbursement? What’s your total profit margin?” And we used those conversations to build out our model. The P&L projections that we built out here show total revenues at the end of year one to be $457,000 and total costs to be 219. Well, that’s cost-of-goods-sold. Total cost would be 243,000 plus our cost-of-goods-sold is 219. So that yields a net operating income of basically negative $5,000 in year one.

Scott:
And this is a service-based physical therapy business. So a patient comes in, gets an hour-long physical therapy session.

Chris:
Mm-hmm.

Scott:
So your cost-of-goods-sold is what?

Chris:
Is paying the therapists and the staff.

Scott:
Great. Okay. And then your operating expenses are going to be the rent for the location?

Chris:
Yeah, exactly. Rent, insurance, utilities, all the franchise fees, all of that stuff.

Scott:
What is your partner going to do in this business?

Chris:
He would be basically the boots on the ground operating the day-to-day of the business, managing the staff and being out in the field talking to the referring physicians to build up the network of referrals.

Scott:
And where is the business physically located?

Chris:
It would be not in southern California.

Mindy:
And does your partner have physical therapy experience or office management experience?

Chris:
He is in the orthopedic field and so he has close relationships with all these doctors who do this referring out to their patients for physical therapy and he is an entrepreneur himself. He runs a small business of his own, currently, So he has management experience and he’s familiar with the space.

Scott:
And when you say boots-on-the-ground operations, is this person full-time in this franchise?

Chris:
It would probably be maybe 20 to 30 hours a week.

Scott:
Okay, so almost full-time. What will your involvement in the business be? How many hours?

Chris:
Yeah, my involvement would probably be somewhere in the range of about 10 hours a week, I would expect, doing more of the remote work such as handling the marketing, setting up campaigns for that sort of thing. Also, helping with some of the personnel management from a distance.

Scott:
Look, you would know better, and with your partner with this, but it feels like you’re an investor in this business and your partner or your friend is going to be the operator in the business. If I was your friend, maybe I’m excited about it now, but in year two I’m not liking this arrangement anymore because I’m doing all of the work in this business and physically operating it and I’m integral to the business. So I wonder if you decide to go in with this business, you should structure it as an investor and then this person gets a compensation agreement and the opportunity to potentially buy you out or have greater ownership stake over time to some degree.

Chris:
We did talk about that. We talked about acknowledging full well that he will be putting more time into it than I will be. And so what we talked about doing was basically paying him an hourly wage for the additional work that he’s doing. That split between if I’m at 10 and he’s at 30, we’d pay him an hourly wage times those 20 hours a week that he’s going above and beyond.

Scott:
Okay, so you’re going to invest $215,000 through some combination of debt or equity to earn nothing year one, and then you’re going to drive profits in years two and three to the tune of 150,000 and 180,000 each is what you said in years two and three. So this business is going to explode. You’re going to go from 450 to well north of a million, a million five in order to drive to that outcome. And you believe this, you’ve done your homework and believe this projection model?

Chris:
Correct. Yes.

Scott:
And when do you want to launch this business? What is the timeline?

Chris:
Sometime in the next year is the goal, yeah.

Scott:
Okay. And one year from now, if you were to stop charitable giving or put that on pause for a little bit, if you were to stop contributing to your 401k, I believe you could generate between $130,000 to $140,000 in cash and add it to your pile of $70,000 in cash. I really like that answer. For a business that will produce no net cash flow in year one, in particular, above getting any type of financing on the business, especially since it’ll be operated remotely with your structure. How’s that sound from an instinctive answer to your question of how to finance it?

Chris:
I like the idea of trying to finance it cash as much as possible. I think I would be unwilling to reduce my giving. It’s something I believe in deeply. It’s a religious belief that I hold that I want to be tithing 10%, so that part I wouldn’t be willing to budge on. But in terms of over the course of the next year taking 100% of my cashflow that I’m generating and sucking it away to fund this specific enterprise, I think I’d be comfortable with that.

