We are short Goosehead Insurance (Nasdaq: GSHD) for three key reasons:

(1) Our analysis shows that, contrary to management’s claims, the failure rate of their first-year   franchisees topped 67% in 2021 and we expect that number to increase again in 2022.

(2) GSHD’s reliance on the housing market is much greater than management lets on – former employees told us that 85%-95% of their new business relies on referrals from people in and around real estate.

(3) We calculate that the CEO and other pre-IPO investors have taken more than $900 million off the   table while the company has only generated $23.4 million in cumulative net income since the IPO, contradicting management’s purported belief that GSHD’s growth is only getting started.

Franchisees primarily fail because they make very little money and are cannibalized by the company’s corporate channel. We calculate that the median first-year franchisee brings home just $38,400, and that does not include payments on the debt that most franchisees take on to finance their fee. As of Q3 2022, 7004 of GSHD’s 1,4035 operating franchisees have less than two years of tenure and are at risk of failing because their leads are drying up and they don’t have a large book of renewals to fall back on. Franchisees that shutter, like the 193 that have already closed this year by our count, 6 risk losing their homes since the spouse of the franchisee must also sign a personal guarantee as part of the franchise agreement.

Contrary to management’s recent representations concerning their dependence on the housing market, our interviews with former employees indicate that GSHD counts on leads for homeowners’ insurance to cross sell other personal lines of insurance. As interest rates have risen, the demand for mortgages has fallen 67% YoY, and existing home sales have fallen 35% YoY.7 Our analysis of GSHD’s data shows their growth is suffering, with GSHD’s growth in the number of policies in force hitting its lowest point in Q3 since the IPO, 8 we expect this carnage to worsen in Q4 since that is usually the slowest time of the year in the housing market.

GSHD’s governance bears a closer resemblance to a fiefdom than a corporation. Mark Jones is the CEO and Chairman, his wife is the Vice-Chairman, his son is the CFO, and his son-in-law is the Chief Legal Officer. GSHD has a Stockholders Agreement that, in our view, makes the board impotent to stop the CEO from filling his pockets at the expense of shareholders. The board must seek permission from Mark Jones before taking any substantial actions against him or other key C-Suite members in his family. This arrangement is the subject of a recent class action lawsuit filed by a current franchisee10 and shareholder alleging it flouts Delaware law concerning corporate governance.

• According to our calculations, as discussed in Appendix A, since GSHD went public in 2018, the
failure rate for signed first-year franchisees has increased from 56% to 67.4%.

• Management is spinning an increase in churn as a positive. It is not. In our view, increased
churn can only mean that more franchisees are running out of money and defaulting on their

• In our assessment, the real reason GSHD is warning analysts that churn will increase is because
the company’s growth is rapidly declining because of the conditions in the housing market
where applications for mortgages have declined 67% YoY:

o GSHD’s has touted its narrow focus on building relationships with referral partners tied
to home closing transactions, like real estate agents and loan officers, as their
differentiating business strategy. This strategy may have fueled growth for GSHD when
the housing market was active, but our analysis indicates that it is becoming a serious
drag on the company’s growth as the housing market has slowed.

o We spoke with five former employees and one point of agreement was that nearly all
referrals, (85%-95% according to former employees who put a number on it), were tied
directly to home closing transactions. The agents would then try to cross-sell leads on
other types of insurance to go along with their homeowner’s policy. These leads have
dried up significantly as a slowing housing market has driven down demand for
mortgages nationwide and the cross selling that goes with it.

o Rising premiums have driven up the company’s renewal revenues, but renewals have
previously only accounted for 60% of revenues. 700 of GSHD’s 1403 franchisees have
less than two-years of tenure. New franchisees need to write new policies to stay in
business and 193 franchisees have already closed their doors in 2022.