WEBVTT

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So, if you have a service-based business or something where you have labor of some sort

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that you rent out at a profit to other people to provide value, then this video is for

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you.

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Welcome to the game where we talk about how to get more customers, how to make more

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customers, how to keep them longer, and the many failures and lessons we have learned

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along the way.

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I hope you enjoy and subscribe.

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Mousenations.

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The other day I was approached by a service-based brick-and-mortar business and they have a very

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profitable single-location model.

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And they wanted to figure out a way or what path was going to be the best vehicle for

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them to make the most money.

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And so we had a really good conversation about this and it broke down the different paths

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they could take and for them it was really valuable and they were very happy about it.

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And so what I wanted to do was break down this exact same process for you.

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So if you have a service-based business or something where you have labor of some sort

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that you rent out at a profit to other people to provide value, then this video is for you.

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If you want to figure out a way to package those services in a way that has a lot of enterprise

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value that has a lot of cash flow while you're growing, then this video is for you.

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So I'm going to break down the only four ways that I know of that you can package your

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service and the labor and knowledge that you have into a profitable business.

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Now some of these have pros in terms they provide more cash flow via margin or lower operational

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drag.

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Others provide more enterprise value but a little bit more difficult to create.

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So I'm going to show you the pros and cons of each of them.

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I have businesses, I own businesses that have three in three of these four categories.

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So I feel like I can speak to these with a decent amount of knowledge and not with a bias

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towards one or the other.

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So the first is a privately held chain.

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So I'll put private chain.

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Everyone, keep your PG hats on.

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So a private chain is basically like you have one location and then you open a second

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and a third.

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And this specific business I was talking to was a person with a salon concept.

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So they had a concept around here and it was doing very well and they were like, man,

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you know, we're thinking about opening more locations and we want to figure out the

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best way to do this or ultimately make money with this model.

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All right.

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So the first is just you open another location, another location, another location, you return,

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you retain all the ownership rights, you take all the risk, you front all the capital,

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you hire all the labor, you control the brand, but you own everything end to end.

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All right.

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So this is a privately held chain.

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All right.

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The first of the four vehicles that you can use to ultimately build your wealth.

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All right.

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At the end, I'll show you the pros and cons of each of them.

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The second, some of you may be familiar with, hopefully, you've definitely frequented

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one of these businesses.

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This is a franchise.

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So Subway, McDonald's, you know, Jiffy, Lou, you know, all of these are franchises, right?

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They are, they are a single model that has been franchised down.

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People buy in, investors typically.

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So this is a different person here.

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An investor who's outside who just wants to find a good return of capital will buy into

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a franchise model.

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And typically because franchises have far lower failure rates than starting your own

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business.

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And so that's the advantage of this is that in theory, there's lower risk.

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Now I could talk about the actuality behind that, which is very different.

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I could also tell you about the tons and tons and tons of franchises that don't actually

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make money.

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I think it's like 90% or 95% of franchises never get past 100 locations, which candidly,

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if you're doing a franchise model, you need to get past 100 to make any real money.

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And you were like, how is that even possible?

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I'll break it down in a second.

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All right.

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So I can't vehicle that you can use in a service-based business to make a fortune.

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Now, number three, number three is a licensing model.

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And I'll tell you some of the pros of this one, a licensing model.

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You might not be as familiar with the businesses that use licensing because depending on how

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they structure the license, you have to differentiate from what a franchise is.

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A franchise has three components.

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You have name, business systems, and fee, all right.

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So if you have all three of those things and people are using your brand, your business

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systems, and your fee, then you are a franchise.

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And if you're operating as a license and you're using those three components, then you

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are an illegal franchise, all right, then you can get tax, you can get fine, and you

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can shut down and all that kind of stuff to pay in the butt.

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I'll talk about the pros and cons of licensing in a second, but that is the third vehicle,

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all right.

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So in a licensing vehicle, you're typically going to have two of those three things.

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So you could have, for example, CrossFit is a licensing, right.

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They give you the name and they have a fee, but they don't have business systems.

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A different version would be, let's say you had a model that worked really well.

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You license all the stuff, but it's white labeled, all right.

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So you have a fee and you have business systems, but you don't have a name or a brand that

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they have to adhere to, all right.

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That would be a licensing model.

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So there's different versions of this, but that is essentially what a third way that

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you could package your existing knowledge or IP in a way that scales to multiple locations

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and ultimately make an enterprise that is very valuable.

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The fourth and it's felt worth mentioning is software.

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And I bring this up because it depends on the type of service you offer.

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Now, if you're cutting hair, you probably can't replace it with software, right.

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But if you are providing some sort of service that software can do, then this would be software

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slash a tech enabled service, all right, hopefully you can read that tech enabled service.

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All right.

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So I'll say number four is is either of those.

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For most people who have a service-based business, it will probably be one through three.

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And the reason I bring that up is because if you're not already really good at software

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and have a software co-founder who knows how to code, knows user experience, knows how

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to build engineering teams, if you don't have something like that, do not try and outsource

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it to a third party team.

