The Philippines has been recognized as the Franchising Hub of Asia. It means that franchising as a business model is well accepted in this country. In fact, it is one of the top choices of any enterprising Filipino with money to spare and who wants to be conservative with his venture.
As with any business, franchising has its share of traps and this article discusses that part which involves money.
Fees and Charges Associated with a Franchise Operation
1. Franchise Fee
One of the first things people ask when they consider going into a franchise business is “How much is the Franchise Fee?”
Indeed, it is one most expensive items you have to deal with when buying a franchise business and you will understand why later. Depending on how you look at it, this is money that you basically just throw out the window and into somebody else’s house.
Franchise Fee is associated with:
- The use of the company name and logo. This is very cool. Most of the time, clients and customers will never know that the business is run by the jerk-next-door.
- The Business System. This is the most valuable assets of a business and one of the most difficult to perfect. This is one area also in which buying a successful franchise business is worthy compared to doing it from scratch. Having a proven business system eliminates a lot of guess work and mistakes that go with running a business. A successful and highly experienced franchisor can tell you the things that work and those that don’t.
- Training and Support. One of the nice things about joining a franchise is the support system the company offers. A good company should take you seriously as a partner in the business. That is, they should have a stake in your success.
Tips on Franchise Fee: It’s very hard to tell if the Franchisor’s Franchise Fee is fair or not. You have to check what its competitors are offering and make sure that you compare apples to apples. Never, ever buy a franchise just because is it something you can afford. There are more things to consider than just the franchise fee.
2. Royalty Fee
This is one thing you really have to think about. Royalty fees come in various forms, such as the following.
- Percentage of gross sales. That is, they get a piece of the pie even before the government gets theirs. Naturally, you — as the operator of the business — get the last piece. The worst royal fee I’ve seen so far in the Philippines is one which is based on the gross sales + VAT.
- Percentage of purchase. This one is the opposite of the royalty fee mentioned previously. Instead of taking it from the items you sold, they take it from the items you buy from them. Technically, this should be lower compared to the other type of royalty fee.
- Fixed recurring fee. Which is not really a royalty fee but more like a rental or retainer’s fee.
Tips on Royalty Fee: Take a good hard look at this item before you consider buying a particular franchise. This is one area that causes a lot of franchisee regrets. Franchising is supposed to foster a win-win partnership, right?
3. Marketing / Advertising Fee
This part is a real bomber because it appears to be legitimate. Like the royalty fee above, marketing fee ( or sometimes named advertising fee) is charged on the franchisee on a periodic basis, usually monthly. This is supposed to help your business by driving clients and customers to your doors, right?
But… there are franchisors that collect marketing fee who never run any single ad, ever!
Tip On Marketing Fee: Have you personally seen for yourself a single ad or marketing campaign by that particular franchisor? How often do they run that campaign? Will it benefit your own franchise operation?
4. Renewal Fee
A Franchise Agreement usually has a set time frame and beyond that you need to renew it with the company. The following should be the ideal scenarios when it comes time to renew:
- You should have recovered your expenses and gained from the past years of operating the franchise business.
- The renewal fee should be lower than the original franchise fee.
Tip on Renewal Fee: Everything else being equal, you should select a franchise that offers the longest renewal term and with the lowest renewal fee.
Do the Math
Doing the numbers before embarking on a franchise deal is one of the smartest things you can do to your planned business venture.
The concept of franchising may be old, but its adoption here in the Philippines is relatively new. As such, there are a lot of unscrupulous businesses disguised as legitimate franchises and who are only after the money of unsuspecting clients who don’t know how to evaluate a business opportunity. Here at NegosyoBuilder.com, we want you to steer clear of that situation.
In the next couple of articles, we will be featuring business and franchise opportunities that are available in the Philippines. As usual, we’ll guide you with some tips and point out the traps to avoid.