Scott:
Okay. The other options here, we can take cash from this after-tax brokerage account and just convert that into cash, pay a small amount of capital gains and use that to buffer your position. That puts you at 130 day one, and it’s a pretty short putt to 215 to buy this franchise, as you put in after that from there. Again, it’s a first time in business. I love the idea of minimizing debt on this particular business, especially since the debt will have so little impact, essentially, on your return profile based on what you believe here. It’s either you’re going to get a 50% cash-on-cash return, starting in year two on an annualized basis. That doesn’t really matter if it goes to 65 %or 70%. It just adds risk, I think, to that front. So I love the idea of being able to do a full cash purchase, at least for your portion, if you can do it. Can your friend swing that?

Chris:
I doubt it. I don’t think so.

Scott:
Okay. So you putting in more cash will create a dynamic where you don’t have equal equity ownership.

Chris:
Mm-hmm.

Scott:
Just zooming back out on this, you know the opportunity really well. I’m not really in love with this plan at the highest level because it just seems a little odd to me that a business would have no cashflow in year one and then zoom and be basically put into triple in revenue by years two and three. It’s certainly possible, but there’s a lot of problems here. It’s out of state, your operations are going to be completely remote, probably by definition could be done by anybody, not really going to be specific to your skillset. Your friend is going to be the one that’s truly operating the business. And I don’t know if I love the plan to just shift the hourly wages. I just wonder in year two or three, if this business does actually perform the way you’re talking about it, if there’s not some resentment there where it’s like, “Well, geez, I could be making an extra 180 grand a year if I didn’t have Chris involved in the business.”
And, I think, thinking through that in a helpful way with that acknowledges that reality today and knows that, “Hey, here’s how we’re feeling today, but we’re not going to feel that way in three, four or five years if things go well.” I would love to be a passive investor for 10% to 15% of that business as a home run, if your 15% of $300,000 or $400,000 a year in income is a home run on a $200,000 put-in, if it actually can sustain at that point in time. So, I don’t know. What’s your reaction to that?

Chris:
Yeah, a couple of things. First of all, I think the cost curve and the revenue curves in those first three years are going to be the most dynamic and change the most. We anticipate this being a 10-year hold basically, and in years four through 10, I pretty much anticipate those profits stabilizing at that $180,000 mark. So it’s basically getting the space essentially ramped up to full capacity and then, once it’s at full capacity, there isn’t really a ton of additional room to grow that. That’s why you’re seeing, I think, what might be looking like untenable profitability going from year zero to year one to two to three, and that’s just a function of getting the staff in place because every physical therapist that you can bring in is $100,000 basically profit to the owner.

Scott:
If you have the appointments.

Chris:
Correct. And that’s where our interviews with other owners and with my business partner, talking to his referring physicians, they’re all saying, “Every time I want to refer a patient to PT either before or after surgery, they have to wait two to three months because everybody’s so backed up.” We see a huge backlog in demand, and so if we can bring the supply to the market, I don’t think there’ll be any problems with meeting that demand.

Mindy:
Okay. If there’s so much demand, Is there enough physical therapists in the area to fill the demand that are looking for other jobs? One of the things that’s been popping up lately is this concept that nobody wants to work and I can’t find anybody to hire. Of course, you can. You just have to pay maybe a lot more than what you think you were going to have to pay. I have no idea what a physical therapist makes, but if you’re planning for 50,000 and everybody’s paying 50,000, you’re like, “Well, I guess I’ve got to bump it up to 60.” And then you’re like, “Oh, everybody else is getting 60. Now I’ve got to bump it up to 75.” Your numbers start to change significantly when you don’t have the numbers that you thought you were going in at.

Chris:
Yeah, you’re right, and that’s, in my opinion, the single biggest risk to entering into this business is finding the PTs to do the work because if say that we found a great PT but then they left a year in or something like that, I couldn’t just step in and my business colleague couldn’t just step in because neither of us are trained PTs. So that, in my opinion, is the biggest risk to this business. And we’re okay with overpaying somebody to bring them over if they’re good and they want to do good work. Based on these numbers, I think that we can afford to pay “top of market” to get somebody really good and then put that risk to bed.

Scott:
Does the business have any current revenue right now?

Chris:
No, we haven’t opened. I mean, does the franchise overall?

Scott:
So it does not exist. You’d be buying franchise rights and then entering into a new market?

