My Framework to Grow ANY Local Business | Spotify Video Exclusive
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What is the main topic discussed in this episode?
I 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, a teeth whitening business. But a breakdown is how I help them walk through this decision of should we go more franchises or should we 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 solve 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.
What are the four main variables to consider when choosing between franchising and private ownership?
You still think about building it as an asset, even if you're never going to sell it, which is transparently like we don't want to sell anything anymore. We want to hold and grow, buy and build, baby.
How does cost versus return impact the decision to franchise or go privately owned?
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 the marketing and selling the franchises, selling the franchises? Or are you more of a product-driven, operational leadership-driven entrepreneur who's like cool with a longer time horizon, just loves investing in people and building kind of a big thing?
What role does effort play in opening new business locations?
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 per location is $250,000 a year. The cost to open was $50,000. So I spend $50,000. I make $500,000 top line. I keep $250,000 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 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 5X, right?
Very different. And this happens all the time. I've seen this with moving businesses that have crazy returns on capital. I've seen with the gym business. It doesn't really matter with the businesses, 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's the best place I can put my money? And if opening another location 5Xs your money every year, you go from 1 million to 5 million, 5 to 25, 25 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 7.5% of 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 gonna collect. Now, these guys were charging 7.5. And so on 250, it was like $35,000 per year that they're making from the franchise, okay? Stay with me. Now, if the franchise runs at the same margins that the individual locations is, at 50%, so $20,000 of what they're gonna make in net earnings at the franchisor level per location that they open.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–0:48
2
What are the four main variables to consider when choosing between franchising and private ownership?
0:48–0:55
3
How does cost versus return impact the decision to franchise or go privately owned?
0:55–1:27
4
What role does effort play in opening new business locations?
1:27–4:14
5
How does an entrepreneur's personality influence their business model choice?
4:14–5:41
6
What are the business metrics that matter for local businesses?
5:41–7:18