1851 Franchise: Tell me your personal franchise story.
Kevin Shen: I started my career in investment banking helping consumer and retail companies raise capital, do mergers and acquisitions, divest assets… all kinds of different things. It just so happened that, at that time, we were doing a lot of sponsor-backed deals. Coincidentally, I worked on a bunch of Roark portfolio company deals (the private equity firm that now owns Mathnasium). As I was nearing the end of my investment banking stint, a CEO that I had worked with — he was CEO of Smashburger at the time — became CEO of Jackson Hewitt through the private equity sponsor. He was looking for somebody to join his team, more on the corporate finance side. I thought that was an interesting opportunity and figured I’d do it for a couple years before business school then figure out what I wanted to do after that. That became an eight-year journey that took me much deeper into being an operator and learning how to run a franchise business.
While I was at Jackson Hewitt, I did corporate finance for all of about a month, then realized I could add more value to the firm at the time through corporate strategy, real estate strategy and franchising strategy. I started going down that path. Along the way, we hired a chief development officer, so I was working directly with him trying to figure out how I could help him with the analytics and number-crunching side. As he transitioned out of the business to a different franchise company, I took over his responsibilities and thereafter, when the head of franchising left, I took over that responsibility, too.
Fast forward to last year, Roark was looking to hire a chief development officer for Mathnasium. It checked all the boxes for me; I was familiar with the sponsor, met the management team and met the Roark folks. It was a great company with a great mission, so it was a no-brainer for me.
1851: The majority of franchisees are risk averse, so when they're getting into the business, they almost have more of a knee-jerk reaction backwards instead of forwards like an investor who says, “Yes, I want to pour my money into this. I'm going to put pressures on fund X or business X, but I'm doing it with a scaling mindset.” So it's almost like an opposite mindset from where I stand. Do you agree with that? Do you see any similarities in who you're working with on both sides of the fence?
Shen: I can see both sides of it. I kind of think of it almost like a Venn diagram where you have some overlap in the middle, but then you also have the polar opposites. I can start with the middle; I think both sets of folks are working to maximize their returns at the end of the day. How they go about it can be very different.
Folks who are looking to invest in a private equity fund — or really any asset manager — are probably looking for something that's passive. Some franchisees are looking for a passive investment as well, but I would say the large majority of folks that we work with are either going to be owner-operators or they're going to have to go out and hire managers and center directors to do this. They have realized that, “If I'm going to start off with just a couple of units, or even just one unit, I'm going to have to be pretty hands-on.” They understand that it's not going to be something where I can just park my money with a fund and have them give me a quarterly summary of how the fund is doing and hopefully I see a return when the fund closes out in five, six, seven years. Whereas the folks who are interested in becoming franchisees, they realize that it's going to be a big investment of time and energy on the front end and then, perhaps as they scale and hire a general manager who can handle multi-units, that can eventually become a great passive revenue stream for them, as well. I can definitely see both sides.
1851: When you're talking with a candidate, especially Jackson Hewitt initially, they come into it like, “Hey, Kevin, I'm going to invest my life savings into this business that I have little to no control over other than operating and hustling at the local level.” Were you fascinated by the mindset or the persona of the franchisee? And then what have you learned over the way that has been valuable to the way that you approach development now?
Shen: I think for me, as somebody who's somewhat risk averse, it's definitely a big leap of faith. I have a ton of respect for people who are entrepreneurs and go out and start their own companies or jump into a franchise. I kind of see franchising as that happy middle ground where you're joining something that's established. You have a much higher rate of success than trying to start your own thing, but like you said, a lot of times, folks are investing their life savings or pulling from 401ks to stand up that business initially. It was always super interesting to me and still is today, talking to folks about how they think about the franchising opportunity, what they're hoping to achieve and how our system might work for them. Does it make sense for them? It’s almost like a due diligence checklist of, “Is this the right opportunity for me? Is this going to be a happy marriage between franchisee and franchisor?” Or do they need to look at something different? Or do they still need to figure out what type of opportunities ultimately make sense, if that’s franchising or something else?
