The ONLY 4 ways to MAKE BILLIONS as a service based business..

Summary

• If you have a service-based business, you can package your services and labor into a profitable business in four main ways, each with its pros and cons.
• A privately held chain allows you to retain ownership, take all the risk, front all capital, hire all labor, and fully control the brand.
• Franchising involves an investor who buys into the model and theoretically has lower risk, but many franchises don’t make significant money or get past 100 locations which is often necessary for substantial profits.
• A licensing model offers the name and fee without business systems. It has fewer start-up costs and high margins, but it’s hard to defend legally and has a lower enterprise value unless you have high yearly retention rates.
• Tech-enabled services through software can't replace all services, like haircutting, but if applicable, it involves significant initial costs and development but can have the highest enterprise value given good customer retention rates.
• The right choice depends on the cost of build-out, profit margins, service requirements, the availability of skilled service providers, and your risk appetite.
• Privately held chains are advisable if initial location setup costs are low (less than six months’ worth of profit to open a new location) and profit margins are high, as you own the entire revenue.
• Franchises make sense for high build-out cost models like McDonald's, allowing you to crowdsource the capital while earning from royalties.
• Licensing is suitable when start-up capital is low and if entering the market quickly is essential, but it may result in lower revenue upon exit.
• Software or tech-enabled services require heavy initial investment and development but can offer the highest potential enterprise value, assuming you have high customer retention.
• As an entrepreneur, assess these models based on the existing value proposition, cash flow needs, initial investment, time commitment, and risk tolerance.
• Consider the scalability of your service, whether the quality and consistency can be maintained across multiple locations or through different ownership structures.

Video

How To Take Action

I would suggest starting by analyzing the services you currently offer in your business, considering the low costs to build out and the potential profits. If you can expand with less than six months' worth of profit and maintain high margins, think about creating a privately held chain.

If that initial investment seems high, consider franchising, especially if the model requires significant capital. But remember, franchising can be tricky and costly at the start, so make sure you are willing to take on that challenge and strive towards having over 100 locations.

For those with limited start-up capital and a need for immediate cash flow, licensing might be a good path. Just ensure your model can handle quick market entry and is distinctive enough to stand out. Keep in mind, though, that this could lead to lower revenue when you are looking to sell your business.

Tech-enabled services can be a great option if your service can be delivered through software, but they require a heavy upfront investment in development. If you go this route, focus on customer retention to build a high enterprise value.

In all these models, it's key to analyze your cash flow needs, the amount of hands-on time you can commit, and your risk tolerance. As you expand, always prioritize maintaining the quality and consistency of the service you provide. That way, no matter which model you choose, you can steadily grow your business.

Quotes by Alex Hormozi

"90 to 95 percent of franchises don't hit over 100 locations"

– Alex Hormozi

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

– Alex Hormozi

"Franchise model, you need to get past 100 to make any real money"

– Alex Hormozi

"A private chain is gonna have the highest costs of opening each location"

– Alex Hormozi

"The amounts of to build out a store compared to the amount of profit it made was almost nothing"

