How to Grow ANY Local Business (my framework)
Summary
TLDRThe video script discusses the decision-making process for business owners considering whether to expand through franchising or private ownership. It highlights four key variables: cost versus return on investment, operational effort, scalability for a potential exit strategy, and the entrepreneur's personal style. The speaker uses a teeth whitening business as an example to illustrate how these factors can influence the choice between franchising for rapid growth and maintaining private control for operational depth.
Takeaways
- 💰 The decision to expand through franchising or private ownership depends on four main variables: cost vs. return, effort to open a location, scalability, and personal entrepreneurial style.
- 📈 High return on investment (ROI) businesses are more likely to opt for private ownership due to the faster and higher returns compared to franchising.
- 🔄 The operational model's centralization or decentralization affects the effort required to open new locations, with centralized models potentially having more operational drag.
- 💡 Entrepreneurs should consider their long-term goals, such as an exit strategy or building a sellable asset, when deciding between franchising and private ownership.
- 💼 The type of entrepreneur one is influences the decision; promotional entrepreneurs may prefer selling franchises, while operational leaders may prefer building their own locations.
- 📊 The business metrics provided in the script, such as top line per location and cost to open, are crucial for evaluating the financial feasibility of expansion strategies.
- 🏆 Franchising can offer a higher enterprise value multiplier compared to private ownership, making it an attractive option for scaling and increasing valuation.
- 🚀 The rate of opening new locations is a critical factor; franchises may open faster if the model is decentralized, allowing for rapid expansion.
- 🤔 Personal preferences and strengths should be aligned with the business model; if there's a mismatch, consider bringing in team members who complement the entrepreneur's skills.
- 🔑 Understanding the constraints and limiting factors in the expansion process, whether internal or external, is essential for strategic planning.
- 🛠️ The script suggests that even if the numbers favor one model, the entrepreneur's personality and preferences play a significant role in the ultimate decision-making process.
Q & A
What are the four main variables to consider when deciding between expanding a business through franchises or private ownership?
-The four main variables are: 1) Cost versus Return on Investment, 2) Effort to open a location (centralized vs. decentralized), 3) Scale and the entrepreneur's exit strategy or long-term ownership goals, and 4) The entrepreneur's personal style (promotional vs. operational leadership driven).
What does 'Top Line per location' refer to in the context of the script?
-'Top Line per location' refers to the annual revenue generated by each business location, which in the script is mentioned to be about $500,000 a year.
What is the significance of the 'Return on Capital' in the decision to franchise or not?
-The 'Return on Capital' indicates how much profit is generated for each dollar invested. A high Return on Capital, such as 5x, suggests that it might be more profitable to open more locations privately rather than franchising.
What is the difference between centralized and decentralized operational models in terms of effort to open a location?
-In a centralized model, more operational work is done at the franchisor level, creating operational drag. In a decentralized model, the franchisee does more of the work, which can affect the ease and speed of opening new locations.
Why is the entrepreneur's exit strategy important when considering the expansion model?
-The entrepreneur's exit strategy is important because it influences the scale of the business they aim to achieve. If they aim for a significant exit, such as a $50 or $100 million valuation, they need to consider which model will help them reach that scale more efficiently.
How does the script suggest determining the right balance between franchising and private ownership?
-The script suggests using a checklist of the four main variables to evaluate the business from an investor's perspective and to align the decision with both the financial metrics and the entrepreneur's personal style.
What is the typical royalty percentage a franchisor might charge in a franchise model?
-The script mentions a royalty percentage of 7.5% of the Top Line as a typical arrangement in a franchise model.
How does the script differentiate between the valuation multiples for franchises versus privately owned locations?
-Franchises typically get a higher multiple of earnings in their valuation because they have a scalable model and potential for future growth. In the script, franchises might get 15 times earnings, while privately owned locations might get 8 times.
What is the role of personality in the decision to franchise or expand privately?
-Personality plays a significant role as it determines the entrepreneur's preference for either selling franchises, which requires a promotional drive, or building and operating locations, which requires operational leadership and a product-driven focus.
How can an entrepreneur address the mismatch between their personal style and the business model that the metrics suggest is best?
-The entrepreneur can bring in team members who complement their skills and address the areas they are less comfortable with, allowing them to pursue the business model that the metrics indicate is most advantageous.
What does the script suggest as a method to overcome internal limitations when scaling a franchise model?
-The script suggests that if internal factors are limiting the ability to sell franchises, the entrepreneur should consider bringing in a sales-driven individual to help scale the business faster.