1851: You were at Jackson Hewitt for over eight years. That's rare in franchising, as well. There tends to be a jumpiness to those that occupy the seat. Either the pressures from the top don't align with some real expectations and that causes a turnover, or they do align but the person that occupies a seat feels like maybe they can't do it in the climate that they're equipped with. And so you were sticky there. From your seat, I would imagine that the business opportunity has to be strong for you to want to stay and believe in it. So what is important to you from a stickiness factor when it comes to a franchisor, and now that you've had only two jobs over a decade, what's your approach to that? What makes you stick at a job for such a long time?
Shen: I think from the franchisor perspective, hopefully it's a company that's investing in the growth of the system. It's kind of focused on making sure that the individual franchisees are set up for success. That's step one. And then step two, I'm always hopeful that year in and year out, I'm still learning, I'm still developing. I joined pretty early on in my career, and so there was a lot of opportunity to take on more responsibility, have a bigger impact on the business and add value, not just to the folks that I'm working with day-to-day, but also shareholders of the private equity firm. It's also the mission of the business. Jackson Hewitt was a company that primarily helped lower-income individuals filing tax returns, and so it was usually the biggest financial event in the clients’ year. Similarly, in some ways, Mathnasium is about helping kids get better at math so that they can build confidence, go out into the world, problem solve and not feel intimidated by something that might be initially very, very daunting. When you check those boxes and then you also have an overarching mission that is very easy to get behind, that makes it super easy for me to get up every day and go to work.
1851: If I'm a potential candidate looking at a business, and I see that you, Kevin, are staying sticky with the company, there's got to be a reason why. And sometimes that reason isn't going to be disclosed in an FDD or hidden in some Item 19 — it's bigger and more powerful than that. Ultimately, I think that one of the biggest things pushing the franchisee over the edge, or not, is whether they feel they're going to be supported in the process of becoming a business owner on their own. So what I love about that comment is that's exactly what the franchisee or the potential buyer should be looking at, as well.
Shen: Totally. We want to make sure that people are as well informed as they can be, and so we have a very robust FDD, we have a very detailed Item 19 and we highly encourage validation. I've been talking to other franchisees in our system, and ultimately, we love to get in front of folks and get them on calls just to kind of talk through the story, mission and messaging, because like you said, you can't put everything in the FDD. Sometimes it needs to be vocalized. You can also get the temperature of folks and see what they're passionate about so that you can convey that side of the business to them, as well. So I totally agree. I love talking to franchisees about all different aspects of what they're looking for, their background, is this a good fit, geography, real estate… the whole rigmarole.
1851: My first perception of Mathnasium, if I'm a buyer, is you guys have hit scale as a business. It's an investor-backed company, and that means the opportunities are more limited. Franchisees that got on in the early stages are going to have occupied some of the bigger markets, which I would imagine from a lead generation standpoint, you do get inquiries from people in markets that are already claimed. Talk to me a little bit about the current landscape or what is the State of the Union from a franchise growth standpoint, and ultimately, who are you looking for and where do they live?
Shen: I think what you described is indicative for any franchise business that has hit scale. There's a trade-off between when you're first starting out and maybe have 10 or 50, or even 100 locations and as you get to 1,000-plus, like we are, and we're in many different countries at this point, the available territory pool starts to decrease a little bit. That being said, there's still a ton of opportunity within our system. I think a company like Roark who owns Dunkin’, Baskin Robbins, Arby's — all these great consumer brands — also wouldn't have invested in Mathnasium had they not also seen the whitespace for growth.
We certainly believe that there's still many, many hundreds of potential locations left in the United States. We have availability in lots of different metro markets. We were founded in Los Angeles, that's where our headquarters is today, but even if you pulled up the map of our locations, we still have probably 20 to 30 available territories across not just the LA region, but some other parts of California. So lots of different opportunities.
We’re talking to folks every day through different channels about the opportunities, but as far as what our ideal franchisee looks like to me, we have different franchisees from all different walks of life. I think one of the preconceived notions about Mathnasium is franchisees are all ex-teachers or ex-educators. Frankly, that’s not the case. Our largest franchisee came from the telecom side of the world where he was operating wireless stores in New York, and now he has close to 50 locations all over the U.S.