Chris:
Yeah.

Scott:
And what does a mature franchise, if you go to another market and buy a mature franchise from another owner right now, what would it cost there that’s meeting these expectations, generating $300,000 to $400,000 a year in EBITDA?

Chris:
Yeah, we’d probably have to pay a multiple of about six to eight X their EBITDA.

Scott:
Okay. So you would put in, in this case, $430,000 to buy this franchise. Let’s say you did it all cash. And in four years, if things went well, you’d have a business that was generating $300,000 to $400,000 in profit that would be worth between, at a low end, 300 times six is 1.8 million and 400 times eight is 3.2 million. That’s an unbelievable return on an investment. Unbelievable is kind of the word there to use on that front. It is possible, I’m sure, but that is a really, really big, big promise there that, again, it seems hard to fathom that that kind opportunity is out there that is from a franchise perspective.

Chris:
Well, yeah. Okay. I guess, let me step back because I think I answered your question incorrectly. If we were looking to buy a group of these franchises, then that’s when it would be at a higher multiple. If we were just going out to buy a single franchise, the multiple would be probably in the three to four range.

Scott:
Okay. So, still, we’re going to generate 900,000 to 1.6 million in terms of the asset that we’re going to build on this, on a $430,000 put-in. Okay. Look, I guess it comes down to we’re not going to be able, Mindy and I, to really assess, go through the model and all those kinds of things. I think we can bring a healthy skepticism. And know the business, you’ve studied the numbers and all that kind of stuff. If you think this is the opportunity and this is the way, then I just go all in on it over the next 12 to 18 months and put all of your discretionary cash flow into a bucket that will go to this to make it levered as lightly as possible, because the return is so incredible that you just described here, within three to four years, you’ll generate an asset that goes from $400,000 in base value to 900,000 to 1.6 million.
I would say, “How do I avoid leverage on that? How do I make it as safe as possible? How do I increase the odds as much as possible?” and concentrate my bet on that. And then after that, once you’ve done the put-in, you’ll have more cash, because you’ll have cashflow coming from that asset. Then I think it comes down to one of those other more passive strategies that we talked about. Is it going to be turnkey or something as passive as you can get it out of state, rental property investing? Is it going to be some form of lending? Is it going to just be putting everything into VTSAX in your after-tax brokerage? That’s an index fund, for everyone listening, or a VOO, another just Vanguard simple low-fee index fund. Moving on from the business, which of those avenues appeals most to you from an investment standpoint?

Chris:
I’ve been a big believer in VTSAX for my whole investing career so far, and it hasn’t done me wrong, So I like that. I’ve done a syndication before, out of state, in the Midwest and it didn’t go great. It ended up being fine, but I think it was maybe the deal didn’t perform how we thought it would, but it kind of got saved by a rising tide lifting all of our boats. If the tide wasn’t rising, I think that boat probably would’ve sank on its own. And especially right now, I don’t think that syndication in the multifamily space is a great option just because of where cap rates and where interest rates are right now. I don’t think that that’s going to be a good spot to park my money. So yeah, I think a brokerage account with VTSAX and VOO is probably what appeals to me the most outside of the business.

Scott:
Okay. So let’s just pop back out here. In 10 years, which is your goal, give or take, you’re going to generate, again, between $100,000 and $125,000 a year, perhaps scaling a little bit if you have a couple of good years in there, scaling even more if the franchise opportunity goes well. And at that point you’re going to have paid down your mortgage balance, let’s call it, by 30 more percent. So you’ll have 400,000 and some odd in change in your mortgage balance. You’ll have about 1 million to 1.5 million in accumulated cash that will be dumped basically in index funds across your 401k and IRA.
And then you may have this franchise, which I’m going to call a 50-50 shot for now. Hopefully, it’s a much higher probability than that. That’s your position in 10 years. That puts you at your FI number. But the question is, does that actually translate to cashflow that you can then spend at that point in time to realize your goal? Would you be comfortable beginning to start selling off some of that index fund portfolio, for example, at that point in time? How does that portfolio sound to you? Because I think it is as simple as that at the highest level for you, despite the complexities of the franchise.