Outlines
📊 Franchise vs. Private Ownership Decision Factors
The speaker discusses the decision-making process for business owners considering whether to expand their business through franchising or by opening privately-owned locations. Four key variables are highlighted: cost versus return on investment, the operational effort required to open new locations, the scalability of the business model, and the entrepreneur's personal goals and preferences. The speaker uses the example of a teeth whitening business to illustrate how these factors can be analyzed, including the business's financial metrics such as top line per location, bottom line, and the cost to open new locations. The discussion emphasizes the importance of viewing the business from an investor's perspective to determine the best strategy for growth and potential exit value.
🔍 Scaling Strategies for Local Businesses
This paragraph delves into the practical aspects of scaling a local business, focusing on the internal and external factors that influence the decision to franchise or to maintain private ownership. The speaker outlines the importance of assessing the rate of opening new locations, the potential for selling franchises, and the entrepreneur's personality type, which can significantly impact the scaling strategy. The discussion also touches on how to address challenges such as staffing and management, suggesting that bringing in experts can help overcome these hurdles. The speaker concludes by emphasizing the importance of aligning the business model with the entrepreneur's strengths and preferences to maximize enterprise value.
Mindmap
Keywords
💡Franchise
💡Return on Investment (ROI)
💡Operational Drag
💡Exit Strategy
💡Enterprise Value
💡Top Line
💡Bottom Line
💡Multiple
💡Promotional Entrepreneur
💡Product-Driven Entrepreneur
💡Operational Leadership
Highlights
Two different businesses approached with the decision of whether to expand through franchising or privately owned locations.
Four main variables to consider when deciding between franchising and private ownership: cost versus return, effort to open a location, scalability, and personal entrepreneur type.
The importance of return on investment and comparing it to other business models like McDonald's for decision-making.
Franchise economics: understanding royalty fees, marketing funds, and revenue percentages.
Enterprise value and the difference in multiples for franchises versus brick and mortar local chains.
The impact of centralization and decentralization on the operational drag and the work distribution between franchisors and franchisees.
Scaling a business to a specific net worth goal and the mathematical approach to determine the number of locations needed.
The role of personal entrepreneur type in the decision-making process and aligning it with the business model.
Strategies for overcoming personal deficiencies in the business by bringing in experts to support areas of weakness.
The importance of considering both the financial and personal aspects of scaling a business.
The potential for a franchise to scale faster due to the decentralized model and the ability to sell franchises.
The challenge of selling franchises and the internal limiting factors that may affect the rate of expansion.
The checklist approach to evaluating the scalability of a local business and the decision to franchise or not.
How to leverage promotional and operational strengths in the business to maximize enterprise value.
The importance of viewing the business through an investor's lens to make informed decisions for scaling.
The ultimate goal of aligning the mathematical and personal aspects of the business to build the highest enterprise value.
Transcripts
had two different businesses that
approached me both had franchises open I
had almost an identical conversation
with both and I'll tell you one of them
which is a whitening teeth whitening
business but a breakdown is how I help
them walk through this decision of
should we go more franchises or we
should go more privately owned and it
really comes down to four main variables
number one is the cost versus The Return
of every dollar you invest in opening
more locations the second is the actual
effort that it takes to open a location
which comes down to is it centralized or
decentralized in terms of where the work
is being done centralized and it means
that there's more operational drag at
the franchisor level if it's
decentralized there's more work for the
franchisee the third thing was actually
looking at this at scale if you have a
number you saw for which almost every
entrepreneur that I know who is in a
local chain wants to solve for some big
exit usually it's 50 or 100 million and
if you want to own it forever totally
fine you still think about building it
as an asset even if you're never going
to sell it just transparently like we
don't want to sell anything anymore we
want to hold and grow buy and build
maybe that's what we do but we also
understand that some entrepreneurs do
want to sell and reversing your net
worth goal into what you actually have
to open at a location level between
franchise and local privately owned ones
that you own all of them is a good math
number to know because it makes the
decision much much easier and then
finally is a little bit of a personal
thing which is which type of
entrepreneur are you are you more of a
promotional entrepreneur so you love the
sales and marketing and selling the
franchises selling the franchises or or
you're more of a product driven
operational leadership driven
entrepreneur who's like who with a
longer time rise and just loves
investing in people and building kind of
a big thick so we'll break down all four
of these here are the business metrics
that are important top line per location
is about 500 000 a year bottom line for
a location is 250 000 a year the cost to
open was 50. so I spend 50 I make 500
Top Line I keep 250 a year later really
good numbers if you have a business that
gets like less than 100 return on
Capital meaning it usually makes more
sense to franchise right off the bat
because the return on capital is too
slow and not big enough if you look at a
McDonald's for example it costs 1.1 1.2
million dollars to open a McDonald's
they make 150 000 a year on average
afterwards so you're looking at like a
15 rate of return right versus spend 50
make 250 you're talking to 5x right very
different and this happens all the time
I've seen this with moving businesses
that have crazy Returns on Capital
