The ONLY 4 ways to MAKE BILLIONS as a service based business..

Summary

In this video, Alex from Mozilla and Acquisition.com discusses four strategies for scaling a service-based business: private chains, franchises, licensing, and software. He explores the pros and cons of each, such as cost, scalability, and enterprise value, providing insights to help entrepreneurs choose the best path for maximizing wealth.

Takeaways

• 📈 Service-based businesses can be scaled using four primary models: private chain, franchise, licensing, and tech-enabled service.
• 🏬 Private chains involve opening multiple locations, retaining full ownership and control, but also assuming all the risk and capital costs.
• 🍔 Franchising involves selling the business model to external investors who open and operate locations, providing a potentially lower risk but higher setup cost path.
• 📜 Licensing allows others to use the business model with less oversight and lower costs, but with challenges in defensibility and lower enterprise value.
• 💻 Tech-enabled services involve using software to scale, which can be highly profitable but requires significant initial investment and expertise.
• 🧮 Private chains are suitable for businesses with low build-out costs, high profit margins, and low service variability, enabling scalable growth.
• 🕹️ Franchises need significant capital and legal setup, and are suitable for businesses with high build-out costs where risk is shared with franchisees.
• 🔗 Licensing offers high margins and low startup costs but is less defensible and has lower enterprise value unless it maintains high retention rates.
• 💡 Software and tech-enabled services provide high enterprise value with significant initial investment, targeting businesses that can be partially or fully automated.
• 🚀 The choice of model depends on various factors including initial costs, profit margins, service variability, market defensibility, and the entrepreneur's risk appetite.

Q & A

What are the four ways to package a service-based business for profitability?

The four ways to package a service-based business are: 1) A privately held chain, 2) A franchise, 3) A licensing model, and 4) Software-enabled service.

What is a privately held chain and how does it work?

A privately held chain is a business model where the owner opens multiple locations while retaining all ownership rights. The owner takes all the risk, fronts all the capital, hires all the labor, and controls the brand.

What are the advantages of starting a franchise business?

The advantages of starting a franchise include lower failure rates compared to starting a business from scratch, and the ability to leverage an established brand and business system. However, it's noted that many franchises struggle to reach profitability and scale.

What is the difference between a franchise and a licensing model?

A franchise involves the use of a brand's name, business systems, and fees, while a licensing model typically involves two of these three components. Franchises are more regulated and have higher start-up costs, whereas licensing can be a lower-cost way to expand a business model.

What are the pros and cons of a licensing model?

Pros of a licensing model include low start-up costs and high margins, similar to franchising. Cons include lower defensibility and enterprise value, meaning it's harder to protect and may not be as attractive for a high exit multiple.

What is a software-enabled service and why might it be a good option for some businesses?

A software-enabled service is a business model where the service is delivered through software. This can be a good option for businesses where the service can be automated or digitized, potentially increasing scalability and reducing the need for physical locations.

Why is it important to consider the cost of opening a new location when deciding between a private chain and a franchise?

The cost of opening a new location is crucial because it affects the capital required and the risk involved. If the cost is low relative to the potential profit, a private chain might be more viable. If the cost is high, franchising can spread the risk and capital requirements among franchisees.

What factors should a business consider when deciding to franchise their model?

Factors to consider include the high costs of setting up a franchise, the time it takes to see profits, the need for a large number of locations to achieve economies of scale, and the ability to maintain consistent service quality across franchises.

How can a business determine if a licensing model is the right choice for them?

A business should consider the ease of replicating their model, the defensibility of their intellectual property, the potential for high margins, and the need for rapid market expansion. A licensing model is often chosen for its low start-up costs and high cash flow potential.

What are the challenges of developing a software-enabled service?

Challenges include the high upfront costs of software development, the need for technical expertise, the time required to build and perfect the software, and achieving high customer retention rates to ensure the software is valued highly in the market.

What is the role of customer retention in the valuation of a software-enabled service?

High customer retention rates, ideally above 80%, are crucial for valuing a software-enabled service. This indicates the service is sticky and valuable to customers, which can significantly increase the enterprise value and potential exit multiple.