Chris:
Yeah, yeah. So I mean if, say, hypothetically, on that 50-50 shot, if the franchise does go well, then it would be throwing off enough cash to fund our lifestyle for the next 10 years. If it didn’t work out and say it totally goes bust, then the money that I have in my brokerage account, I think I would probably have no choice but to start selling it off.

Scott:
If you wanted to be FI.

Chris:
If I wanted to be FI, yeah. And the other thing as well is, if I did retire out of medical sales and did go into ministry, I think there still would be some level of compensation and my wife would be still working throughout this whole time as well. So if she’s making, we’ll call it maybe 80 to 100 grand a year, something like that, after tax, from when I’m 45 on to retirement age, and if I’m working in ministry making, say, $50,000 a year, I think that still would give us enough just income to get through those years. So I probably wouldn’t have to sell too much from my portfolio or I could just maybe live off some of the dividends that it generates.

Scott:
No, I think that’s right. Again, I think that, because at 375K in household income, I mean, the game becomes very, very simple with your expense profile. You’re just going to generate so much cash over the next couple of years that you will get to your number. It’s just the portfolio at the end that I think you need to think through to a certain degree because, look, you’re going to hit the number even if you don’t really get that much in way of returns just from amortization of your current mortgage, elimination of your car payment and the savings that you’re going to generate from the job. I just would caution you as you’re moving towards that, if the goal is to truly be FI in 10 years, I think you’re going to find it hard emotively or behaviorally to actually start selling off stocks and living off of that portfolio to some degree and truly feeling FI and having that ultimate optionality.
If your portfolio looks like $2 million in stocks and 1.5 million in home equity, that’s a hard portfolio to truly live off of. I know no FI individuals who have a portfolio like that who are actually not generating additional sources of income. If the plan is generated just from those sources of income and be WIFI, like Carl, Mindy’s husband, then that’s different as well because you’ll be able to cover those expenses. But I just want to caution you there, and I’d say think about that.
Yeah, $3.5 million handed to you, is that how you’d allocate it at the end of that day? Options to consider that might be more attractive is just pay off the mortgage. You pay off the mortgage. Now your housing expense goes from $4,800 a month to something closer to $2,000 a month. That makes things a lot easier. And what you could say, “Okay, I’m going to go to some 5% yield. I can go to a public REIT or something like that that has 5% yield that’s slightly levered, very highly liquid, and that will give me, if I put a million in there that gives me $50,000. That’s actually going to go a long way towards the rest of my expense profile here.” Or I’m going to go into… Go ahead, you looked like you were about to say something.

Chris:
Yeah. Something that I’ve thought about as well a lot is paying off my mortgage at 2.625%. Paying that down early doesn’t seem like a great use of my money, just from an opportunity cost standpoint, but in terms of being able to free up cashflow by having a paid-off mortgage and cutting that monthly payment basically in half, that number gets multiplied by 25 X or whatever if you’re using the 4% rule. So I guess that’s something I go back and forth on is, well, yeah, paying off my house early would technically lower my FIRE number, but it would also actually be a non-optimal use of my money to do that when I could just put that money into a 5% REIT like you’re saying.

Scott:
That’s right. So, that’s going to be your challenge. You don’t have a math problem here. The math is super simple. You generate $375,000 a year and you spend less than a third of that. So you’re not going to have trouble from an accumulation perspective. You’re going to, though, if you want to achieve FI and actually get around this dilemma that I’m telling you I’ve seen with tons of other people, people just don’t have a home mortgage and $2 million in stocks, most of which is behind the RRA and truly begin selling off the little chunks of equity. They’ve all got a couple of aces in the hole. You may have that ace in the hole with WIFI and the ministry work, and so that’s fine if you want to get there, but just know that that will be a constraint to feeling FI at that point in time, and that’s the trap to think through.
That could be a trap for someone like your situation. You’ve got all the opportunities and wonderful situations set up in the world, but if you think about, “Hey, let’s say I wasn’t working and my wife wasn’t working and I had $3.5 million dollars, surely there’s a solution to $3.5 million net worth and an allocation of that that would generate enough cashflow and a low enough cost lifestyle to meet those needs?” That’s an easy, but it will be suboptimal. It will reduce the tax efficiency to some degree of your portfolio. It will reduce the long-term net worth, but it will give you that true financial freedom, a grounding of you don’t have to depend on any sources of income at that point in time. Which may be more valuable to you and your wife than the optimal state of not paying off that 2.5% mortgage at all earlier, the 10% long-term growth that we all expect from our index funds based on historicals.

