How to Grow ANY Local Business (my framework) | Summary and Q&A

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April 5, 2023
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Alex Hormozi
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How to Grow ANY Local Business (my framework)

TL;DR

Businesses must consider cost, effort, scalability, and entrepreneurial preferences when deciding between franchising or privately-owned locations.

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Key Insights

  • ๐Ÿ’ฐ Cost versus return on investment: Opening more franchise locations versus privately owned ones depends on the financial aspect, with franchises offering potentially higher returns on capital in comparison to privately owned locations.
  • ๐Ÿญ Centralized versus decentralized operations: The decision also hinges on whether the work is centralized or decentralized, as this affects operational efficiency at both the franchisor and franchisee levels.
  • ๐Ÿ”Ž Scaling and future goals: Entrepreneurs aiming for a big exit typically consider building an asset even if they don't plan to sell it. Understanding the net worth goal and the number of locations needed helps make the decision between franchises and privately owned locations easier.
  • ๐Ÿงช Entrepreneur type: The type of entrepreneur also plays a role, with promotional entrepreneurs preferring to focus on sales and marketing, while product-driven entrepreneurs enjoy investing in people and building larger entities.
  • ๐Ÿ’ต Business metrics: The average top-line revenue per location is $500,000 per year, generating a bottom-line profit of $250,000 per year. These numbers determine the financial viability of franchises versus privately owned locations.
  • ๐Ÿš€ Franchise economics: Franchisees receive a percentage of the top-line revenue as royalties and marketing fund contributions. In this case, they earn around $35,000 per year per franchise location.
  • ๐Ÿ”’ Enterprise value: Franchise locations have a higher enterprise value multiple (15x) than privately owned locations (8x), making franchises more attractive to investors. Consequently, opening franchise locations adds greater value to the business.
  • ๐Ÿ”„ Scaling constraints: The scalability of franchises versus privately owned locations depends on the model's centralization or decentralization. Franchises may enable opening multiple locations with less effort, while privately owned locations require higher return on capital but offer greater individual valuation.
  • ๐Ÿ’ผ Personal preferences: Personality plays a role in the decision, with promotion-driven entrepreneurs more inclined towards franchising and product-driven entrepreneurs favoring privately owned locations. Combining strengths with collaborators can bridge any gaps in skillsets.

Transcript

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 d... Read More

Questions & Answers

Q: What are the key variables to consider when deciding between franchising and privately-owned locations for a business?

When making this decision, businesses should analyze the cost vs. return on investment, the effort required to open new locations, the scalability of the business model, and the personal preferences of the entrepreneur.

Q: Why is it necessary to switch from a business hat to an investor hat when considering franchising vs. privately-owned locations?

As a business starts generating profits, it becomes crucial to assess the best investment options. Evaluating the return on capital and potential growth through franchise or privately-owned locations helps determine where to allocate resources effectively.

Q: How does the enterprise value differ for franchise and privately-owned locations?

Franchise locations tend to receive a higher enterprise value multiple due to the expansion potential and guaranteed new openings. Privately-owned locations may have a lower multiple but offer higher valuations per location opened.

Q: How can scalability impact the decision between franchising and privately-owned locations?

If a business has a decentralized franchise model, more franchises can be opened with less effort compared to privately-owned locations. However, if the model requires more centralized operations, opening privately-owned locations may be more efficient.

Q: How do personal entrepreneurial preferences play a role in the decision-making process?

Entrepreneurs who are sales-oriented and enjoy promoting the business may find franchising a better fit. Conversely, those who prioritize product development and operational leadership may opt for privately-owned locations. Aligning preferences with the chosen strategy can lead to better outcomes.

Summary & Key Takeaways

  • Businesses must evaluate the return on investment and cost of opening more locations to make an informed decision between franchising and privately-owned locations.

  • Scalability is a crucial factor, as entrepreneurs often aim for a large exit, and understanding the impact of franchise vs. privately-owned locations on net worth is essential.

  • Personal entrepreneurial preferences, such as sales and marketing focus or operational leadership, play a role in determining the best strategy for growth.

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