There are several ways, and knowing them may well be your only protection against falling victim to one.

Franchising has made great inroads in the Philippines because of the increasing number of people succeeding in business through this route.
But franchising has a downside: it has given rise to scams.

Franchise scams have indeed been on the upswing, but it hasn’t reached crisis proportions as it had in the United States in the 70s – considered the franchising “dark ages” – when countless individuals were duped into investing in non-existent franchises.

The situation became so bad that the United States government had to step in to regulate the franchising sector.

We haven’t reached the boiling point yet, but we may well be on our way if we did not take steps to stop franchise scams in their tracks.

Unfortunately we are on our in this, as no government agency exists to regulate franchise operations in the Philippines.

But we can start by advocating responsible franchising.

It doesn’t mean we’re promoting “perfect franchising,” because nowhere in the world would one find a foolproof system.

Each franchise system is fraught with problems and challenges and it is vital for one to know how to distinguish between a responsible franchiser and a con artist.

The first will readily admit that his system is imperfect, but he’s committed to helping the franchisees achieve the same level of success he did with company-owned branches.
The latter will rave about his franchise but gloss over its imperfections.

He’s our only to collect the fees and is not the least interested in helping the franchisees.
Despite the obvious difference many people couldn’t tell one from other.

Being able to spot a franchise scam is the best way to avoid losing our shirt.

The following are the red flags to look for to keep from falling prey to swindlers.

Promise of good returns. Like a suitor who would vow to give heaven and earth, you will know the franchiser is pulling your leg if he promises too-good to be true profits even with little or no effort from you.

Responsible franchisers do not guarantee specific rate of returns.

All they will offer is a business system that has worked for them and, if followed to the letter, would also work for you were hands on with the business.

Good franchisers lay their cards on the table and know how to manage your expectations.
They are successful because they’ve worked hard to build their system and are committed to growing it through franchising.

High-pressure tactics. Be wary of people who pressure you into parting with your money now because the franchise feeds will go up tomorrow, or lure you into getting their buy-one, get-one-franchise free offer.

This tactic not only trivializes a franchise, but also deprives you of your right to do due diligence.
A franchise often entails a major investment, and those not wanting you to do some background checks are those with skeletons to hide.

Evasive answers to questions about the franchise. Franchisers or their representatives should know their franchise like the back of their hand.

They should be able to answer whatever questions you may have.

And if they cannot answer right away, at least they’re eager to get back to you as soon as they have it.

Your alarm bells should sound once you ask how long the franchise has been around or how well the franchised outlets have been doing and they answer by hyping their profits instead.

A con artist is one who paints a rosy picture of his franchise- how profitable all the franchised outlets have been, and the short time you can get your investment back.

The franchiser not having a track record. A business concept that has not been tested in the market, or a franchise with no company-owned branches is one indication of a franchise scam.
Fro a franchiser to be considered legitimate, he should have been franchise at least a year, and is overseeing at least a couple of successful company-owned outlets.

Responsible franchising means the franchiser is making available a business system that he has operated successfully.

What model can he hold up if the franchiser has not proved that his system actually working? How can the franchiser share a successful experience if he has none?

Steep start-up fees. Any franchise investment can be broken down and each fee justified. There is a formula for computing the fees that franchisers follow when franchising their business.

Responsible franchise investment because the sooner the franchisee recovers the investment, the better for the business and the franchiser’s reputation.

A swindler will tend to charge exorbitant fees because he is more interested in raking in money than in the franchisee recouping his investment.

A true franchiser cares about how you will recover your investment and is upfront with how your payment will be used in the franchise.

Talking with the franchisee broker instead of with the franchiser.

While franchise brokers may be of help, their involvement ends at some point in the application process.

You should have the chance to meet with the franchiser, and the broker should be willing to schedule a meeting.

If the broker turned down your request for an appointment, it is time to look for other franchise offerings.

A franchise is fraudulent if the only people willing to sit down with you are the brokers or the marketing staff. You should be able to meet the franchiser in person.

Lack of a franchise organization. Check if the franchiser has put an organization on place that will guide you when you operate your franchise. If there is none, it means you will be on your own when you operate your franchise.

Bona fide franchisers design an effective system that will help you make your franchised branch a success.

These are but a few of the warning signs to watch when buying a franchise, although still the best way to protect us from falling victims is to do our homework.