We do have plenty of ex-teachers and ex-educators. We’re very passionate about education and wanting to further that and also getting better work-life balance as far as the hours go. We’re usually open from 3pm to 7pm, so they can have more time to do other things besides just teaching or running a business. The numbers are detailed in the FDD, but we're open to talking to really anybody who wants to start their own business and hopefully is passionate about helping kids get better at math.
1851: When you were doing your own due diligence on the business, what pleasantly surprised you as you dug into the Mathnasium experience that you may have not seen as an outsider?
Shen: I'll talk about it from a practical perspective, and I'm kind of thinking bigger picture. But for me, I was very excited about the opportunity to take a founder-led business through its first ownership by a very, very well respected premier private equity firm. The nice thing about taking over founder-led businesses is there's lots of low-hanging fruit to improve your business, specifically on how to make it easier for operators and franchisees to run their own businesses. We're quickly tackling those at this point. We're launching all different types of tools — centralized systems for marketing, business intelligence tools — so that franchisees can focus more on the day-to-day of generating leads and talking to students or parents rather than working to figure out what they need to do in terms of something like digital marketing. That was super exciting to me.
Bigger picture, the first time that I was in a center and able to see the students engaged, having fun learning math, building that confidence and seeing that light bulb go off, that rekindled my own passion towards education. I did supplementary education growing up, and it wasn't a fun experience for me. It felt more like school and homework. But seeing these kids come in a couple times a week, do their punch cards and win prizes, it kind of opened my eyes to a different way of math education. One that maybe isn’t adequately addressed by the education system. So seeing all that put together and seeing the magic that happens in the center was awesome. I thought, “How do we get this in more people's hands? How do we get it to more kids across the U.S.? How do we get into other countries?” It’s magic, really.
1851: If you look at the business opportunity, naturally, Mathnasium is going to be positioned as an education franchise, but really, it's a confidence franchise. That's where I agree with you; I think there's another layer there.
Shen: Yeah, I totally agree with you. That's exactly right. Especially today, try to tackle math — it’s always constantly changing. Frankly, it’s taught differently today than when we were growing up. Now it’s Common Core. Sometimes students bring homework home to their parents and the parents say, “This is how I did it, but are you going to get in trouble if you do it the way I did it?” It’s getting more and more complex.
As the world sort of gravitates towards AI and machine learning and all these different development ideas that are essentially built on math as the foundation, it becomes super important for kids to have a strong math foundation. And if they kind of miss that on ramp, whether it's in grade three or grade four, algebra, eighth grade — I think it becomes a very slippery slope where, like you said, they're not getting confidence day in and day out that they otherwise would be exposed to and start developing so that when they go out and tackle more difficult problems, whether it's relationship problems or adjusting to a new environment or going to college and trying to figure out, “What am I good at? How do I make friends?”
They could have gotten that confidence by getting over that hump initially, which is usually the first boulder. Kids generally are able to figure out reading and English and other subjects fairly naturally; I think math is where the education system has a lot of room for improvement. Once they hit that first boulder, hopefully they get over it, but if they don't, it's a very slippery slope. Us being there to help push them over that hump is hugely beneficial to their long-term growth trajectory.
1851: It's so fundamental, and you get to the realities of a franchisee. They also have to have those foundational elements on there. Not just the math side, but also the confidence side, because you're going to invest a portion of your life savings into this business, and after you open it, Kevin's not going to be there every day to say, “You got this!” Ultimately, you're going to have to be able to dig deep and say, “I can sit in my center and do nothing today, or I could get out and shake some hands and build some relationships in my community.” And that's something that, as silly as this may sound, what you're teaching from a math standpoint, is going to be a skill set that franchisees of tomorrow are going to need, as well.
Shen: As they go on that journey and start figuring things out, I think it's confidence, but also, you alluded to it, it's the skill set that translates across the spectrum of what they're going to need in life to manage their finances or manage their business or manage 10 other different aspects of what they're trying to accomplish. Without that solid math foundation, without that confidence boost that comes with being able to tackle tough problems, you're not set up for success, essentially.
