Vertical Franchises

Vertical software companies like Slice offer pizzerias a full-stack technology platform, marketing software and group purchasing advantages for supplies. These include point-of-sale, online ordering, digital marketing and phone ordering. Pizzerias on Slice can customize their brand, which is important for an industry based on localization.

Historically SMB owners have joined franchises for the benefit of brand recognition, customer support and economies of scale which increases chances of success. There are drawbacks: owners don’t retain their brand identity, there are high setup costs and conflicts of interest. In recent years, as technology has become more advanced, most legacy franchisors are unable to offer solutions that go beyond brand.

Slice’s “Owner” portal showing offerings for pizzerias

In end-markets like pizzerias where customers have low profit margins and by default low-willingness-to-pay, number of locations are less than 100,000 and there is resistance to buying software solutions, we believe vertical franchises can create venture-like outcomes. At Cat Rock, we were investors in Domino’s, where I saw first-hand how powerful this model is. Domino’s has built a $18B market cap business, with $4.5B of FY’23 revenues and $520M FY’23 net income on-top of a store-base comprised of 95% franchises.

Domino’s FY’23 gross margins were 39% with net margins of ~12%. McDonalds, another franchise model, operates at 50% gross margins and 25% net margins on $25B of revenue. Vertical software businesses are at an inflection point where they can offer all the benefits of franchisors to their end customers bundled with the advantages of software like embedded fintech, order management systems and digital marketing tools allowing franchisees to retain their brand identity.

With upfront franchising fees, take-rates on payments, lending, payroll and more, vertical software companies can capture a higher percentage of end-customer revenues. If the average vertical software company is able to monetize 1% of a commercial service company’s revenue through per-seat pricing (~$12k ACV), a franchise model should be able to capture 5% (~$60k ACV).

At 7% market penetration, which is generous for a traditional SaaS company trying to sell software into a customer base that doesn’t want it, that’s the difference between a $60M and $300M revenue business. Perhaps more important than revenue capture is the fact that the franchise model gives ambitious workers the opportunity to become entrepreneurs, which can unlock demand that’s non-existent in the SaaS paradigm.

Levante previously looked at Owners in the landscaping industry, which offers business incorporation, licensing & permits tools and insurance products to landscapers looking to leave and own their own businesses. These “latent” entrepreneurs previously would have needed to figure out these mission-critical but prohibitive setups on their own, which kept them stuck as workers while seeing their bosses pull in six or sometimes seven-figures a year.

Industries where vertical software has struggled like commercial and home services, car washes, maintenance repair and more can finally be opened up with higher margins and faster onboarding times.