We should neither allow ourselves to be stampeded into buying a franchise nor be lured by attractive sales pitches.

Invest time instead in verifying franchise offerings that caught our interest, and making sure their franchisers have a solid track record and reputation in the industry.

Talk with as many people as possible with the franchisers, the middle management of the franchise organizations, and more important, the franchisees themselves.

You will then be contributing towards stemming the tide of franchise scams in the country.
Unscrupulous franchisers erode the credibility of franchising, and discourage others from using this expansion route that has changed world of business.

‘EACH FRANCHISE system is fraught with problems and challenges and it is vital for one to know how to distinguish between a responsible franchiser and a con artist.’

If you’re looking for the safest way to expand or diversify a business, it’s franchising.

Now if that’s true, why do so many people fear franchising?

Since its beginning in the late 1800s, and with its post World War II expansion especially in the United States, franchising has developed one of the greatest business success stories of all time. Main Street America is populated by franchise outlets. From restaurants to specialty food shops, bookstores to clothing stores, beauty shops to postal centers, and a plethora of service providers, including carpet cleaners, auto shops and home remodelers, franchising is everywhere. Franchise businesses take in 40 percent of all retail sales in the United States.

There are some 2,000+ franchise companies supporting more than 900,000 franchised outlets in America. Countless people have become wealthy through franchising, and there are no financial or educational barriers to keep anyone from using this concept successfully. Governments around the world, and especially in the United States, have made it possible for the average person to investigate franchising and predict the outcome of a franchise investment. University studies, government statistics, and even polls by the Gallop Organization support the success of franchising.

So what’s to fear about franchising?

Critics say there are plenty of things to scare you away from the concept. Listen to the critics-some of whom failed in franchising and therefore believe they have the “credentials” to be critics–and they’ll tell you all the horror stories about franchising. Of course, there are horror stories about businesses of all kinds, yet only a misinformed person would say that owning a business is bad. Anyone who is willing to believe franchise critics, without doing their own homework, is probably better off fearing franchising. They’d also be better off not owning a business of any kind!

Fear is normal among business owners. Few people succeed without at least some fear. People like a little fear-they find it motivating. The greater the fear, the harder they work! Fear is only a problem when it stops you dead in your tracks. If you were so fearful of franchising that you couldn’t make a decision to buy one, that could be a mistake. However, that’s not to say that franchising is for everyone. It’s not. In fact, it may not be for you. But how will you know unless you move beyond your fear?

Let’s look at a few of the objections posed by franchise critics. Their information is not all wrong. It’s just not entirely accurate. And much of it decries simple common sense. They want people to believe that franchising is evil when, in fact, countless people will tell you that franchising helped them climb to greater levels of satisfaction and profit through their businesses. Franchising in America has helped tens of thousands of business owners become more successful.

Of all the franchise companies operating in the United States, some are better than others, but they are not all bad. Of all the franchisees in the United States, some are more profitable than others, but they are not all struggling for survival or even at odds with their franchisor, as some critics would have you believe. A little bit of investigation will show anyone who’s interested that there’s more good than evil in franchising.

Critics of franchising–including some misinformed legislators, educators, attorneys, accountants, reporters, and others who may have personal agendas-frequently miss the point about the success of franchising. Here’s the first complaint from many of them:

“The franchisor will make you pay a fee–upfront.”

That’s true. And let me quickly point out that these fees are sometimes hefty, up to $50,000 (though many cost less than $20,000). Critics say these fees are inflated and often unnecessary. They’ll have you think you can start a business independent of a franchisor without paying an upfront fee. And perhaps you can.

So why do franchisors charge franchise fees? If they didn’t have to, they wouldn’t! It would be a lot easier to sell franchises without an upfront fee. But franchise fees are necessary for several good reasons.

First, the franchise fee helps the franchisor recover money invested to start-up and maintain the franchise network. A franchise start-up can easily cost millions of dollars, and the ongoing legal, administrative, and operational costs can be staggering. A well-advised franchisor understands that break-even may be years away, requiring a specific number of franchises to be sold and supported. There’s a cost to franchising, just as there is to any product or service that’s sold. Surely it’s easy to understand that a franchisor has a right to recover this money.

Ah, but does it have to be paid upfront? That’s the rub for many critics, as well as for many would-be investors. Yes, it has to be paid upfront, and for another good reason. Let’s say you’re asked to reveal all your trade secrets plus train someone how to operate your business. Are you willing to do that without a financial guarantee? Before you spill your beans, you’ll want some money upfront. So does a franchisor.

