Pros and cons of private chains

From: alexhormozi

A privately held chain is a business model where an owner expands their successful single location by opening additional locations, while retaining all ownership rights and control over the brand [00:01:42]. This means the owner takes all the risk, fronts all the capital, hires all the labor, and manages everything end-to-end [00:01:46].

Characteristics and Considerations

• Expansion Method [00:01:22]
  • One location is opened, then a second, and a third [00:01:23].
  • Example: A salon concept for hair that wanted to open more locations [00:01:26].
• Enterprise Value [00:01:00]
  • The enterprise value (EV) for a private chain is considered “very good” [00:08:53].
• Ownership and Control [00:01:42]
  • The owner retains all ownership rights, controls the brand, and manages everything end-to-end [00:01:42].

Pros of a Private Chain Model

• Full Ownership of Revenue [00:07:44]
  • If opening new locations is inexpensive and profitable, owning the entire revenue stream is more beneficial than sharing it through licensing or franchising [00:07:40]. An example portfolio company transitioned from a licensing model to a private chain, leading to significant revenue growth (from $0.5millionto$12 million/year in 14 months) [00:07:49].

Cons of a Private Chain Model

• Highest Opening Costs [00:05:04]
  • There are incremental costs for each new location, including build-out, location scouting, lease negotiation, and construction [00:05:08].
• Significant Risk and Capital Investment [00:01:44]
  • The owner takes all the risk and must front all the capital for each new location [00:01:44].
  • This includes the risk of the lease for its entire duration [00:05:17].
• Labor and Staffing Responsibilities [00:01:46]
  • The owner is responsible for hiring and controlling all employees [00:01:46].
• Challenges with Specialized Services [00:06:41]
  • Scaling a private chain becomes more difficult if the service requires highly specialized skills, leading to inconsistency in service provision [00:06:43].
  • To be scalable, the service should be “productized” to minimize variability and decrease the skill requirements of the labor needed to operate the system [00:07:14].

When a Private Chain is Worthwhile

A private chain is worth considering under specific conditions:

• Low Build-Out Costs [00:05:31]
  • If the cost to build a new location is low relative to the income it generates [00:05:34].
  • Specifically, if the cost is less than six months’ worth of profit from the first year [00:05:48].
  • Example: Insomnia Cookies has tiny locations requiring only an oven and a front door, making it very low to build with high profit margins [00:05:57].
• Low Service Requirements [00:06:41]
  • The business model should allow for minimal variability and low skill requirements for labor, making the service easily replicable [00:07:15].
  • Example: Subway’s success is attributed to anyone being able to make a consistent sandwich using the same recipes and processes [00:07:06].
• Certainty of Success in New Markets [00:12:57]
  • If there’s a strong certainty of success when entering a new market and the cost to open is low, then owning the whole thing privately makes sense [00:12:57].

Many of the world’s biggest brands started as private chains before potentially moving to other models or expanding directly to consumers [00:06:22]. Examples include product-based businesses like Chanel, Louis Vuitton, and Christian Dior, where the build-out costs are minimal compared to the profit generated [00:06:25].

Investors looking to scale a service-based business consider private chains as one of four primary vehicles for building wealth and enterprise value [00:01:55].