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.