Think for a moment about the value of paying an upfront franchise fee. What’s it worth if a franchisor hands you an established business system, one that you can use to churn out a profit year after year? You don’t have to invent the system, or even test it. It’s already a proven, working system! What would it have cost you to invent this system, assuming that you could? What’s it worth if the franchisor not only gives you the system, but spends a couple of weeks or more training you to use it?

Now, if you already know how to build and expand a business you probably don’t need a franchisor. But what if you don’t know? Do you have the franchisor’s experience of site selection, personnel recruiting and development, training, sales and production, marketing, advertising, operations, and all other factors relative to a thriving business? Do you have the benefit of group buying power and name recognition? If not, then the franchisor’s business system alone-without the training and support-may very well justify the upfront franchise fee. Go out and ask people who failed as independent business owners if they wouldn’t have preferred to buy a franchisor’s expertise and guidance. Ask someone who has spent 60 to 80 hours a week in the same business for 25 years, struggling most of the time, if it wouldn’t have been worth it-years earlier-to pay a franchisor to show them how to accomplish success faster and bigger. What would that have done for their quality of life?

Yes, success does come with a price and it’s called a franchise fee, and it will be required upfront. Keep in mind, not all franchises are created equal. Some are better than others. Some have inflated their franchise fees and they do not deliver on what they promise. But with a little homework-asking questions of existing franchisees, for example-you can easily determine which franchises are worth an upfront fee.

Critics say: “You’ll have to pay the franchisor a royalty. Forever!”

Yes, you will. Not forever, but for as long as you remain a franchisee. Franchisors generally collect a weekly or monthly percentage of a franchisee’s gross sales. That’s their royalty. The percentage will range from several points to double digits. Generally, royalties are higher than 5% and less than 10%.

While franchise fees help franchisors recover dollars invested in the business system, royalties supplement the franchisor’s ongoing operating costs, and provide a profit. Accountants and lawyers, who are not necessarily critics of franchising, have advised clients not to buy franchises because they thought the royalty fee was unnecessary, or too high, or it would prevent the client from turning a profit. Let’s look at the facts.

Support is a primary reason for the success of franchised businesses. Why do so many non-franchised businesses go out of business? It’s not for lack of capital, even though under-capitalization is often an issue. However, there are many instances where the business owner had plenty of money. But he or she ran out of money trying to figure out how to turn a profit. Franchisees usually don’t face that issue. First, they are licensed to use a proven business system. Second, they get ongoing support from a coach-their franchisor. Just like athletes who benefit from a coach giving them encouragement as well as helping them improve their style and performance, business owners can also benefit from ongoing coaching. You might already be pretty good at running your business, but imagine what might happen if you had someone who could help you improve just a notch or two! That’s what good franchisors provide to franchisees.

Of course, good franchisors are well staffed. Operating a franchisor’s home office is a huge financial undertaking. Making the payroll for 30, 50 or more than 100 people requires cash flow. Where does the franchisor get the money? Royalties! Successful franchisees recognize the value of the franchisor’s training and field operations staffs. They come to appreciate the research and development people, the technical, financial, legal and media experts employed by the franchisor. Successful franchisees don’t quibble about paying a franchisor a percentage of their gross sales because they know it’s a good investment in their business. Again, not all franchisors are created equal. Some provide more value than others. Before you invest in a franchise, find out if your franchisor of choice delivers what you will need to be successful.

Critics say: “Owning a franchise is just like having a job. You’ve got to take orders from the franchisor. You’re not really in business for yourself. You’re like an indentured servant.”

Entrepreneurial people are difficult to train as franchisees. We value our right to make decisions. We cherish freedom. We do not like following orders. We want the right to do things our way, even if it’s the wrong way. If you don’t want to march to a franchisor’s drumbeat, do yourself and franchising a favor and do not buy a franchise. You may never become as successful as you had hoped, but buying a franchise won’t get you there, either.

Believe it or not, like it or not, consumers prefer the same old same old. Think about it for a moment. If you’ve patronized a particular business in the past-a restaurant, a beauty shop, a home decorator, the auto repair shop-and you were pleased with the results, would you return to that same business again and again? Of course you would. If you moved to another state and needed a particular service or product, would you patronize a business you never heard of, or look for one that you recognize? Once again, it’s an easy answer. You like knowing what you’re going to get before you buy it. You like familiarity, and franchisors and franchisees know that familiarity breeds more business.

