Franchise Business Idea
Buy SMBs in specific niches, with ‘franchisable’ brands, then apply a set of playbooks to acquired co to optimize operations, increase revenue and profit margins, and eventually turn them into a franchisable opportunity.
- Unique ability to develop and deploy scalable playbooks to become a machine that spins out scalable franchise opportunities
Tl;dr: Franchises are businesses that produce novel, proprietary, repeatable IP that can generate significant value for customers and have high-margin, equity-efficient distribution.
~ from Slow Ventures email: Fwd: Why Venture Should Care About Franchises
By Slow Ventures
November 15, 2023
Several months ago, the team got really hooked on franchises, and after several months running down the franchise rabbit hole, we're excited to finally share some slides outlining our main learnings and convictions.
Tl;dr: Franchises are businesses that produce novel, proprietary, repeatable IP that can generate significant value for customers and have high margin, equity efficient distribution. Our job as venture capital investors is to find such businesses, and enable them to test core hypotheses that, if true, push the business over an inflection point.
Having said that, we know you probably want more color before dipping your toes into the franchise world alongside us - so we couldn't resist highlighting some key takeaways from the deck below.
Let's dive in.
1. Public and private franchises shape an overlooked category within the venture capital community
- We gathered data from a sample of 41 major public franchises and calculated that the average 2022 FY net income was $674M (8.9%), while the average YoY revenue growth was 28.9%. Compare this to Shopify, a vSaaS favorite, which generated a $3.46B net loss and 21.4% revenue growth over the same period.
- On the private market side, and besides the clear success case studies (e.g. Crumbl Cookies, Orangetheory), we found a growing array of franchises leveraging the model to scale hyper-niche services. We believe this is the beauty of the franchise model: scaling hyper-niche, hyper local services businesses with infinite reach.
- One nuance to be added is that performance in the industry is primarily driven by a few outliers, with the median franchise having just around 40 locations and adding only a few units per year. But that's a model which the venture industry is already familiar with..
2. The next generation of franchise entrepreneurs is coming
- Franchising as a business model will prove particularly well catered to the transition towards community-based wealth creation. As a large swath of the tech infrastructure has now been deployed and is becoming increasingly cheap, entrepreneurs will learn to leverage it to bring small niches and communities to unheard-of scale (i.e. franchising will empower the upcoming generation of Billionaires Next Door).
- The creator and franchise worlds will crossbreed. For one, creators could become category franchisors for smaller creators, or act as lead gen for their own franchise altogether – this is in fact already happening, e.g. Laura Spaulding, the CEO of Spaulding Decon is a former police officer, turned YouTuber, turned franchisor. But this could also work the other way around, with franchisee/ors making the leap into the creator world (e.g. Brian Beers).
- Franchises will prove particularly attractive to the rising generation of entrepreneurs looking for FCF and independence. Epoch after epoch, talents tend to flow towards new industries: from big corporations in the 60s and 70s, to finance and law in the 80s and 90s to tech starting in the 2000s. As uncertainty and institutional decrepitude keep sneaking in, franchises will emerge as a desirable landing place for the rising generation of bright young people. The growing interest in ETA among recent MBA graduates is one fact that already points to this.
3. Several tailwinds make now the right time to build innovative franchise brands
- Industry tailwind. Franchisees in established franchise networks are relatively unhappy with the status quo, often feeling they are lacking operational support, or questioning the fairness of existing terms. Pointing to this, a recent survey found that franchisees would “possibly” or “probably” terminate their current ownership of a franchised business within the next year if they could do so without penalty. Additionally, the decision by some major franchises, such as McDonald’s, to increase royalty fees for new franchisees is likely to worsen these concerns. This creates an opportunity for new franchises to step in with an approach that prioritizes franchisees and develops robust built-in support systems.
- Regulatory tailwind. It appears that the government is not pursuing franchisors as vigorously for being the actual employer as initially anticipated. We can expect this trend to enable franchises to offer enhanced value-added services to their franchisees, ultimately leading to improved franchise offerings.
- Talent tailwind. There are two influx streams into the franchise industry that we believe are going to grow in importance: first, younger generations, who are increasingly investing in SMBs (cf. takeaway #2), and possibly tech employees as well, as they are either realizing that franchise ownership is a great option when they want to pursue entrepreneurship (with layoffs acting as a catalyst) or are simply quitting their jobs to find more fulfilling alternatives.
4. There is still potential for optimizing the franchise tech stack
Mapping the Franchise Tech Stack
- First, the set of needs to be addressed by this tech stack is unconventionally extensive. This is true horizontally: franchises need solutions including traditional ERP, CRM, POS, finance, legal and marketing tools, but also more unconventional tools to deal with real-estate, leasing, royalties, integrations with call centers for service franchises, or analytics across locations, etc. This is also true vertically as franchises interact with two sets of customers: franchisees (primary customers) and end customers (secondary), thereby creating dual requirements for CRM and marketing for example. Ultimately, this vertical and horizontal depth makes data aggregation particularly hard.
- Franchises form the poor child of software target markets. Franchises have the choice between end-to-end solutions that are specifically tailored for the franchise industry (e.g. Franconnect) but that lack sector-specificity, or they can adopt end-to-end vertical SaaS (e.g. Mindbody) that are unable to meet the specific needs of franchise businesses.
- Creating a robust data middleware will be an important unlock. The franchise industry is too diverse (sector-wide, and needs-wide) for one single platform to emerge, and the tech stack is therefore more likely to remain a vast net of plug-and-play solutions. This notably means there is an opportunity to create a data middleware that will streamline the flow of data between these solutions. We think this will be even more important as adjacent functions (HR, Ops notably) grow in importance, but also as new use cases emerge (e.g. David Energy which is now helping multi-location businesses to understand their operations from an energy standpoint).
5. Why you think we're wrong
- "Individual locations aren’t a venture bet." Correct but that’s not what we’re doing. We want to invest at the franchisor level - McDonald’s corporate, not the McDonald’s down the block. We are backing entrepreneurs who are beginning/ready to franchise their business. They usually have a few corporate-owned locations running, have a hypothesis on growth/replicability, and are now ready to franchise. Our capital is to test scalability and replication, not to develop the IP or run the location(s).
- "Even if franchises are a thing, just invest in the software." The biggest profit pools have historically been in the franchises themselves rather than the technology vendors who serve them. Software is a piece of the broader bet we’re excited to make as franchises can bring software to industries/sectors in which tech adoption has remained low.
- "You won’t produce venture returns." Franchises can be big, profitable companies, and our capital can propel emerging franchises up the curve faster. Franchises are highly equity efficient businesses, even as they grow. They generally don’t require massive and successive rounds of dilutive equity to grow.
- "Franchisors won’t want to take your money." Not all franchisors will want to take our money, like all founders don’t – which is a good thing. Only those chasing a J-curve growth curve will, as our money will help them to accelerate.
For a deeper exploration of the franchise world, don't forget to check our deck.