With an estimated failure rate of 80 to 90 percent, the startup life is not for the faint of heart. Launching your own startup requires a lot of patience, dedication, and willingness to take risks. But not everyone wants high risk businesses. If you are one of those people who prefer to start small with sure and steady gains, then franchising might be a good alternate investment.
But before jumping the gun, first you need to know what franchising is and all the other intricacies involved in the process. In addition to that, there are other factors you need to consider before investing in a franchise. We will go over all of that in this article.
What is franchising?
Franchising is an arrangement wherein a person (the franchisee) is allowed by another (the franchisor) to market the latter’s product or service including its trademark, logo, or name and to utilize its business formula for a fixed fee.
There are three common types of franchising arrangements: product franchising, manufacturing franchise, and business format franchising. In product franchising, the franchisor allows the franchisee to distribute the former’s products and use its trademark and name for a fee. The franchisor could also require the franchisee to purchase a minimum amount of its products.
In a manufacturing franchise, the franchisee not only has the right to sell the franchisor’s product but is also allowed to manufacture the product on his own (subject to product manufacturing guidelines). Examples of business that engage in this kind of franchising arrangement are food and beverage companies. Coca-Cola (franchisor) for example, only supplies the syrup ingredient to soft drink bottlers (franchisee) who then proceeds to mix, bottle, and distribute the final product.
Lastly, a business format franchise not only allows the distribution of the franchised product but also gives the franchisee the right to the franchisor’s business concept or model. In this arrangement, the franchisor gives the franchisee access to its business methodology and could also provide the training, marketing, and supply of needed equipment and materials depending on the agreement. In return, the franchisor asks for a royalty and franchise fee plus a certain percentage of the franchisee’s monthly revenue. In a business format franchise, the franchisee is bound to follow strict control guidelines especially on the goods or services offered, their quality, and operational methods, in order to maintain a consistent brand experience for customers.
Franchising in the Philippines
Here in the Philippines, the most common type of franchise is the business format franchise. Notable examples are fast food chains such as McDonalds and Jollibee. It is estimated that around 55% of franchises are food-related businesses while 45% are in retail. While there are no laws that specifically cover franchising in the country, franchising agreements are considered contracts and governed by the Civil Code. Franchising arrangements could also be considered as technology transfer arrangements and covered by the pertinent provisions in the Intellectual Property Code.
How do I get a franchise?
Once you have decided on the franchise you want, talk to the franchisor directly by contacting them. Their contact details can usually be found in their website. If they don’t have a website, you can go to their nearest office branch and inquire there.
You can also go to a local franchise association for reference. These associations can easily provide you a list of business franchisors. Notable examples are the Philippine Franchising Association and Association of the Filipino Franchisers Inc. You could also go to their website and look at their member directory. The directory will contain a list of their members open to franchising and their contact persons.
Afterwards, you will have to undergo an application process with the franchisor to determine the viability of the franchising arrangement. This could take some time as doing location and feasibility studies may be needed.
If after the application both parties are still agreeable to the arrangement, they can then proceed to sign a contract. This contract is called the Franchise Agreement (FA) and it contains the terms and conditions of the franchise arrangement such as length of effectivity, renewal, grounds for termination and other provisions.
If you are not exactly sure on what to do, it is advisable to talk to a franchise consultant to help you out. These experts will guide you through the entire franchising process. Hiring a lawyer to advise you on some legal matters (especially those you don’t understand) is also highly recommended.
Fees to be paid depend on the specifics of the franchise agreement. But most of the time, franchisors would always ask for a franchise fee and a continuous payment of royalties. The franchise fee is the payment for the right to use the franchisor’s trade name and business model. It is usually non-refundable. On the other hand, royalties are a percentage of the franchisee’s revenue paid monthly or weekly. Other than the two, the franchise agreement may provide for additional fees such as advertising fees for system-wide marketing.
Total cost of the franchising investment is calculated as total capital investment. This covers all the fees to be paid and investments on branch construction and furnitures. Depending on the type of franchise, your total capital investment could cost as little as a few thousand pesos to more than a million.
Many statistics point out that franchises in the country have a high success rate of around 90 percent. But don’t be misled into believing that franchising is easy. Success is not 100% guaranteed. Moreover, this statistic alone should not be your sole consideration in deciding whether to get a franchise or not. It is also important to consider other factors such as the money you are willing to invest, the line of business you are passionate about, the reputation of the franchisor and the franchise agreement itself.
Keep in mind that getting into franchising is a very big investment. You cannot afford to rush into it without carefully considering all factors. Do your research diligently. Ask other franchisees, interview people, or seek expert advice. Only then should you decide whether franchising is really for you or not.