1851: I find that the philosophical side is deeply valuable for the sales process for franchisees that fill out the form and get on the line. Does this philosophical part enter the sales processes and enter discovery day? Is it any part of the discussion that you're having with candidates today that maybe you weren't having as much, say, five years ago?
Shen: It's a big part of why we think it's a compelling opportunity. For us, the sales process is not that difficult, frankly, because the business and the opportunity sells itself. We have a very effective FDD, top to bottom. I think it’s when folks come in for discovery day, they meet with the executives and they hear the vision that they start to piece it together about why this is different and how it works and why the system is successful when you just follow the steps that are in place and just replicate upon that success.
The business has been up double digits for the last 15 some odd years, and it's only a 21-year-old business at this point. When you see that trajectory, you realize that they know what they're doing. It's a system that clearly works. It's a system that clearly appeals to not just kids, but also their parents. How do I understand the magic that happens and figure out if that's something that I want to be part of? That's why, during discovery day, we take all of our candidates that come to LA to the first center in Westwood LA so that they can see. At 3 or 4 in the afternoon, when kids start to roll in, they're checking in or talking to instructors… They’re going through that process, and they're having fun. It’s seeing all of that magic that unfolds that really reinforces what it's all about and how it's very different than other concepts that are out there. It's very fun-focused. When you go and read our Google reviews or Yelp reviews against other folks, you start to see that this is why the NPS scores are so much higher. This is why the students are stickier, and this is why parents want to continue using this product, and then it just all connects from there.
1851: For businesses to achieve double-digit growth, most of the time, they can't just serve the same product or the same service or do things the same way that they've always done it. There has to be this hunger for innovation. Because you're saying, “Our business continues to have the hunger to innovate,” what that does is take a franchisee that joined the system five years ago from an average unit volume as disclosed in Item 19 of the FDD to one that is vastly different today. What that does is it helps franchisees set expectations, know what the brand can contribute and look around at peers and say, “Alright, as a part of the system, I can see all of these other franchise owners who are super hungry about the innovations or opportunities Mathnasium is offering. This is the ship that I can join.”
Shen: Exactly. We have teams dedicated to keeping the curriculum fresh and teams dedicated to innovating to providing more digital tools. If you want to run a center that's iPad-only or tablet-only versus pencil and paper, these are all options that are available today. If you want a center that's hybrid-friendly, because kids have baseball practice and maybe they can't make it in this week but maybe they can do it from the bedroom, we have options available for that, too. None of that really existed five years ago, and so the AUVs as you track the FDD continue to translate. From our perspective, it’s also making the lives of the franchisees easier. There’s less behind-the-scenes administrative stuff and more front of office, interacting with folks. That's going to always be the focus of the management team, and hopefully that continues to translate on the top line for franchisees, too.
1851: If there’s a ghost candidate that's looking at the business, what do you want them to know about this business opportunity that maybe they haven't fully seen around the world wide web?
Shen: Really, if you’re an entrepreneur looking for a business opportunity, if you’re interested in an education or kid-related concept, this is something that you should definitely be looking at. It’s a business that’s continuing to grow, it’s got a great sponsor behind it, it’s got a great management team with a great track record and we’re super dedicated to making the franchisees’ lives easier. I don’t necessarily think that can be said for a lot of the concepts out there, especially concepts that have been around for a while. They kind of hit a plateau in their life cycle, whereas we’re continuing to grow. As long as you’re hungry to take on a different business opportunity, we’re certainly here to support you.
1851: Even if you weren’t a teenager saying, “Someday I want to own a Mathnasium,” you can probably get behind some of the philosophical things that we have discussed. The other thing that is deeply critical to note is that even though some people may think Mathnasium is too big to offer them an opportunity, the reality is that there are plenty of opportunities in the system. It also doesn’t hurt for you to go through the process. If you’re at the finish line and asking yourself, “Should I inquire or not?”, why not?
Shen: Absolutely. The worst case is that that territory’s not available, but depending on what is available, it might still work for you. We’d love to explore what folks are looking for, explore the geography and just have a conversation about what your aspirations are, what gets you excited and if Mathnasium can fit into that puzzle.