Struggling to pay his way through university on minimum wages, 17-year-old Fred DeLuca decided to try to boost his income by starting his own business. He talked a family friend into lending him $1000 and set up a sandwich shop, Pete’s Super Submarines. Ten years later, the former broke med student had 16 stores. But then the business’s growth exploded – and in one more decade, had more than 500 stores. Today, the business, renamed Subway in 1978, is the world’s largest food service chain, with a reported 44,000 stores worldwide.
How did DeLuca do it?
By scaling the business rather than growing it in the ‘normal’ way. Scaling enables you to increase your sales without a substantial increase in resources. There are several different ways of scaling. Fred DeLuca chose franchising.
Why franchising?
Other ways of scaling – think venture capital and joint venturing – generally involve sharing your business with your investors or partners. Franchising doesn’t. Like other ways of scaling, franchising employs other people’s time and money in order to grow, but you – the franchisor – retain complete control of your own business and all the valuable intellectual property (IP) in it. Instead, you grant your franchisees the right to use your business model, brand and other IP. But only for a certain time and in a certain place. And in return for regular payments, known as franchise royalties.
In fact, franchising is a lot like other business models we take for granted every day.
Renting out a house or commercial premises. Loaning out money. Leasing out a car or equipment. In these cases, the rights to use something of value are made available, but there is no transfer of ownership. The same general principle applies to franchising.