How to Grow Your Local Business: A Framework

How to Grow Your Local Business: A Framework

As a business owner, you’re always looking for ways to grow and expand your business. But how do you know whether to open more franchises or stick to privately owned locations? In a recent video on YouTube, entrepreneur Gary Vaynerchuk shared his framework for making this decision.

According to Vaynerchuk, there are four main variables to consider:

1. Cost vs. Return: Consider the cost of opening more locations compared to the potential return on investment. If your business has a low return on capital, it may make more sense to franchise.
2. Effort: Determine whether your business is centralized or decentralized in terms of where the work is being done. If it’s more decentralized and the franchisees do most of the work, it may be easier to open more franchise locations.
3. Scale: Determine your net worth goal and the number of locations you’ll need to achieve it. This will help inform whether to open more franchises or privately owned locations.
4. Personal Preferences: Determine whether you’re more of a promotional entrepreneur or a product-driven, operational leader. This will inform whether you prefer to sell franchises or invest in people and build a big team.

To illustrate how this framework works in practice, Vaynerchuk shared the example of a teeth whitening business. The business metrics that are important include a top line per location of $500,000 a year and a bottom line of $250,000 a year. The cost to open a location is $50,000. If you spend $50,000 to open a location and make $500,000 in top-line revenue, you’ll keep $250,000 a year later. This is a really good return on investment.

However, if your business has a low return on capital, franchising may make more sense. For example, a McDonald’s franchise costs $1.1 to $1.2 million to open and makes $150,000 a year on average. This is a 15% return on investment, which is lower than the return on investment for the teeth whitening business.

If you do decide to franchise, keep in mind that franchises usually have a higher enterprise value than privately owned locations. Franchises typically get two times the multiple that a brick-and-mortar local chain will get. This means that for every location you open at the franchise level, you’ll add $300,000 to the franchise valuation. For every location you open on the privately held side, you’ll add $2 million. This can help inform how hard it is to open locations and what the constraints are.

In conclusion, Vaynerchuk’s framework for growing your local business involves considering cost vs. return, effort, scale, and personal preferences. By taking these variables into account, you can make an informed decision about whether to open more franchises or privately owned location