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In most businesses, the rule of thumb is that the bigger you grow, the harder you work and the more moving pieces you have — managing more things, employees, taxes and more headaches.
Not when you’re a franchisee. Franchising is a business of systems including systems to scale. When your goal is not to buy a job but to create generational wealth by expanding a franchise, over the long term, you do less work while making more money because the franchise business includes the team building and them running it for you. Then the second bite of this beautiful apple is you have a healthy, valuable business to sell for a life-changing amount of money.
Compounding and Blitzscaling
Let’s start at the beginning. People buy franchises for long-term goals: the opportunity to be your own boss, financial security, to leave a legacy for children and grandchildren. That’s great. But it’s also a lot of work — and a lot of investment — in the beginning. But with the magic of compounding and Blitzscaling, you can make a lot more, and over time, work less.
Take a theoretical example. You invest $250,000 in a franchise that nets about $200,000 per year. Over 10 years, you’ve made $2 million in profit. Since this business is an asset and if you decide to sell that franchise for, let’s say 6x profit, you could net perhaps another $1.2 million in capital gains. So, you made over $3 million from that $250,000 investment. Congratulations!
I knew someone who purchased a sandwich franchise for his daughter, with the goal of accruing profits to cover the cost of raising the child, from education to college to marriage and her own first home. The investment in that particular franchise was about $50,000 out of his pocket and an SBA loan. That $50,000 yielded $1.5 million along the way in profits and then the purchase price when they eventually sold it.
A ‘snowball rolling downhill’
But it gets better. What if you take that $250,000 profit and invest it in another franchise, or in income-producing real estate? And then you do it again, and again, while your profits compound. Over 10 years, that initial investment is like a snowball rolling downhill, growing and growing until you have a multi-unit business that you can sell for many times your investment, earning you life-changing money when you sell.
You open one to two franchises and roll the profits so they open another location, then you take the profits from the three locations and open two more, the profits from those five units to open three more, and so on. That’s blitzscaling. Remember the second bite at the apple — you are eventually selling this entire business, so not only have you self-funded and compounded your returns but your exit is now a multiple of that large enterprise.
Fine, you say. But wouldn’t 10 times the number of stores or restaurants be 10 times the work? No. It actually gets easier and more profitable as you grow and, since success leaves clues, you can model and emulate the hundreds of other franchisees growing large franchise businesses. Your model will include both the resources to run the franchise businesses but also the resources to scale new locations, most of which are outsourced.
After the first unit, you’re hiring managers to oversee the staff — you’re not cleaning the floors, making the food or ringing up a purchase. You’re available to offer guidance and deal with the corporate headquarters, which is supplying most of your training materials. You keep an eye on things and look for new investments.
If you’re the franchisor, that’s even more true. The upfront franchise fee is just the beginning of a successful long-term relationship that should benefit both of you. And you do less of the work.
Related: Want to Become a Franchisee? Run Through This Checklist First.
Work less but bring in more money
I interviewed two people on our Smart Franchising with Fransmart podcast recently, both of whom said they self-funded 10-plus locations, compounding their returns. One of the two sold his business (second bite at the apple) and, now semi-retired, helps new prospective franchises become wealthy in franchising.
An example we use all the time is the sale of a five-unit franchise for $180,000. If that franchisee opens all five units, and grosses $1 million per store, the franchisor could 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 to the franchisor, who is providing the same support and service to those five stores as he would to one. And most of the support takes place in the first 12 to 24 months. (Seriously, reproducing a binder of marketing materials isn’t that hard.) After that, the franchisee should be operating well — and probably asking to buy more franchises from you.
That’s how Five Guys 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 immensely profitable business, that has an existing pipeline for expansion, making it even more valuable. It’s worth thinking long term and doing this right.
This story originally appeared on Entrepreneur