Familiarity is one of the reasons franchised businesses succeed. Each one that’s successful follows a system. The system has been crafted to meet the needs of consumers and ultimately to produce a profit for the person who implements the system. That’s called franchising. When franchisees refuse or fail to implement the system, their business under-performs and may eventually fail. Requiring franchisees to follow a system makes good sense!

Most small business owners, including franchisees, have little expertise in running a business. They may have perfected a skill or a craft, but that’s not the same as running a business. To succeed in business, an operator needs a system-even more than money-to survive and succeed. The system is one of the primary reasons for investing in a franchise. You may not like a franchisor’s system, or parts of the system. You might not like the way the franchisor advertises, markets and sells its products and services. You might not like the franchisor’s dress code, or decorating scheme, or hours of operation. But you best not minimize or ignore the franchisor’s system, and you are required to implement it to a T. If you don’t follow the system, the franchisor has the right to disenfranchise you, and for the sake of the franchise network, the sooner the better. A renegade franchisee can destroy an entire company. Franchised businesses work because they are systematized.

If you don’t like that, or you don’t like systems, or you don’t want to follow another’s system, do not invest in a franchise! It’s not for you.

Don’t believe the argument that in every instance franchising is buying yourself a job. Do you know anyone who sold their job after they quit, or retired? You can’t sell a job, but you surely can sell your franchise business. And just imagine how valuable it may be. With a franchisor’s brand name and goodwill, the operating system, as well as marketing and sales systems, plus research and development and ongoing training and coaching, your business is likely to attract an enviable sales price. With a good franchise, you’ll have an asset than many people may want to buy.

And one more point about the nonsense of buying a job. Franchisors do not make all the decisions for franchisees. A franchisor doesn’t show up in a franchisee’s office or store every morning to motivate the staff, or even to hire and train the staff. Personnel decisions almost always belong to the franchisees. Customer and vendor relationships also remain the domain of franchisees. Franchisors provide instruction and coaching, but they do not do the work of the franchisee. Ultimately, it’s your hard work that builds a successful business. Even so, a good franchisor provides its franchisees with many opportunities to voice their opinions and to help shape the franchise business.

So if you’ve lost some of the fear you might have had about franchising, how would you go about finding a good franchise opportunity? There are many online resources that you can consult beginning with the International Franchise Association’s (IFA) site at Franchise.org. There are seminars produced by the International Franchise Expo–see FranchiseExpo.com–and there’s plenty of good reading material.

Perhaps the best resource is the franchisor’s disclosure document, which is required by federal law. Franchisors must give it to you free before you can invest in their franchise. Be sure to ask for it! It’s critical reading. The disclosure document is written in a layman’s language so it’s reasonably easy to understand. Almost everything you need to evaluate a franchise opportunity can be found in the disclosure document.

The document includes a description of the franchise, a list of all fees required, the franchisee’s obligations, the franchisor’s obligations, information about territory, restrictions on what the franchisee may sell, financial statements for the franchisor and even the franchisor’s litigation and bankruptcy history, if any. However, the single most important section of the disclosure document may be the list of the franchise outlets. There you will find contact information for existing as well as previous franchisees.

Armed with this information, get on the telephone and start doing some research. Call as many of the existing franchisees as you want-there’s no limit. Ask them whatever you want. For example, “Would you buy the franchise all over again, knowing what you know now?” . . . “Does the franchisor deliver on its promises?” . . . “How has the franchisor’s system helped you advance the growth and profit of your business?”

Critics will tell you that existing franchisees will lie to you because the franchisor pays them. But you should know that if the franchisor pays them for helping to sell a franchise, that information has to be disclosed. If you call a dozen to 20 or more franchisees, you’ll likely hear some negatives as well as positives about the business and the franchisor. Call enough franchisees to get a fair sampling. Stop calling when you feel you have enough information to evaluate the franchise opportunity.

Along with this research, you should also consult with a franchise attorney and an accountant that understands franchising. Rely on the IFA to lead you to good sources. You may need to investigate several franchises before you find a good one, and one that’s a right fit for you.