seeing with gym business doesn't really
matter with the business is but you have
to switch from your business hat to your
investor hat and start looking at your
business investment because once you
start generating real money you have to
think where is the best place I can put
my money and if opening another location
5x is your money every year you go from
1 million to 5 million five to twenty
five twenty five to 125 that becomes a
very attractive machine if you expand
the time Horizon we have this business
these individuals had decided to do the
franchise so this is what their
franchise economics looked like they
would get seven and a half percent a Top
Line it's a royalty on Top Line and it's
usually some sort of marketing fund that
everyone chips into so they can get
National branding some franchises do
flat fees some do royalties doesn't
really matter there's a certain
percentage of Revenue that you're going
to collect now these guys were charging
seven and a half and so on 250 it was
like thirty five thousand dollars per
year that they're making from the
franchise Okay so stay with me now if
the franchise runs at the same margins
at the individual locations at 50 so
twenty thousand dollars of what they're
gonna make in net earnings at the
franchisor level per location that they
open here's the kicker and this moves us
on to our second kind of variable here
you've moved past the first checkpoint
and you're like okay our economics are
pretty good like we're over a hundred
percent we're in that line but now it's
like well how hard is it if you have
twenty thousand dollars in net earnings
per franchise you open and you've got
250 000 per location that you open on
your own the franchises get usually two
times the multiple that a brick and
mortar local chain will get so they
might get like 15 times earnings in
terms of the Enterprise Value what an
investor might buy for it because
franchises usually have a certain amount
of open and usually more have yet to be
open and so an investor is willing to
pay 15 times today because they already
really know they're paying if nothing
else changes a 5x multiple because they
know the other 200 are going to open
guaranteed it's legal has to happen
versus getting 8X on the individual
location so 8X on 250 would be 2 million
dollars versus 15x on 20 which would be
300 000 which means that for every
location you open at the franchise level
you add 300 000 to the franchise
valuation for every location you open on
the privately held side you would add
two million dollars so that then informs
how hard is it to open these locations
what is the constraint if we have a
super decentralized model meaning the
franchisees do most of the work then it
might mean that we could open 10 times
more franchises for the same effort as
opening one at that point it might make
more sense to open more franchise
locations if it's super centralizes and
you're doing most of the work then
sometimes it makes a lot more sense to
actually just keep opening locations on
your own provided the return on capital
is there you don't need to open spend a
million dollars to open a facility to
make 200 Grand right and the numbers
pencil out where you just look dollars
and cents if I want to have a 100
million dollar exit which you can't have
an exit or not but you can still always
build as though a sellable entity like
we will always build an asset so that it
is sell not so that we sell it so 100
million means 50 locations open
privately or 333 locations open with a
franchise and so you have to look at
that and think okay if I can open let's
say one or two locations a month which
most franchise locations do then it
would only take me like two maybe three
years to get to this number now what's
my rate of opening at the franchise
level often times especially with when I
talk to franchisors they're usually
limiting factors internal not external
the problem is internal then it means
maybe they can open like three or four
locations for the franchise which means
it would actually take them longer to
get their ultimate outcome and that's
assuming they can sell franchises like
hotcakes which is not always that easy
that leads me to the fourth point on
this checklist that I walk through
mentally the final thing is just
personality wise so if I look at an
entrepreneur in their super promotion
driven they love selling they love they
love the sizzle they love the the hunt
right of selling franchises then
franchising when I'm at 50 50 might
still be the right play on the flip side
if there's somebody who's a little bit
more product driven a little more
leadership driven like love the Ops all
that kind of stuff then it might be more
of a self-sustained lower number higher
value play and here's the key difference
if you have a really Stark difference
between franchise versus private let's
say a super promotion driven
entrepreneur but all the maths is that
you should own it privately then if you
phrase the thing that you don't like as
a deficiency in the business then it
becomes very solvable so for example
Staffing each of these locations becomes
hard you've got all these kind of low
skill low-wage employees which can be
difficult to manage lots of churn Etc so
what do you do you hire somebody who's
ran a staffing for a franchise that's
gone from 50 to 250 multiple times
that's what I would do when we invest
it's exactly what the move would be we
can take somebody who's super promotion
driven and then bring in one or two
people to support them in the things
that they don't like that are way better
than them at it and then you get the
outcome where the math and the
personalities work together to build the
ultimate Enterprise Value and on the
flip side if you're a super like Ops
product Etc type entrepreneur but all
the metrics say that you should
franchise this thing then we bring a
really hypey sales driven person into
the business to go hunt for you to bring
more franchises in so that you can scale
faster because that's the way that your
model's been set up either way these are
variables that you can play with and
those are the four points that I look at
as checklist of how I'm going to scale a
local business that comes to us we made
a checklist so that you can actually
look through these four things for
yourself actually go through it and fill
it out and look at both those things
because you'll actually look at it as an
investor and it'll make you a better
business owner
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