When I first met the founders of Buffalo Wild Wings, it was 1991 and they had about six locations. They wanted me to try everything on the menu, so we went to the biggest table in the house and began ordering. The wings were hot. But the business potential was hotter.
I’m a franchise consultant. My job is to help turn brands into franchises, and turn franchises into giant franchises. So when I meet with a potential client, I want to know: Are they ready? Jim Disbrow and Scott Lowery, the founders of Buffalo Wild Wings, were clearly ready. Their unit-level financials were great. They were eager learners. We had a good growth strategy.
But here’s what really sold me: They understood what they were building. It wasn’t just a great brand. It was a Money Machine. I have consulted with literally thousands of businesses, and not everyone understands this, or is willing to do the work required. But I am telling you: The most successful entrepreneurs I’ve ever worked with all understood that a business is ultimately just a Money Machine.
So what is a Money Machine? Good question.
It’s something that provides a reasonable return on investment (ROI) to you as its owner, regardless of whether you have ever even set foot in an individual operation. You can pay yourself dividends or reinvest in your future growth. But ultimately, your Money Machine should provide you with an ROI that is commensurate with the risk you are taking by going into that business.
Franchisors and franchisees both build Money Machines — because even though their businesses are different, the same principles apply. So let’s make sure you’re building your Money Machine the right way.
Related: We Crunched 5 Years of Franchise Industry Data. Here Are 4 Big Trends You Should Know About.
Image Credit: Pete Reynolds
Your machine’s core
There is no universal model of business success. But there are commonalities. I call this the “small business success cycle” — which is in the chart above.
Start at the 12 o’clock position, where the chart says “Ongoing consumer desire or need.” If you’re not solving someone’s desire or need, you have no business — so you must do that, and do it sustainably and repeatably. Then you need ways to convince prospective buyers why you are a better choice than your competitors.
Keep going around the cycle. As you do so, you need to fulfill your brand promise at a price and margin that provides you with adequate profit. You must also maintain a relationship with your clients or customers through communication. and then use their feedback to continuously improve.
These ideas may sound simple, but their execution is complex. Each step requires its own systems and measurements. So before we go further, we should pause on the two most important measurements of all: ROI and Key Performance Indicators (KPIs).
First, ROI. If you go into business, you’re investing money and time — and hoping for a good return. It should be that simple. Ideally, you want that return to be north of 20% annualized (plus a market-rate salary if you plan to work in the business) — although, with many small businesses, you may not be able to achieve that kind of ROI in the first couple of years. You should adjust that number up or down based on the perceived risk associated with your desired startup. For example, if your Money Machine required a sizable capital investment in an unproven business model, your risk would be substantially higher, and thus your required ROI should also be higher.
Next, KPIs. Think of these as the inputs into your business’s system. Each of them has target ranges that, if achieved and combined successfully, will allow you to manufacture the output of profitability.
KPIs vary substantially depending on your industry, so you need to understand yours. For restaurants, a few of the many important KPI measurements include your sales-to-investment ratio, your food costs, your labor costs, your average ticket, your table turns, and your occupancy costs. If you are in the hotel business, some important KPIs include your overall occupancy rate and your average revenue per occupied room.
Moreover, the target numbers for each of these KPIs will likely be different even within the same industry. For example, in the restaurant industry, a steakhouse might aim for food costs in the range of 35%, while for a pizza restaurant that number might be closer to 30%.
If you change your KPIs and target ranges, those decisions will ripple out into other areas of your business. For example, let’s consider a restaurant: The logical assumption is that we want to keep our food costs down. After all, each percentage point saved on food costs, all else being equal, will translate to a significant increase in profitability. But everything is not always equal. If you can reduce your food costs by eliminating waste, improving portion or inventory controls, or establishing better systems for pricing or purchasing, that could improve your Money Machine. On the other hand, if you had to sacrifice quality, raise prices unreasonably high, or make your portions so small that your customers are left dissatisfied, then your reduced food costs KPI could have a severe negative impact on your overall profitability. After all, anyone can decrease food costs to 2% if they charge $50 for a burger. But how many burgers could one sell at that price?
Likewise, you could reduce your labor costs in your restaurant simply by hiring fewer people. But if that results in poor service and unhappy customers, you may have missed the point of the exercise. So as you start identifying the KPIs and target numbers that will ultimately drive your business, consider the consequences of valuing or adjusting them.
Generally speaking, the KPIs for a franchise or small business can be grouped into several major categories: marketing metrics, sales metrics, production and financial metrics, and client satisfaction metrics. These KPIs generally occur in that approximate order. Marketing drives sales. Sales drive production. Production drives client satisfaction. And client satisfaction (and the word-of-mouth it delivers) drives repeat and new business.
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Assemble your machine
In considering how to create your Money Machine, think about your business as if it were a car going down the assembly line. There are certain things you need to think about first and other things that will come further down the line. Different inputs to your assembly line will occur at each step of the process. You must make the right moves at each step to end up with the best possible result.
Just as Ford has many potential suppliers to source auto parts from, you will have a similar number of choices to make at each step of building your business.
So what parts are you assembling? Let’s start with the most basic one: your customers. Knowing your customers is the first step toward building any business. You must determine who they are, what they need, and what message will drive them to your door. You also need to figure out how to find them in the most cost-efficient way — and at an acquisition cost that will allow you to make money.
Here’s the next piece to assemble: your price. What will customers pay for your product or service, and how you can differentiate from your competitors enough to capture some of those customers? Essentially, you need to create a reason for your customers to buy from you (and not someone else) at a price point that allows you to make a profit. And like all aspects of your system, you want that customer acquisition element of your process to be simple (so you do not have to do it yourself) and repeatable (as much as possible in today’s rapidly changing world).