– Alex Hormozi

Full Transcript

approached by service-based brick and mortar business and they have a very profitable single location model and they wanted to figure out a way or what path was going to be the best vehicle for them to make the most money and so we had a really good conversation about this and they broke down the different paths they could take um and for them it was really valuable and they were very happy about it and so what i wanted to do was break down this exact same process for you so if you have a service-based business or something where you have labor of some sort that you rent out at a profit to other people to provide value then this video is for you and if you want to figure out a way to package those services in a way that is that is uh that has a lot of enterprise value that has a lot of cash flow while you're growing then this video is for you okay so i'm gonna break down the only four ways that i know of that you can package your service and the labor and knowledge that you have into a profitable business now some of these have pros in terms they provide more cash flow have higher margin or lower operational drag others provide more enterprise value but a little bit more difficult to create so i'm going to show you the pros and cons of each of them i have businesses i own businesses that have three in three of these four categories right so i feel like i can speak to these with a decent amount of knowledge and not with a bias towards one or the other all right so the first is a privately held chain all right so i'll put private chain everyone uh you know keep your pg hats on so a private chain is basically like you have one location and then you open a second and a third and the specific business i was talking to was a person who had a salon concept so they did a concept around hair uh and he was doing very well and they were like man you know we're thinking about opening more locations and we want to figure out the best way to do this or ultimately make money with this model all right so the first is is just you open another location then another location another location you return you return retain all the ownership rights you take all the risk you front all the capital you hire all the labor you control the brand um but you own everything end to end all right so this is a privately held chain all right this is the first of the four vehicles that you can use to ultimately build your wealth all right at the end i'll show you the pros and cons of each of them the second some of you may be familiar with hopefully you've definitely frequented one of these businesses as a franchise so subway mcdonald's you know jiffy lube you know all of these are franchises right they are they are a single model that has been franchised out people buy in investors typically so this is a different person here an investor who's outside who just wants to find a good return of capital will buy into a franchise model and typically because franchises have far lower uh failure rates than starting your own business and so that's the advantage of this is that in theory there's lower risk now i could talk about the actuality behind that which is very different i could also tell you about the tons and tons and tons of franchises don't actually make money i think it's like 90 or 95 of franchises never get past 100 locations which candidly if you're doing a franchise model you need to get past 100 to make any real money and you were like how is that even possible i'll break it down in a second all right so that is the second vehicle that you can use in a service-based business to make a fortune now number three number three is a licensing model and i'll tell you some of the pros of this one a licensing model you might not be as familiar with the businesses that use licensing because depending on how they structure the license to you have to differentiate from what a franchise is a franchise has three components you have name business systems and fee all right so if you have all three of those things and people are using your brand your business systems and your fee then you are a franchise and if you're operating as a license and you're using those three components then you are an illegal franchise all right then you can get tat you can get fined and you can shut down and all that kind of stuff it's paying the butt i'll talk about the pros and cons of licensing in a second but that is the third vehicle all right so in a licensing vehicle you're typically gonna have two of those three things so you could have for example crossfit is a licensing right they give you the name and they have a fee but they don't have business systems a different version would be let's say you had a model that worked really well you license all the stuff but it's white labeled all right so you have a fee and you have business systems but you don't have a name or a brand that they have to adhere to all right that would be a licensing model so there's different versions of this um but that is essentially what a third way that you could package your existing knowledge or ip uh in a way that scales to multiple locations and ultimately make an enterprise that is very valuable the fourth and it's felt worth mentioning is software and i and i bring this up because it depends on the type of service you offer now if you're cutting hair you probably can't replace it with software right but if you are providing some sort of service that software can do um then this would be software attack enabled service all right hopefully you can read that tech enabled service all right so i'd say number four is is either of those for most people who have a service based business it will probably be one through three and the reason i bring that up is because if you're not already really good at software and have a software co-founder who knows how to code knows user experience knows how to build engineering teams if you don't have something like that do not try and outsource it to a third party team i promise you it will probably not work all right now you i promise you it won't work all right just please just two million three million dollars of development later i've made the mistakes let me give you a three million dollar gift don't do it i told you that i have three of these four and so let's go through the advantages or disadvantages that i walk through with this particular business all right so a private chain is gonna have the highest costs of opening each location so there's incremental cost every new location you have to do the build out you have to negotiate you have to find the location you have to negotiate the leases you have to you have to build everything out and then you have the risk of the lease for the duration of the time on top of that you have to staff it you control the employees etc now when is a private chain uh something that is worthwhile so i would say i'm looking at two main things where a private chain would be worth considering first is that they have low costs of build out right so if it doesn't cost a lot of money to build a new location so let's say if it costs less than you know forty or fifty thousand dollars to build a location now that's an absolute number but relative to the income that it generates let's say it generates four hundred thousand a year in profit if it costs you i should probably put a percentage on this but i would say if it costs you less than six months worth of profit in the first year to open a new location then it would be it would make sense to open a private chain so a great example of this would be insomnia cookies all right these tiny little locations they just had i think they were like 800 square feet on average they're tiny they just have to put an oven in there and a front door window and they have lots of delivery and for them they had tons of margin because it was cookies they were selling flour and sugar for big margins and the amount that a location could make it was tremendous compared to the cost all right and so here it's very low to build very high profit and so it's worth owning the entire thing all right that's a private chain so some of the biggest brands in the world start as private chains and then they go direct to consumers so chanel louis vuitton christian dior you know i mean all of these are brands they had brick and mortar locations they owned everything because the amounts of to build out a store compared to the amount of profit it made was almost nothing now that is a product business not a service business but i'm still at least explaining the point the third piece is that um it's low service requirements so the more specialized you are in terms of the types of skills that are required to do the business or provide the value the more difficult it is to scale in a private setting all right and that is because it is inconsistency of service will be a problem so if you're very good at your thing and you have your location and it works well if if you are