🍟 10/3/2022 – Franchising = Business as a Service
SPONSORED BY QUIQ CAPITAL
Whether you’re a franchisee, franchisor, or independent business owner – financing is an amazing tool to help you expand your business.
But the process of determining if your business will qualify for a loan can be long, arduous, and uncertain.
Quiq Capital offers a better way by guaranteeing fast answers through technology and high-touch underwriting.
If you have over $500k in annual revenue, a 600 FICO store, and have been in business for 2+ years, you already meet Quiq’s minimum requirements regardless of the industry your business is in!
Think QUIQ – and get up to $2 Million in non-dilutive capital to grow your business.
Franchising = Business as a Service
If you follow me on twitter, you may have seen my tweets about the concept of “Business-as-a-Service” aka BaaS.
If you did, I’m diving deeper into it here than I did on the ol’ bird app.
This piece originally started back in June, when I had a realization. Cryptocurrencies, which for most of their lifetime were viewed as sketchy, illegal, associated with drug transactions, etc. had all of a sudden since 2020 become viewed as “the future”.
Because some genius rebranded “crypto” to “Web3”. That got me thinking, and I tweeted this:
The crypto industry hasn’t changed, just the name of it did.
I’m not here to discuss if crypto is legit or not, or what will happen to it in the future. Regardless of your stance, you gotta admit that rebrand has done wonders for how people think about crypto.
I’m going as far as saying it’s as powerful a rebrand as mayonnaise being called “aioli” (it’s the same thing folks, let’s be real).
So What is BaaS?
BaaS is another way to look at what the franchising model is at its core, and also shows the the similarities it has to SaaS (software as a service).
SaaS companies are unanimously viewed as cooler and sexier than your average franchise, and in part is why some of the best founders and employees gravitate to SaaS companies (and tech in general).
However, franchises are just as cool when you really break down what they’re doing, but the reality is that we have a brand problem.
That’s right, the “F-word”, aka franchises, has a bit of a perception issue.
The average joe that hears that word likely associates it with 1 of 2 things:
1). McDonald’s, or
2). Pyramid schemes
So bascially this means that many people who hear the word “franchises” instantly think of a cheeseburger company that’s been around since the 1950’s, or equating it to fraud, being ripped off, etc.
But if you say the word “SaaS”, every tech bro in America instantly dreams of legendary startups, strong recurring revenue, the glory of IPO’ing, getting acquired, etc.
So to say that franchises are getting the short end of the stick at the moment would be an understatement.
Hence, this is why I wanted to reframe franchising as Business-as-a-Service, because not only does that offer the masses another way to look at the same business model, but the similarities are hard to ignore.
Software as a Service
SaaS companies build software products, and sell them to individuals and/or companies. Netflix sells to individuals, while HubSpot, the CRM I used in my franchise development days, sells to small businesses and enterprise level institutions.
For HubSpot specifically, thousands and thousands of sales team use their software to organize their leads, perform automated and personalized outreach, and ultimately make their work more efficient and effective.
In exchange for using it, companies don’t have to pay an outrageous amount of money to access it, but instead just pay a monthly fee.
From Hubspot’s perspective, the name of the game is scale – at a certain number of customers, the recurring revenue they generate is at an incredibly high margin. The only way this fails, is if customers opt out of the monthly subscription.
Customers that opt out are referred to as “churn”, and customers will churn if the price is not worth the benefit they get from a B2B SaaS product.
Business as a Service
Franchisors (the providers of BaaS) all start with 1 location. They have a choice of either continuing to build their own locations, or they can package up the operational insights, and sell that to individuals that want to own their own business.
Being a mulit-unit owner is of course incredibly lucrative, and has been something I highlight regularly in this newsletter.
But building more locations requires much more capital, and also adds in layers of management and complexity as your units under management grow.
So instead, you can sell BaaS, and give entrepreneurs your playbook for running a [insert any small business here] in exchange for ~6% of monthly revenue.
When franchisors have an exceptional BaaS offering, just like SaaS companies, the margins become outstanding at a certain scale.
The big difference however is that the franchisor‘s true customer is their franchisee. A franchisee has much more skin in the game than a sales director who’s using company money to pay for a HubSpot subscription.
A franchisee, the BaaS customer, won’t just opt out at a moment’s notice.
Given this difference in incentives, if your BaaS offering enables entrepreneurs to start up and succeed in business, then churn only occurs if your franchisees go out of business!
I bring this brand up a lot, but Crumbl is a perfect example of being an amazing BaaS provider.
The average unit volume in 2021 was $1.6M, with a net income of $350K. Crumbl coroporate owns just 1 of their own cookie shops, but makes $30M/year in royalties alone. Most importantly, they’ve never had a BaaS customer (i.e. a franchisee) close their doors!
That’s the perfect example of a BaaS provider enabling entrepreneurs to succeed.
And the lack of churn is why the recurring revenue generated from royalties is perhaps the most dependable in the world (even better than SaaS). The ripple effect from that is BaaS founders, just like SaaS founders, get insane multiples.
Example: Firehouse Subs got a 20x EBITDA multiple (all in cash) when they were acquired in November 2021.
BaaS > SaaS
The franchise industry needs more BaaS providers. When it’s done right, I really think it’s the most equitable business model out there, as the best franchisors are legitimate wealth creators for all their franchisees.
Tying it back to the beginning, McDonald’s may be a “cheese burger company that’s been around since the 1950’s”, but they’re also wealth creators.
The average McDonald’s franchisee today owns 8 locations and is worth ~$23.2M.
So yes, while the franchisor certainly reaps the financial benefits of scale, franchisees can also make life changing returns too.
And the best part is, BaaS isn’t limited to just restaurants, it can be done in any industry:
- Home services
If you’re interested in learning more about this, check out my upcoming podcast season that starts tomorrow on YouTube. I’ll be interviewing founders who are selling Business-as-a-Service across a variety of industries.
Subscribe here to learn from the founders of Crumbl, and a slew of other successful brands!
Chick-Fil-A Exec Leaves for Crumbl
Speaking of Crumbl, they made news last week when they poached Graciela Chadwick, an exec from Chick-Fil-A. Graciela will be Crumbl’s new COO. It’s no secret that CFA’s customer service is unmatched, so you can expect Graciela to integrate that into Crumbl’s system. On the surface, this looks like a great hire for the cookie giant!
Smashburger Expansion is Heating Up
TLC Gourmet Food International signed on for 15+ units in Florida. Smashburger, which has dropped from 330+ units in 2017 to just 240 today, is a better-burger brand that is due for a comeback, thanks to being acquired by Filipino giant Jollibee Foods Corporation in 2018.
Disclaimer: This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this site constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any franchises, securities, or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the franchise and/or securities laws of such jurisdiction.
All Content in this email is information of a general nature and does not address the detailed circumstances of any particular individual or entity. Nothing in the email constitutes professional and/or financial advice, nor does any information in the email constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content in this email before making any decisions based on such information or other Content.