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I promise you, it will probably not work.

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All right.

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Now, I promise you won't work.

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All right.

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Just please, just two million, three million dollars of development later, I've made the

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mistakes.

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Let me give you a three million dollar gift.

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Don't do it.

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I told you that I have three of these four.

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And so let's go through the advantages or disadvantages that I walk through with this

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particular business.

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All right.

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So a private chain is going to have the highest costs of opening each location.

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So there's incremental costs.

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Every new location you have to do the build out, you have to negotiate.

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You have to find the location, you have to negotiate the leases, you have to build everything

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out.

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And then you have the risk of the lease for the duration of the time.

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On top of that, you have to staff it, you control the employees, et cetera.

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Now, when is a private chain, something that is worthwhile?

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So I would say I'm looking at two main things where a private chain would be worth considering.

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First is that they have low costs of build out, right?

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So if it doesn't cost a lot of money to build a new location, so let's say if it costs

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less than, you know, 40 or 50,000 dollars to build a location, now that's an absolute

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number, but relative to the income that it generates, let's say it generates 400,000

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a year in profit.

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If it cost you, I should probably put a percentage on this, but I would say if it cost you

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less than six months worth of profit in the first year to open a new location, then it

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would be, it would make sense to open a private chain.

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So a great example of this would be insomnia cookies.

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All right.

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These tiny little locations, they just had, I think they were like 800 square feet on average.

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They're tiny.

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They just have to put an oven in there and a front window and they have lots of delivery.

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And for them, they had tons of margin because it was cookies.

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They're selling flour and sugar for big margins and the amount that a location could make

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was tremendous compared to the cost.

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All right.

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And so here, it's very low build, very high profit, and so it's worth owning the entire

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thing.

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All right.

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That's a private chain.

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So some of the biggest brands in the world start as private chains and then they go

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direct to consumer.

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So Chanel, Louis Vuitton, Christian Dior, you know, I mean, all of these are brands.

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They had brick and mortar locations.

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They owned everything because the amount to build out a store compared to the amount

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of profit that I made was almost nothing.

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Now that is a product business, not a service business, but I'm still at least explaining

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the point.

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The third piece is that it's low service requirements.

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So the more specialized you are in terms of the types of skills that are required to do

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the business or provide the value, the more difficult it is to scale in a private setting.

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All right.

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And that is because it is inconsistency of service will be a problem.

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So if you're very good at your thing and you have your location and it works well, if

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you are required to make that level of value, provided to the end consumer, then it's

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not going to be a scalable model.

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Most of the nation real quick, if you are a business owner that has a big, old business

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and wants to get to a much bigger business, going to $50, $100,000 plus we would love to

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talk to you.

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And if you like that, we would like to hear more about it.

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Go to acquisition.com and you can plan anywhere on the page and talk to one of our team

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and see if we can help you get there.

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All right.

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The reason that subway, for example, works is because anybody can make a sandwich that

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tastes the same way if you use the same recipes and use the same process, right?

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Now, if you can productize your service in such a way that you minimize the variability

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and you can decrease the scale requirements of the labor that is required to work that

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system, then you have a very scalable model, which is the goal.

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So private chain.

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So for example, for us, just a side note, we have one of our businesses that is a private

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chain and they were actually, they were in a licensing model, right?

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And one of the came in as acquisition.com portfolio company, I actually moved them over

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here because candidly, there are licensees were making so much money using their system

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and it cost so little to open new locations that I was like, we should just be owning all

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this revenue.

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It's not worth just giving all the revenue away and giving all the trades he could write.

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And so we transitioned the business over and in the last 14 months to get from a half

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a million dollar your business to a $12 million a year business.

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Pretty cool, right?

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So that is number one.

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The second is franchise, right?

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So pros and cons of franchises, cons, very, very litigious, very expensive to start.

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It actually costs about $750,000 to start a franchise just in terms of the set up fees

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and legal and in filings and all that kind of stuff that you have to do in order.

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And that's just, if that's just to get started, that's not even to get it going.

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And to really build a franchise the right way, most times it takes one to two years to really

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start seeing profits because you'll sell locations, but the cost of selling franchisees

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that franchise upfront fee will typically only cover the cost of acquisition, all right?

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So what it costs you to get franchise leads from franchise brokers to people who want

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to buy investments, it'll usually cost you almost the entire upfront fee, which is usually

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about $50 grand for many franchises.

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And so you're only going to make money once they open off of royalties from top line,

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all right?

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So it's a very slow model, but the enterprise value of franchise is extremely high.

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So enterprise value, the EV on both of these is very good, all right, for private chain

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and franchise.

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Both of them are very good.

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So franchise multiple only comes off of the corporate franchise revenue because technically

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you're selling LLCs to other people.

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So other people are the owners of the vast majority of the profit of the business, right?

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And so you're only making your money off of the royalties that are coming in and then

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you still have all of your costs of running your actual franchise, helping the franchise

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uses succeed, et cetera.