Chris:
So, if I’m hearing you correctly and thinking through it, I’m a big fan of simplicity. That’s why I like VTSAX. So if you did just give me $3.5 million dollars and said, “Go do with it as you will, set this up,” in just a beautifully simple world, I would put $1.5 million down on the house and then just have the remaining $2 million in a brokerage account, I guess, to throw off the dividends that I would live off of. I’d have to do the math to see what $2 million-

Scott:
That would give you 2% dividends, so that’d be 40 grand.

Chris:
Yeah. And if I didn’t have my mortgage expenses and stuff, I think I want to say the number of my annual spending would be somewhere in the range of 70 to 80 grand or something like that. So that’s halfway there, basically. Say it’s 80 grand, so it’d be halfway there just off of dividends, and then I’d basically just have to sell 2% of that two million a year.

Scott:
Or you could go into a REIT that offers 4% dividend yields, to some degree, or you could buy rental properties, put 750 into one to three rental properties somewhere in the country that will give you a 6% to 8% cap rate, or some combination of the above. Right now, if you were to go buy another house, I presume you have an excellent credit score, great income, all that kind of good stuff, if you were to re-buy this house right now, someone with your position would get a loan for $600,000, $700,000 and they’d pay 7.5% simple interest. So getting that cashflow is not a challenge in today’s environment if you just think about like, oh, I could just lend to someone exactly like me or buy a mortgage REIT that had that kind of yield there.
That’s just the question I would pose to you. I think that when you get to that point, because you don’t have big problems, you have great problems here. You’re going to get to FI. You’re going to get to FI, and it’s going to be great, and all you’ve got to do is keep doing what you’re doing and you don’t have to even be that efficient about it in order to get there. But just, when you get there, I think that something you might find is, “Hey, if I don’t design my portfolio now with that end in mind, I’m going to find it actually quite difficult to truly sell off 2% of my equity position at that point in time to live off of it.”
And you’re going to be trapped in that situation because it’s going to be very hard to allocate a million dollars in capital gains from your stock portfolio to something that produces a higher income yield if you don’t do that intentionally from day one. So those are the questions I would pose to you because you’re in such a strong position, and I think if you think about those, you might feel freer, even if it doesn’t actually change the total net worth number at the end of that journey.

Mindy:
One thing I want to point out is that when Scott asked you about your optimal portfolio, you didn’t mention the franchise at all.

Chris:
Yeah, just from the perspective of simplicity, having a $2 million pile of cash that’s all in one single VTSAX, that definitely appeals to the simple beauty and elegance of the ideal portfolio.

Mindy:
Yes. And as somebody who has a rather complicated portfolio, I can tell you I long for a really, really simple portfolio. We’ve had lots of conversations about that. A couple of more things about the franchise before we wrap up. How many of these franchises are in the US of this brand and how proven of a track record does this brand have? We haven’t mentioned brand names, so I don’t know exactly which one we’re talking about. And you don’t have to answer these questions for me, these are just something for you to think about, going forward. I agree with Scott. I don’t love, love, love this idea simply because you and your partner aren’t physical therapists, and if your physical therapists quit, you can’t hop in and take over.
It’s not like you have a McDonald’s franchise and if your employees quit, you can jump in there and you can figure out that register really quickly and you can go behind. I think you actually have to know how to do everything when you’re the franchise owner. I just want you to think more about the arguments that Scott made. Because, I mean, honestly, if we can’t talk you out of this, then great, but if we can talk you out of it, then maybe it’s not the right investment vehicle

Chris:
As anonymous as possible, there’s a bunch of these clinics that are across the country, and in talking with the other owners that we’ve talked with, which has probably been, I don’t know, between 30 and 50 owner interviews that we’ve done, they’re all making healthy profits from their businesses.

Mindy:
And do they have trouble finding physical therapists to work in their branches or is that a question you haven’t asked?

