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If you look top-down at the franchise industry in the United States, there are north of 4,000 unique franchise brands. But if you ask 30-year industry veteran Scott Jones, he’ll tell you the brutal truth: there are far more bad franchises than there are good ones.
Scott, the founder and CEO of Franchise Guide Group, has sat in every seat at the franchising table: franchisor, franchisee, supplier, and master franchise owner. On a recent episode of The Exit Podcast, he sat down with host Steve McGarry to break down exactly what separates a struggling “lifestyle” business from an elite, scalable machine built for a massive exit.
If you are looking to acquire a franchise or scale your current operation toward a lucrative exit, here is the blueprint Scott shared for maximizing enterprise value.
1. Look for Depth and Quality in the “Playbook”
The entire premise of buying a franchise is that you are buying an established system. As Steve McGarry noted, a business is inherently more transferable and valuable when you can seamlessly plug a new operator into a functioning system.
However, the bad franchise systems break down right here. They lack robust, repeatable processes.
“The franchise systems that really are robust, where the franchisees thrive, they don’t just survive, but they really do thrive. They’ve got really strong systems, really strong processes that the franchisee can follow. That’s what you’re paying for: this playbook that, if you follow it, you’ll do well.” — Scott Jones
When doing due diligence, look past the brand’s marketing and look deeply at the quality of their standard operating procedures (SOPs).
2. Avoid the “Emotional Widget” Trap
Scott frequently consults with highly accomplished corporate executives and M&A professionals. Yet, when these brilliant business minds decide to buy a franchise of their own, they often throw their corporate discipline out the window.
The reason? Emotion.
Too many buyers fall in love with the “widget”, the product, the fitness modality, or the specific service, and let passion blind their due diligence. Instead of starting with their long-term objectives and exit goals, they focus purely on what they are excited to sell.
Furthermore, first-time buyers often make infrastructure mistakes that are nearly impossible to fix later, such as buying into a territory that leaves zero room to physically scale or expand.
3. Pass the “90-Day Test” to Eliminate Key Person Risk
A common pitfall for single-unit franchise owners is building the business entirely around themselves. They think strictly about replacing their corporate income rather than building enterprise value.
“If I have one location, and a manager gets sick or wants to go on vacation, I become the manager,” Scott explains. This creates massive key-person risk, which completely tanks your value when it’s time to sell.
To combat this, Scott views every new business venture through a strict operational lens: Will the business survive, or what problems will arise, if I am totally gone for 90 days?
If you invest heavily in developing strong people, clear processes, and robust marketing structures from day one, the business can scale independently. When a business thrives without the owner’s day-to-day presence, its valuation multiple automatically climbs.
4. How to Drive Your Valuation from a 3x to an 8x Multiple
What actually commands a premium multiple in the franchise world? Scott shares a few clear levers:
- Predictable, Durable Cash Flow: Sophisticated buyers look heavily at customer concentration and where the business sits in its lifecycle. Is it still growing year-over-year, or has it peaked?
- Local Hyper-Documentation: Scott shares an example of an operator making $\$600,000$ in Seller’s Discretionary Earnings (SDE). On top of the franchisor’s playbook, this owner built a 117-page local SOP document. This absolute clarity of cash flow and operational ease justified a strong valuation.
- Scarcity and Brand Maturity: Industry matters, but the brand partner matters more. Scott highlights the boutique fitness space. Average brands with weaker maturity often trade at a 2.5x to 3.5x multiple. However, elite, highly sought-after brands that have been completely “sold out” for new territorial development for years routinely see their franchisees exit at 5x to 8x multiples due to pure scarcity.
5. The Ultimate Exit Playbook: The Private Equity Roll-Up
When asked what advice he would give his younger self, Scott didn’t hesitate: Go bigger, faster, by utilizing private equity roll-ups.
Within the right franchise network, there are countless franchisees who own three, four, or five locations that have essentially become “lifestyle businesses”. These owners are often looking for a comfortable exit.
Scott notes that savvy operators within elite systems are partnering with private equity firms to aggressively buy out these smaller, local operators. He cites an example of a franchisee in a boutique fitness system who started with just six locations. Over a four-to-five-year period, they rolled up smaller territories to scale to over 120 studios, creating an extraordinary amount of enterprise wealth.
Ready to Explore the World of Franchising?
Whether you want to build a hands-off semi-absentee business or execute a massive regional roll-up strategy, choosing the right franchise partner is the single most important decision you will make.
Scott Jones offers his personalized advisory services completely at no cost to buyers (he is compensated directly by the franchise brands when a perfect, mutual match is made).
To connect with Scott and find an exceptional franchise system tailored to your wealth and exit goals, reach out directly via email at [email protected] or visit franchiseguidegroup.com.