required to make that level of value provided to the end consumer that it's not going to be a scalable model all right the reason that subway for example works is because anybody can make a sandwich that tastes the same way if you use the same recipes and use the same process right now if you can productize your service in such a way that you minimize the variability and you can decrease the skill requirements of the labor that is is required to work that system then you have a very scalable model which is the goal so private chain so for example for us just as a side note we have one of our businesses that is a private chain and they were actually they were in a licensing model right and when they came in as acquisition.com portfolio company i actually moved them over here because candidly their licensees were making so much money using their system and it cost so little to open new locations that i was like we should just be owning all this revenue it's not worth just giving all the revenue away and giving all the trade secrets right and so we transitioned the business over and in the last uh 14 months took it from a half a million dollar your business to a 12 million a year business pretty cool right so that is number one the second is franchise right so pros and cons of franchises cons very very litigious very expensive to start it usually costs about 750 000 uh to start a franchise just in terms of the setup fees and legal and and filings and all that kind of stuff that you have to do in order and that's just if that's just to get started that's not even to get it going and to really build a franchise the right way most times it takes one to two years to really start seeing profits because you'll sell locations but the cost of selling franchisees that franchise upfront fee will typically only cover the cost of acquisition all right so what it costs you to get franchise leads from franchise brokers or people who want to buy investments it'll usually cost you almost the entire upfront fee which is usually about 50 grand for many franchises and so you're only going to make money once they open off of royalties from top line all right so it's a very slow model but the enterprise value of a franchise is extremely high so enterprise value the ev on both of these is very good all right for private chain and franchise both of them are very good but the franchise multiple only comes off of the corporate franchise revenue because technically you're selling llc's to other people so other people are the owners of the vast majority of the profit of the business right so you're only making your money off of the royalties that are coming in and then you still have all of your costs of running your actual franchise helping the franchisees succeed etc now when you would start a franchise would be something where you have very very high build up costs right if a new location costs a ton of money like mcdonald's right costs whatever a million bucks to open mcdonald's that's a lot of capital right and so you would want to give you want to give that risk that capital risk to other people you basically crowdsource for lack of a term the ownership of these new locations and then you take a piece off the top now mcdonald's obviously owns the real estate too because they're very smart cookies that is uh the franchise model in a nutshell right you're running on a very small percentage of top line and you have to have lots and lots of locations and if you guys want a rule of thumb you usually need to have 100 plus locations for a franchise really to make sense and here's a fun fact for you 90 to 95 percent of franchises don't hit over 100 locations all right so as much as people have service-based business and think that the ultimate goal is to build a franchise so that someday they can franchise their business the franchise is not the end goal it is the beginning of the next journey all right you have not yet succeeded you might impress your parents and your friends but you will not impress your bank accounts or the players in the game who really understand how it works all right so number one private chain number two franchise opportunity number three licensing all right the advantage here is that it it it's the lowest cost so almost no cost to license out a model typically you have super high margins just like franchising does the margins are high in franchising it just costs a lot to start so high margins now the problems with this is that it's not that defensible it's very hard to defend and there's very little enterprise value so very low multiples when you sell unless you have a ridiculously sticky licensing agreement all right so for you for an idea if anyone's curious you would want to have 80 plus yearly retention on licensees for for you to get a real really attractive uh exit multiple right so we're talking you know six plus multiple on the exit all right and so now the advantage of licensing is that it doesn't cost you any money it's very high cash flow throughout the process and you can pretty much make money day one right and so when you're newer sometimes licensing makes the most sense right so uh gym launch that business is a licensing business right and it was my first business i didn't have tons of money um you know to get it going and i wanted to start generating cash flow sooner and so that was why i did that the business that we have um i won't i won't sure what it is because we try not to get people to copy what we're doing um but in uh in one of our niches uh like i said earlier we went from having a licensing model to owning a ton of locations right now we have 12 locations and we open a new location every month which is pretty cool number four software so if you have a way and this requires a ton of cost to build lots of time very low cash flow you're like why would i do software it's because the enterprise value on the exit is usually the highest but again everyone likes to hear that oh i heard you can exit software for a ton yeah but the same requirement of churn is still 80 or higher yearly uh retention right and the higher you make that retention it's got to be above 80 percent or no one's even consider you a software they're just going to consider you a normal service that just has some tech element to it all right and so each of these has pros and cons and so if you're thinking about scaling your service based business i'll think of which of these four buckets do you fit in and which of these strategies makes the most sense for you all right and so this is how i look at service-based businesses if i'm going to come in as an investor and i want to help them scale or triple or or 5x in you know five year period i'm going to say which of these vehicles is going to make most sense for the ip and the value that we're providing based on the model that exists the cash flow that i require the amount of upfront investment the time to go and a lot of times just the appetite risk of the entrepreneur and how unbel and how structurally sound the return is on the model so if we know beyond a shadow of a debt that when we enter a mark we're gonna freaking murder it and it costs us not a lot of money to open it then we're gonna own the whole thing privately now same thing if we know we're going to kill it but it costs a million bucks to open a location then we might franchise right and if it costs no money right and we don't think that it's a really protectable ip right let's say it's a more offer based business like jim launch for example in the beginning was a very offer driven business offer is very easy to copy right and so it was how quickly can we take as much market share as we possibly can so for licensing it's speed right you can you can you can absolutely outpace anyone else in the market on speed and you make lots of cash flow but you're going to sacrifice a lot of money on the exit right and so with licensing you make money throughout the process rather than having a big lump at the end and probably the exact opposite with that would be like a software type thing so if you take the time develop the software you put the cache up front to develop it you figure out a way to do it and then ultimately figure out a way to make it as valuable as as you have to achieve this 80 or higher uh yearly retention on the customers that you are selling or it will not be valuable at all and it will be valued like the other ones except you just wasted a bunch of money and time so i hope this uh provided value for you if you're if you're thinking about how to ultimately create your enterprise in a way that has the most value then i would think through each of these four different vehicles um as monetization structures uh for the opportunity all right so lots of mozzie nation if you don't know who i am my name is alex from mozilla and acquisition.com our portfolio is about 85 million a year in revenue so if you like this hit subscribe and if you did i love you either way i'll catch you guys next video bye