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  "documentTitle": "Goosehead Insurance, Inc. (GSHD)",
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  "authorName": "Wolfpack Research",
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  "sourceTypeSlug": "short_seller",
  "sourceTypeLabel": "Short seller",
  "presentationDate": "2023-02-16 00:00:00",
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  "notes": "The slide uses a narrative structure to expose a discrepancy between management's reported metrics and the author's calculated metrics.",
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      "text": "This created a perverse incentive whereby franchise recruiters would engage in boiler-room sales tactics (described by one former employee as predatory) to get people to sign a franchise agreement, knowing full well that the person was unlikely to follow-through.",
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      "text": "franchisee failure rate: 67%",
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      "text": "The difference is due in part to the fact that GHSD talks about their failure rate as a percentage of all franchisees instead of franchisees in their first year, which mutes the signal. Another reason our calculations are different from GHSD’s is because we include franchisees who sign their agreements but fail to launch, while GHSD omits this group from their calculations.",
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      "text": "When GHSD’s management team discusses the churn rate for franchisees the number they offer is far lower than the one we calculated. According to management, churn for franchisees is historically 15%, but it waned down to single digits during the pandemic, and is waxing to more than 25% in Q4, 2022.54 In contrast, according to our calculations, the number of franchisees that failed to get to a second year started at 56% in 2018 and has grown to eclipse 67%.",
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      "text": "This created a perverse incentive whereby franchise recruiters would engage in boiler-room sales tactics (described by one former employee as predatory)56 to get people to sign a franchise agreement, knowing full well that the person was unlikely to follow-through.",
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      "kind": "paragraph",
      "text": "There is also a lack of clarity as to whether a signed, yet unlaunched franchisee is booted out of the system or is rolled over to next year's list of franchisees in the 0-1 tenure category as disclosed above.58",
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      "kind": "paragraph",
      "text": "The reason why we think it is important to include GHSD’s signed-but-never-launched franchisees is because GHSD includes them in its reported franchisee numbers. GHSD trumpets its franchisee number and even describes them as franchise locations in presentations, only footnoting the fact that a large portion of the franchisees have not launched59 and therefore cannot have a location.",
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      "text": "In our conversations with employees, we learned that franchise recruiters were initially compensated based on how many franchisees they signed, instead of getting compensated for the ones that launched.55 Additionally, we have also learned that franchisees do not pay their initial fee upon signing the franchise agreement, but immediately prior to training, which is the precursor to launch.",
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      "text": "In the Q3 Earnings Call, Mark Jones Jr. stated that the company was trying to address this issue and reduce the number of people in the pipeline who would never launch.57 If GHSD is successful in changing the incentive structure so the company reduces the number of franchisees who sign but never launch, then that could improve the failure rate, even as the number of operating franchisees that shutter their existing businesses skyrockets due to unfavorable conditions in the housing market in 2022.",
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      "kind": "title",
      "text": "GHSD’s High Failure Rate is Due in Part to Franchisees Who Never Launch",
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