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Franchise vs. Private Ownership Expansion Strategies

Apr 24, 2025

Business Expansion: Franchise vs. Private Ownership

Key Decision Factors

  1. Cost vs. Return

    • Assess the return on every dollar invested in opening more locations.

  2. Effort to Open Locations

    • Centralized vs. Decentralized operations.
      • Centralized: More operational drag at the franchisor level.
      • Decentralized: More work for the franchisee.

  3. Scale and Exit Strategy

    • Determine personal goals (e.g., big exit, asset building).
    • Reverse engineer net worth goals to location-level economics (franchise vs. privately owned).

  4. Type of Entrepreneur

    • Promotional entrepreneur: Focused on sales and marketing.
    • Product-driven entrepreneur: Focused on operations and leadership.

Business Metrics

  • Top Line per Location: $500,000/year.
  • Bottom Line per Location: $250,000/year.
  • Cost to Open: $50,000.
  • Return on Capital Example: Spend $50k, make $500k (Top Line), keep $250k/year.

Franchise vs. Private Ownership Economics

  • Franchise Royalties: 7.5% on Top Line.
    • Example: $35,000/year from $250,000 location.
  • Enterprise Value Multiples:
    • Franchises may get 15x earnings due to potential growth.
    • Privately held: 8x earnings.
  • Valuation Impact per Location:
    • Franchise: Adds $300,000 per location.
    • Private: Adds $2 million per location.

Operational Considerations

  • Decentralized Model Advantages:
    • Potentially open more franchises for equivalent effort.
  • Centralized Model:
    • May favor privately owning locations if return on capital is high.

Strategic Growth Planning

  • 100 Million Dollar Exit: Requires either 50 private locations or 333 franchise locations.
  • Opening Rates:
    • Private locations: 1-2/month.
    • Franchises: Higher internal limitations.

Personal and Internal Factors

  • Entrepreneurial Personality:
    • Promotion-driven: May favor franchises.
    • Ops/product-driven: May favor private ownership.
  • Overcoming Challenges:
    • Hire complementary skills (e.g., staffing for franchises, sales for private chains).

Conclusion

  • Checklist for Decision Making:
    • Use the outlined points to evaluate and plan for business expansion.
    • Approach decisions as both a business owner and investor.

The lecture emphasizes understanding your business model and personal strengths, along with thoroughly analyzing financial implications, to determine the most effective expansion strategy. By considering the key variables, entrepreneurs can make informed decisions to maximize enterprise value.

Full transcript