How to Grow ANY Local Business (my framework)

Summary

The 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

00:00

📊 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.

05:02

🔍 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.

Keywords

💡Franchise

A franchise is a type of business arrangement where a parent company (franchisor) licenses its business model, brand, and systems to an individual or entity (franchisee) who agrees to operate under the franchisor's guidelines. In the video, the concept of franchising is discussed as a potential growth strategy for a business, with the franchisor receiving royalties and marketing fees from franchisees.

💡Return on Investment (ROI)

Return on Investment (ROI) is a financial metric used to evaluate the efficiency of an investment or compare the efficiency of different investments. It's calculated by dividing the net profit by the total cost of investment. In the context of the video, ROI is a critical factor in deciding whether to expand through franchising or by opening privately-owned locations, with higher ROI favoring the latter.

💡Operational Drag

Operational drag refers to the inefficiencies and additional workload that a central management team may experience as they try to manage and control more locations or units. In the video, it's mentioned that if a business model is decentralized, the operational drag is less at the franchisor level, but more work is required from the franchisee.

💡Exit Strategy

An exit strategy in business refers to the plan for owners to sell their ownership stake in a company. It's often associated with a significant financial goal, such as achieving a certain valuation before selling. The video discusses the importance of considering an exit strategy when deciding between franchising and private ownership, as it can influence the business's scalability and valuation.

💡Enterprise Value

Enterprise Value (EV) is an economic measure that reflects the market's estimate of a company's total value. It's calculated by considering the company's debt, cash, and other factors on its balance sheet. In the script, the difference in enterprise value multiples between franchises and privately-owned businesses is highlighted as a key factor in the decision-making process.

💡Top Line

Top Line, also known as revenue or sales, is the total amount of money a company brings in before any deductions are made. In the video, the top line per location is mentioned as an important metric, with franchises generating a certain percentage of this as royalties.

💡Bottom Line

The bottom line, or net income, is the profit a company makes after all expenses have been deducted from its total revenue. It's a key indicator of a company's financial health. The video uses the bottom line per location as a measure to compare the profitability of franchises versus privately-owned locations.

💡Multiple

A multiple in finance refers to the ratio of the selling price of a company to a relevant measure such as earnings or cash flow. It's used to value a company in an acquisition or sale. The script discusses how the multiples for franchises and privately-owned businesses differ, affecting the valuation and potential exit strategy.

💡Promotional Entrepreneur

A promotional entrepreneur is someone who is highly skilled at marketing and selling, often focusing on the promotional aspects of a business. In the video, the speaker differentiates between promotional entrepreneurs who might prefer franchising due to their sales skills and those who are more operationally focused.

💡Product-Driven Entrepreneur

A product-driven entrepreneur is focused on the development and success of their product or service. They are often deeply involved in the operational and product development aspects of the business. The video suggests that product-driven entrepreneurs might prefer to grow their business organically rather than through franchising.

💡Operational Leadership

Operational leadership refers to the ability to manage and lead a company's day-to-day operations effectively. It involves strategic planning, resource allocation, and team management. The video mentions operational leadership as a key characteristic of entrepreneurs who might prefer to own and operate their businesses privately.

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