Here’s the final piece to assemble: How you’ll produce your product or service at a cost that allows you to make a profit while making your customers happy. Do that, and you are well on your way to creating your Money Machine.
Of course, this simple sequential process will be much messier in the real world. Entrepreneurs often start with the product or service they plan to provide, believing they have found that better mousetrap. But if you fail to think about your business holistically and sequentially, you may build a business that cannot be replicated.
Related: The Basics of Making Money in Franchising
Customize your paradigm
So far, we’ve talked about the fundamentals of business — whom you serve, how you serve them, and how you make it financially sustainable. You could call this your business paradigm; it’s the set of assumptions, models, or beliefs that ideally guide you to success.
Every business is different, which means every business will need a slightly different paradigm. The purpose of this paradigm is to provide you with a simple set of analytical tools that will give you performance benchmarks. So here’s a piece of cautionary advice: Don’t overcomplicate it.
Your paradigm should be simple. If your business model paradigm looks like the schematics for building a 747, you will never be able to use the many data points in your analysis to course-correct.
Essentially, your business paradigm needs to be actionable — which means that you will want to limit it to only the data you need to alert you when you start to go off course. Your primary KPIs will be lead generation, sales, production, and client satisfaction. Under each of those broad categories, you will probably want three to five more granular KPIs to monitor. This will leave you with a maximum of perhaps 20 different measurements to monitor on a regular basis. Some of these KPIs can be found in your profit and loss (P&L) statement, the standard accounting document that measures revenue, expenses, and profits. But many of these KPIs will be measurements you need to create yourself, based on your own needs.
Beyond that, of course, this can’t just be about numbers. It has to be about understanding what changes those numbers. If you cannot glance at your P&L statement and understand each line item (and whether you are performing with appropriate efficiency), you simply do not fully grasp the nature of your business. Likewise, if you do not fully understand your KPIs, you are much more likely to find yourself mired in an unanticipated crisis.
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Make it work without you
One of the key qualities of a machine is that it is not dependent on one specific individual to operate it. While there may be particular skills needed to run it, no engineer would take the trouble and expense to design a machine that only worked for one person.
The same is true for a Money Machine. If you are integral to the performance of your business, you have not built a Money Machine. You built a job.
When Henry Ford turned on the conveyor belt at his first assembly line, he did not need to run the welder or stand over his workers to see that things were done correctly. He simply turned the key and let the assembly line run.
When entrepreneurs come to me looking to franchise, one of the telltale signs that they may not be ready is their inability to break away from their work, even for a day. They are often so tied up in their business that simply scheduling a 90-minute phone call is a challenge. And when it comes to implementing their expansion plans, their primary concern is often their ability to devote the time and effort to the program — and an unwillingness to delegate to others.
One of the most difficult lessons for many entrepreneurs to learn is that if they want to grow, they need to give up control. If they can’t, they will usually fail. Expansion requires you to create systems, and then recruit and trust talented people to implement them.
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Apply the multiplier model
Once your Money Machine works without you, you can turn it on and watch it print money. It can run while you are on vacation, at your children’s athletic events, or on the golf course. You can even take the money and reinvest it in a second Money Machine. The formula for growth should become relatively easy to predict, barring an unexpected disaster.
Use systems to create a duplicable Money Machine, measure its performance, and harvest the returns. Reinvest those returns in another Money Machine, continue to monitor performance, and harvest the returns. Reinvest in another Money Machine. Lather. Rinse. Repeat. That’s the Multiplier Model.
Like I said earlier: This applies to both franchisors and franchisees. Franchisors are building systems that repeat. Franchisees are buying units that could eventually run without them. Both can do more. Both can multiply.
Let’s assume that your Money Machine requires an investment of $180,000 in equipment, build-out, and signage. Let’s further assume that you need another $90,000 in working capital until your Money Machine breaks even at the end of the first year. And let’s assume that at the end of year two, your Money Machine will generate revenue of $600,000 and will generate a profit, after paying the salaries of everyone involved, of 20% (maybe 15% after taxes), giving you $90,000 in returns. Let’s further assume that you can live off the manager’s salary while you build the business and can reinvest all the profits in growth.
If you were to reinvest all your profits, you could open a second Money Machine in year four. And at the end of year four, you would have two Money Machines, generating 15% returns on $1.2 million in revenue. Your timeline now gets cut in half, although at some point you will need to add overhead. In year six, you have enough capital to build a third Money Machine.
Here is where it starts to get interesting. In year eight, you could open a fourth unit, a fifth in year nine, a sixth in year 10, and two more in year 11. By year 20, if you had the fortitude to continue reinvesting at that pace, you would have 65 units in operation, $39 million in revenue, and nearly $5 million in annual profits, with 17 additional locations scheduled to open the following year.
Of course, that does not account for your need for incremental overhead to support your growth. And it assumes that the business model does not change or evolve over the years — which is unlikely. And, of course, it also assumes that there are no major recessions or other setbacks along the way. So there is some optimistic thinking baked into this analysis.
Then again, my example also did not account for any bank financing or tenant improvement allowances that might have been granted. It did not account for any purchasing economies that might have improved margins, or increased buying power on advertising, or stronger name recognition that might have driven higher revenue. And it did not account for faster growth strategies, such as franchising, that would allow for more aggressive market penetration.
You can’t predict everything. But the point remains the same: If you build a successful business model that works without your direct involvement, duplicating that business model over time will multiply those profits substantially.
Then, as your Money Machine grows, so does your money.
