SHARE THE WEALTH

Everybody wants to grow the business. Gaining more market share, winning more customers, and (ultimately) making bigger profits are all goals the directors eagerly aim for. 

For most firms, though, restraints on capital limit the rate at which the company is able to grow. Working capital quickly runs out, and in any case most small firms rely on borrowed money that has to be paid back on the nail—unlike major firms, which can sell shares and only have to pay out if the company is profitable. 

There is, however, a way to break the deadlock—franchise the business format.

In the early 1950s, Holiday Inns started in America. The company had a good business format, and developed a clear brand image that conveyed a mid-range, comfortable hotel for business users (during the week) and family users (at weekends).

The problem for the company is that new hotels are expensive items. Building a hotel is costly and time-consuming, but Holiday Inns did not want to go the route of buying up existing buildings since they wanted to retain their branding intact.

The answer was to franchise the format. Holiday Inns are almost all owned by the people who run them. The parent company helps prospective franchisees to find appropriate sites, build the right hotel, train the staff, create the appropriate decor, and market the hotel. For the franchisee, being given a complete business format.

dramatically reduces the business risk (and goes down well with the bank, too), and also allows the hotel to tap into Holiday Inns’ existing branding and reputation.

From the viewpoint of the parent company, franchising has allowed a much more rapid growth than would otherwise have been possible. Franchisees pay fees and royalties for being allowed to use the format, and although the overall profit per hotel might be lower than would be the case for directly owned hotels, Holiday Inns are able to open an average of one hotel per day somewhere in the world. 

There is no question that Holiday Inns could never have grown as rapidly as they have without franchising—being prepared to share the idea, and the wealth.

Practice:

• Your business model must be proven to work.
• You will need to allow early franchisers in at a lower rate than you would like to charge later ones—after all, you are still an unknown quantity.
• You must have a very clear manual, covering every possible circumstance: apart from the need for franchisees to know how to operate, this will ensure you keep your brand values intact.
• Accept that you will have to provide a lot of support in the early stages, but regard this as an investment in the future.