Ray Kroc, the founder of McDonald’s, coined the phrase: Franchising is going into business for yourself, but not by yourself. That says it all. When you accept franchising for what it is, you accept the world’s most powerful system for building and expanding a business. If you explore what franchising offers, and thoroughly investigate the franchise opportunities of your choice before you invest, you can expect to succeed as a franchisee.

Will you succeed without fear? No. You’ll be afraid from time to time. But you ought to be scared to death to go into business without franchising!

Franchises are one of the fastest-growing types of businesses in the U.S. and can be purchased for as little as a few thousand dollars, to over a million dollars. There are franchises for all kinds of products and services—food, pet grooming, massage services, auto repair, etc. Although exact statistics are hard to find, they also tend to have a higher success rate than independent businesses that are not franchises.

Although franchises tend to have higher success rates, they also have risks , and can fail for any number of reasons like any other business. You must investigate Joe’s Restaurant Franchise just as thoroughly as Joe’s Local Diner before buying it. There are a number of great resources in addition to this article to help you determine if a franchise is the right way for you to go. The U.S. Small Business Administration (SBA) has some excellent resources , as do several other services like business brokerage websites. Enter “Is Franchising For Me” in any Internet search engine, and you’ll retrieve links to a large number of resources.

What is a Franchise?

The SBA resource I mentioned above offers the following definition for a franchise: A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or sells goods or services that meet the franchisor’s quality standards. As a business model, franchising is essentially a finance vehicle for expansion of the concept. You, the franchisee, finance the start up of the individual franchised unit and pay licensing and royalty fees to the franchisor. This is as opposed to the franchise company bearing the costs of opening its own units (many franchises do have company-owned stores along with franchised stores). The franchise agreement is a contract that governs the manner in which you will do business.

For the fees you pay, the franchisor licenses to you the use of the name of the business and provides other support. Typically there is a business operating system in place, contracts for products or services sold, equipment packages, store design packages, etc. Many franchisors will also arrange for financing relationships. Some franchisors supply the product directly and make money on the sale of that product to you. Such an arrangement usually reduces or eliminates the royalties you would otherwise pay. Typically, you will pay an upfront license fee and then pay ongoing royalties—usually as a percentage of your sales—plus contribute to regional and/or national advertising funds. The franchisor will hopefully provide business expertise as well—operations management, marketing, selecting locations—and should provide training, typically at their corporate headquarters for one to two weeks, plus training and support as you plan and get your franchise unit ready to open.

As a franchisee you own the business, but you are subject to the guidelines of the franchise agreement—products, store décor, uniforms, where product is purchased, certain advertising guidelines, etc. Franchising may be a good option if you prefer a business with existing brand recognition and defined processes you can follow, instead of creating the business from scratch on your own. The service and support offered by a franchisor varies from chain to chain—and may not always live up to your expectations. But the essence of the value of a franchise is the following:

• Existing brand value (unless brand new to the market)
• Existing operating system
• Existing product/service selection
• Supplier relationships (sometimes with favorable terms)
• Training
• Proven locations up and running based on the concept (unless brand new to the market)
• Cooperative advertising and cross-traffic with other franchisees

These things, like all things of value, have to be earned. In the case of a franchise, in addition to all the work you will have to do to be successful in any business, you have to pay the franchisor for the right to use their systems and trademarks. As noted above, this payment typically takes the form of an upfront “franchise license fee” and then a payment of ongoing royalties, plus a contribution to local and/or regional and national advertising funds. Upfront fees can be fairly nominal, like $5,000, or can be in the tens of thousands of dollars. Royalties (charged as a % of your revenue) vary by chain, but are often in the 5% – 8% range. Advertising contributions are also typically charged as a percentage of sales and can vary substantially, but typically range from 1% to 5%, with 3% – 4% being the most common in my experience. In addition to contributions to regional or national advertising funds, you will have to spend additional local marketing dollars to be a success—don’t assume you can rely on your percentage contributions to provide adequate marketing resources to make you a success.

What’s the Right Franchise?

Only you can answer that question, but some things to bear in mind are:

• What are your interests?
• How much capital do you have?
• Do you want to develop multiple units?
• What days or hours do you want to work?
• How easy is it to re-sell your franchise and what are the restrictions or costs from the franchisor?