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Now when you would start a franchise, it would be something where you have very, very high

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build up costs, right?

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If a new location costs a ton of money like McDonald's, right, costs whatever a million bucks

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to open McDonald's, that's a lot of capital, right?

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And so you would want to give, you want to give that risk, that capital risk to other people.

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You basically crowd source for lack of a term, the ownership of these new locations and

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then you take a piece off the top.

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Now McDonald's obviously owns the real estate too because they're very smart cookies.

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That is the franchise model in a nutshell, right?

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You're running on a very small percentage of top line and you have to have lots and lots

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of locations.

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And if you guys want to rule a firm, you usually need to have 100 plus locations for a franchise

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really to make sense.

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And here's a fun fact for you.

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90 to 95% of franchises don't hit over 100 locations, all right?

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So as much as people have service-based business and think that the ultimate goal is to build

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a franchise.

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So that's some day they could franchise service.

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The franchise is not the end goal.

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It is the beginning of the next journey, all right?

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You have not yet succeeded.

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You might impress your parents and your friends, but you will not impress your bank accounts

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or the players in the game who really understand how it works, all right?

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So number one, private chain, number two, franchise opportunity.

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Number three, licensing, all right?

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The advantage here is that it's the lowest cost, so almost no cost to license out a model.

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Typically, you have super high margins, just like franchising does.

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The margins are high in franchising, it just costs a lot to start.

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So high margins.

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Now the problems with this is that it's not that defensible, it's very hard to defend,

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and there's very little enterprise value.

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So very low multiples when you sell unless you have a ridiculously sticky licensing agreement.

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All right?

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For you, for an idea if anyone's curious, you would want to have 80% plus yearly retention

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on licensees for you to get a real, really attractive exit multiple, right?

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So we're talking, you know, six plus multiple on the exit, all right?

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And so now the advantage of licensing is that it doesn't cost you any money.

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It's very high cash flow throughout the process, and you can pretty much make money day

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one, right?

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And so when you're newer, sometimes licensing makes the most sense, right?

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So gym launch, that business is a licensing business, right?

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And it was my first business.

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I didn't have tons of money, you know, to get it going, and I wanted to start generating

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cash flow sooner.

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And so that was why I did that.

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The business that we have, I won't, I won't share what it is because we try not to give

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people a copy what we're doing.

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But in one of our niches, I think I said earlier, we went from having a licensing model to

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owning a ton of locations.

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Right now we have 12 locations and we open a new location every month, which is pretty

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cool.

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Number four, software.

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So if you have a way, and this requires a ton of costs to build, lots of time, very low

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cash flow, you're like, why would I do software?

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It's because the enterprise value on the exit is usually the highest.

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But again, everyone likes to hear that.

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Oh, I heard you can exit software for a ton.

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Yeah, but the same requirement of turn is still 80% or higher yearly retention, right?

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And the higher you make that retention, it's got to be above 80% or no one's even going

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to consider you a software.

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They're just going to consider you a normal service that just has some tech element to it.

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And so each of these has pros and cons.

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And so if you're thinking about scaling your service based business, I'll think of which

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of these four buckets do you fit in and which of these strategies makes the most sense for

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you.

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All right.

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And so this is how I look at service based businesses.

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If I'm going to come in as an investor and I want to help them scale or triple or five

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X in five year period, I'm going to say which of these vehicles is going to make most

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sense for the IP and the value that we're providing based on the model that exists, the

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cash flow that I require, the amount of upfront investment, the time to go.

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And a lot of times just the appetite risk of the entrepreneur and how un and how structurally

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sound the return is on the model.

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So if we know beyond a shout of a dad that when we enter a market, we're going to freaking

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murder it and it costs us not a lot of money to open it, then we're going to own the whole

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thing privately.

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Now, same thing.

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If we know we're going to kill it, but it costs a million bucks to open a location that

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we might franchise, right?

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And if it costs no money, right?

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And we don't think that it's a really protectable IP, right?

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Let's say it's a more offer based business like Jim lunch, for example, in the beginning

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was very offer driven business offers very easy to copy, right?

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And so it was how quickly can we take as much market areas we possibly can't?

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So for licensing, it's speed, right?

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You can absolutely outpace anyone else in the market on speed and you make lots of cash

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flow, but you're going to sacrifice a lot of money on the exit, right?

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And so with licensing, you make money throughout the process rather than having a big lump

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at the end.

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And probably the exact opposite of that would be like a software type thing.

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So if you take the time to develop the software, you put the cash up front to develop it,

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you figure out a way to do it, and then ultimately figure out a way to make it as valuable as

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you have to achieve this 80% or higher yearly retention on the customers that you are selling

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or it will not be valuable at all.

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And it will be valued like the other ones except you just wasted a bunch of money in time.

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So I hope this provided value for you if you're thinking about how to ultimately create your

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enterprise in a way that has the most value that I would think through each of these four

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different vehicles as monetization structures for the opportunity.