In a nutshell, franchising is a business model that allows the franchisee to sell the products or services of the franchisor (the parent company). It is an easy doorway to entrepreneurship for anyone who wants to take a short-cut and minimize the risks involved in creating and running a business from scratch.
The following are some of the attractive aspects of operating a franchise business:
- The use of company trademark, trade name or any other similar company identification.
- Training Programs
- Marketing and Advertising Assistance
Sounds good enough for you?
Well, as with everything else in business, franchising is not without its problems. There are a lot of jerks in the world of franchising. You may have already heard of “success stories” of franchise companies that started small and have grown by leaps and bounds in a matter of two years! On the surface, that’s indeed very impressive especially if the story is masterfully crafted by the media whose main job is to attract as much attention from a lot of viewers as possible. But, did you ever wonder where the money came from? Was it a result of offering a set profitable products and services? Or, was the “success money” extracted from franchise fees? As a potential franchisee, it’s important that you have to know the real score. Otherwise, you might just become their rich source of cash.
The rest of the article provides practical tips you can use before you buy a franchise business.
1. Check The Company’s Background and Track RecordFirst, it would be good if like the company, its management and the way they conduct their business operations. Ideally, you should have patronized their products and services for a long time already.
Avoid buying franchise from a company that is relatively new in the market — less than five years. You may seem to like their products and the services they offer, but you can’t tell if they are really profitable or they are losing if they just launched their business.
There are only two reasons why businesses survive: (a) they are profitable, or (b) the owners have deep pockets. Common sense dictates that the former is your best bet. You have to be convinced of their track record of success in the marketplace. Otherwise, you might just become their cash cow.
2. Know The Money Involved
At the very least, you need to determine the following:
- Franchise Fee / Renewal Fee
- Estimated Capital Outlay
- Royalty Fees
- Advertising Fees
- Estimated Operating Expenses
Beware of the hidden costs and fees that are not clearly spelled out such as the Renewal Fee. You can never find such information from the company’s marketing and promotional materials. You have to be creative in figuring this one out.
Furthermore, there is no point in buying a franchise you can’t afford. And speaking of affordability, you have to check if financing is available. Can you obtain a business loan? Will they extend help in getting a loan?
(See also: How To Fund A Start-up.)
3. Look At Their Earnings Claim
Is it too good to be true? Do you know the average industry standard? If you can have a copy of their audited Financial Statements, that’s good. It’s one way to verify their claims. But I doubt it if they will share such information. This is where your personal research comes in. You have to compare them from the competition, whether those are franchised operations or independent businesses.
Naturally, you want to avoid dealing with outright liars, cheaters and scammers.
4. Talk To Other Franchisees
Remember we talked about hidden fees and avoiding scammers? This is one of the ways to uncover them.
The franchisor should be able to give you list of company owned outlets and as well as franchisees. One of the smartest moves you can take is to personally visit the stores and possibly talk with the franchisees.
5. Obtain A Written Proposal, Sample Contract, Franchise Agreement
Read it carefully. This simple document speaks a lot about the company you are dealing with. Can you spot typos and grammatical errors? Does the proposal even make sense to you?
And most importantly, can you terminate the franchise agreement? In what instances and how much will it cost?
It helps if you consider the help of a lawyer or accountant who is familiar with our local Business or Franchise Laws. But you can do that later when you are already convinced about the business.
Deal Or No Deal?
When it comes to franchise opportunities in the Philippines, you have a lot to choose from. But you have to watch out for the bad apples that could be lurking somewhere and ready to take you for a ride.
There is nothing to rush. You must be in a position to say “No Deal” if you smell something fishy. Always read the fine print and use your common sense.