I have received inquiries on this site, from friends, and from business minded relatives, mostly from OFWs based in the USA and Middle East, and a few from those based in the Philippines who have enough savings, on how to buy a franchise. A plethora of questions are asked ranging from: how much capital do they need to buy a franchise, what is the best franchise, how to be a franchisee, how to franchise a business etc. etc.
I cannot avoid telling my friends and relatives that buying a franchise is akin to the “halo halo” or “the sari-sari store” mentality that we have. Do not get a franchise because so and so friend or relative has one. The impression I am getting is that having a franchise business has become a status symbol for some people, hay naku hehe. IMO, it is best to develop a business concept and start developing it and be the seller of a franchise than be the franchisee.
Below is a comprehensive tips and guides if you are planning of getting a franchise business.
Advantages and disadvantages of a franchise
I have nothing against buying an existing and successful franchise like Jollibee or Seven Eleven as they provide many advantages. Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.
- Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
- You can use a recognized brand name and trademarks. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
- The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
- You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
- Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
- You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
- Relationships with suppliers have already been established.
- Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough
- You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
- All profits (a percentage of sales) are usually shared with the franchisor.
What you should consider before buying a franchise?
As with any new business venture, you need to consider carefully whether you have got the right skills and attitude to run a successful franchise. You need to consider how much you enjoy managing people, selling to the public or working alone - as these are common requirements of different types of franchise.
- You must be prepared to sell and you will need entrepreneurial flair. A franchise gives you a business blueprint - but it won't automatically give you customers.
- You'll need to work hard, probably for long hours. Do you have the necessary dedication?
- Running your own business can be stressful. Think how you react to pressure.
- You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
- On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.
What is the right franchise for you?
- Do you like office work? Or would you prefer a business that involves physical labour or using a particular skill?
- Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
- Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
- Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?
Assess a franchise opportunity
To assess if a franchise represents a sound business opportunity, you'll need to consider:
- what the business is and how it operates
- the location of the franchise (or your proposed location)
- the success of the franchise concept - the length of time in business and how financially successful they are
- the amount and strength of competition from other businesses in the same market sector - at both a local and national level
- any market research that has analyzed the public perception of the franchisor's (the business offering the franchise) brand
- levels of initial and ongoing costs
- how much training and support you'll get in setting up and running the business
- conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew
The franchisor will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims.
One of the most helpful things you can do before deciding on a franchise is to visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones. It is important to visit new and established franchises - of differing levels of success - in as many different locations as possible. This should give you a good idea of the challenges you yourself will face should you decide to go ahead with a specific franchise.
Write and develop a business plan, it can help you
Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance. If you are planning to get bank financing in buying and running your franchise business (most people do), then you need to develop a sound business plan.
How to purchase a franchise
There are a number of key things you need to consider when planning to buy a franchise.
- Assess yourself to see what kind of franchise, if any, will suit you.
- Find out what franchises are available and draw up a shortlist.
- Assess franchise opportunities carefully, ask questions and talk to other franchisees.
- When you find a business, investigate its financial prospects. Base this on thorough research of performance figures. Include an analysis of three years' accounts - if they have been trading for that period - and management figures.
- If you'll need to raise finance, ask your bank if it will consider a loan for the type of franchise you're considering.
- Do your own market research into the business and the competitors in your area.
- Draw up a business plan.
- Check the franchise agreement and get professional advice.
However, it is advisable to make sure you don't:
- take up the first opportunity before investigating alternatives
- allow yourself to be hurried into making a decision
- pay any non-refundable deposit
- commit yourself before you're completely sure
- assume a business will work in your area just because it works elsewhere
- rely on the forecasts provided by the business selling you the franchise
- sign any agreement without legal advice
Tips on franchise agreements
The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice. Get a specimen contract for them to review.
- Areas covered by a typical agreement
- Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
- Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
- Fees - what initial fee will you pay? What percentage of sales revenue will you pay? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
- Support - how much help will you get starting the business? What continuing support will you get?
- Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
- Exit - what happens if you can't continue in the business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?