Chris:
Yeah, and that’s why it’s my number one concern as well is because that seems to be the hardest nut to crack is how do you… And, I mean, it’s the same in most businesses. How do you find, attract, retain the top talent? It’s going to be the same question no matter what kind of business you’re running. It’s no different in this field, as well, but the difference is that I’m legally not able to hop in if something were to happen because I don’t have the license. So it’s certainly something to think about and weigh the projections. Based on the conversations that we’ve had, it seems quite lucrative to me, once you get past the first year, being able to have a pretty stable income of $15,000 to $180,000 per person for doing not that much work seems solid, but there’s definitely a lot of risks to it as well.

Scott:
Well, Chris, this has been a really good conversation. Thank you so much for sharing all this stuff with us and we hope it was really helpful here. We really appreciate you coming on BiggerPockets Money Podcast today.

Chris:
Hey, thank you so much for having me. I really respect you guys and appreciate all you’ve done in this space, and it was an honor to get to talk with you both.

Scott:
Awesome. Thank you so much.

Mindy:
Thank you, Chris. We’ll talk to you soon. All right, Scott, that was a very interesting conversation. I really appreciated the things that you brought up for Chris to consider with regards to his franchise opportunity.

Scott:
Yeah, I just think it’s interesting here because I think that, look, zooming out to the big picture, and I think Chris disagreed with me a little bit on a couple couple of these points, but I think the house is the major asset and the major consideration here. This is a $1.5 million asset. It has $800,000 in equity and $600,000 in mortgage balance. We’re not willing to work around it, but we have to acknowledge that that is the strategy that is being employed by Chris and Chris’s family is investing in this house, fundamentally. It is the largest single expense. More money is going towards the house than any other asset. More money has gone into the investment than has gone into any other asset, and that is going to factor in to the path to financial independence.
The good news is that we have such a high income, we’ve been earning such a high income and we have the opportunity to continue expanding that, that doesn’t really matter. We can work around that and begin investing in other asset classes. And I think Chris really needs to think about what he wants that portfolio to look like in a couple of years. And I think that if he does not, he will fall under the trap that too many upper middle class Americans that have the fortune of having and the privilege of having great incomes he has fall into, which is all that wealth is in the 401k and the home equity and is not really realizable. There’s no real freedom there. You’re almost even more trapped in that high-income treadmill there, if we don’t make an intentional effort to keep expenses low, avoid consumer debt and build a spendable after-tax cashflow-generating wealth in vehicles outside of the traditional 401k and home equity.

Mindy:
Yeah, absolutely. I just am cautious about the ability to hire employees in this, still. It’s getting better, but it’s still a difficult time right now, so that’s one of the biggest things I would like Chris to consider.

Scott:
Yeah. Look, I think within that framework I just talked about, we have now this play in the small business category. I love the opportunities in the small business category and I think this could work, but I think one of the issues, paradoxically, that Chris runs into is that you’re in such a high income that he may find it to his disadvantage to be actually attempting to run a franchise on the side remotely in this particular situation. And he may be very successful with this. He’s run the numbers. He’s a very careful guy and clearly generates a high income, clearly successful in a lot of ways.
But I would feel more comfortable with the franchise opportunity if it was local, if it didn’t require a specific physical therapy skillset in order to get into and operate. If there were those kinds of backup plans, I think the probability of success would be higher. But with Chris’s situation, he is able to generate enough cash on an annualized basis to make a bet like this every two years. So even if he were to make three of them and two of them failed in the next six years, he still might have a winner to this effect. I think it could still be good math for him.

Mindy:
That’s a good point. I like that. And, again, everybody’s situation is different, so what we recommend for Chris is because of Chris’s specific situation, if you have a specific situation that you would like Scott and I to chime in about, we would love to talk to you. You can email [email protected] or [email protected], or you can fill out the Finance Friday application at biggerpockets.com/financereview. And if you don’t want to use your name or don’t want to use your video or both, we can have you be anonymous. We just want to share your numbers and tell your story. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is the Scott Trench. I am Mindy Jensen saying be our bee, honeybee.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, Copywriting by Nate Weinraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.