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In most businesses, the general rule is that the bigger you get, the harder you work and the more moving parts you have—managing more things, employees, taxes, and more. headache.
Not when you're a franchise. Franchising is a systems business including systems at scale. When your goal is not to buy a business, but to create generational wealth by expanding a franchise, over the long term, you do less work making more money because franchise business involves team building and they run it for you. Then the second bite of this beautiful apple is that you have a healthy and worthwhile business to sell for a life-changing amount of money.
Blitz composition and escalation
Let's start from the beginning. People buy franchises for long-term goals: the opportunity to be their own boss, financial security, to leave a legacy for their children and grandchildren. This is wonderful. But it's also a lot of work – and a lot of investment – at first. But with the magic of mixing and lightning scaling, you can do much more, and over time, work less.
Take a theoretical example. you pour in $250,000 in a franchise that makes about $200,000 a year. Over 10 years, you made $2 million in profit. Since this business is an asset, and if you decided to sell that franchise for, say, 6x earnings, you could make maybe another $1.2 million in capital gains. So you made over $3 million on that $250,000 investment. congratulations!
I knew someone who bought a sandwich franchise for his daughter, with the goal of collecting profits to cover the cost of raising the child, from college education to marriage and her first home. The investment in that particular franchise was about $50,000 out of his own pocket and a SBA loan. That $50,000 brought in $1.5 million down the road in profits and then the purchase price when they finally sold it.
A 'snowball rolling downhill'
But it gets better. What if you take that $250,000 profit and invest it in another one franchise, or in income producing real estate? And then you do it again, and again, as your profits compound. Over 10 years, that initial investment snowballs downhill, grows and grows until you have a multi-unit business that you can sell for multiples of your investment, earning you life-changing money when you sell.
You open one to two franchises and put the profits into them opening another location, then you take the profits from three locations and open two more, the profits from those five units to open three more, and so on. This is rapid scaling. Remember the second bite of the apple – you eventually are selling this whole business, so not only have you self-funded and compounded your returns, but your output is now a multiple of that huge undertaking.
Okay, you say. But wouldn't 10 times the number of shops or restaurants be 10 times the work? No. In fact, it becomes easier more profitable as you grow and, since success leaves clues, you can model and emulate hundreds of other franchisees who grow large franchise businesses. Your model will include both the resources to run franchise businesses, but also the resources to scale new locations, most of which are contracted.
After the first unit, you are hiring managers to supervise the staff – you are not cleaning the floors, making the food or doing a shopping. You are available to provide guidance and deal with it company headquarters, which supplies most of your training materials. You keep an eye on things and look for new investments.
If you are the franchisor, this is even more true. The initial franchise fee is just the beginning of a successful long-term relationship that should benefit both. And you do less work.
Connected: Want to become a franchisee? Do this checklist first.
Work less, but bring in more money
I recently interviewed two people on our Smart Franchise with Fransmart podcast who both said they self-funded 10-plus locations, adding their returns. One of the two sold his business (second bite at the apple) and, now semi-retired, helps young future franchisees strike it rich in franchising.
An example we use all the time is selling a five-unit franchise for $180,000. If that franchisee opens all five units and earns $1 million per store, the franchisor can receive a 6 percent royalty, a 2 percent marketing fee and a 1 percent supply line vendor rebate—about $90,000 per store per year . That's $4.5 million over 10 years for the franchisor, which is providing the same support and service to these five stores as it would to one. And most of the support is done in the first 12 to 24 months. (Seriously, reproducing a binder of marketing materials isn't that hard.) After that, the franchisee should be up and running—and maybe ask to buy more franchises from you.
so Five Boys has grown from four restaurants to 1,500, and other franchises are continuing to grow. You work less, but bring in more money. And when the time comes to sell, you've built an extremely profitable business that has an existing pipeline for expansion, making it even more valuable. It pays to think long term and get it right.