The financial value a franchise brings to you is an important question to ask yourself. For example, if you are giving up 10% of your revenue in the form of 6% royalties and a 4% advertising co-op fee (which, in theory, comes back to your benefit in the form of marketing resources and advertising), you need to objectively assess what you get back for that 10%. 10% right off the top is a significant amount of money. Will you have a higher probability of success? Will you make more money on the bottom line in spite of the 10% expense? It may be simply that a franchise makes it possible for you to be in business for yourself because of your comfort level with an existing concept, versus trying to create your own. This is why many people go with a franchise, and it’s a good reason, but be sure you understand the financial costs and tradeoffs.

Brand Value

Once you are in the business and have some experience, the primary value (besides any ongoing support and training, which is usually minimal) is the equity of the brand you have franchised. A good franchisee is one who understands that the royalty % he or she is giving up each week is an investment in the brand equity of the chain. A brand that is consistent across its various units will tend to build a more positive reputation and therefore drive more customers—more revenue and more profits—to its franchisees. Think about McDonalds®, considered by many to be the model of a successful franchise system. Imagine if every McDonalds restaurant had a different menu with different products, inconsistent quality, and systems that were changed by every franchisee and therefore different. It would be impossible for the customer to know what to expect before they walked in, i.e., the brand “McDonalds” would have little or no value, sales would slide, stores would fail, and the chain wouldn’t be what it is today (we might have never even heard of it!). By insisting that its franchisees conform to the principles of the brand, i.e., create consistency according to high standards, McDonalds and its franchisees have generally thrived (NOTE: this is not an endorsement of McDonalds, nor is it a prediction of success with a McDonalds franchise. It is only the conclusions of an industry observer and, admittedly, long term customer!). Franchisees that do not conform to the system are destroying their own investment by undermining consistency and therefore the brand. The difficult role of a franchisee is to be independent enough to be capable of owning your own business, but understanding at the same time that you are part of a larger system to which you need to contribute value (i.e., conformity and consistency) in order to be successful yourself.

Master Franchising

I’ll only touch briefly on master franchising, but you may want to follow up in detail on your own, as master franchising can be a very powerful and lucrative business opportunity for the right person. One company that specializes in master franchising is Franchise Growth Systems (FGS), and you can retrieve additional information on master franchising at their website, franchisegrowth.com. Many franchise systems have three overall levels to the organization:

• Corporate Franchisor—this is typically the entity that that developed the concept and from whom you are buying your franchise license.
• Master Franchisee —this is the entity that buys the right to develop franchisees in a given territory, like a state.
• Franchisee—this is the person who buys the franchisee license and operates the actual franchise unit.

There are two major aspects of the master franchisee you need to understand:

• Is it an opportunity that makes sense for you; and
• If you become a franchisee, what is the impact of the master franchisee on your success?

FGS calls master franchising “the best kept secret in franchising,” and it is a pretty unique type of opportunity. Basically, the master buys from the franchisor the rights to develop franchisees in a territory. For each franchise license the Master Franchisee sells, it typically receives one half of the upfront license fee—and that’s not even the good part! It then receives up to half of the ongoing royalties paid by all franchisees operating in its territory. If the master gets a number of units open in his or her territory, 3% (or whatever his or her share of royalties is) of the annual sales in the territory can grow very quickly.

The master typically has to open the first unit in the territory, which increases the capital required. The cost of Master agreements can vary widely, but typically sell for about $.03 to $.10 per head of population in a territory. A state with 3,000,000 people at $.05 per head would require a $150,000 investment. With the first unit to be opened by the master added in, significant capital can be required. If the cost to open a retail store in a retail franchise is $150,000, the total upfront cost to the master is $300,000 in this example. A good Master Franchisee has multiple qualities:

• A strong financial position to invest in the territory and a unit upfront, and wait for the chain to grow over 2 – 5 years.
• Sales/business development skills.
• People management skills.
• The ability to understand and manage the franchisor/franchisee relationship.
• An appreciation for good franchisee operations.
• A commitment to the success of his or her franchisees.

Master franchisees that lack these skills can be very detrimental to a market and actually undermine the success of the market by creating discord among franchisees, and even turning franchisees against their own concept. Talk in depth with existing franchisees about their experiences with their master franchisee. The master role is sometimes called a Development Agent or Area Developer and, while there can be variations, the role is essentially the same. Bottom line: find out who the “middleman” is, and make sure they are a person with good values and a commitment to the success of their franchisees. This can be even more important than the quality of the franchise parent.

A last note: not all franchise systems have the middle role. Some master franchisees also are the ones who open and own all the units (versus recruiting other franchisees to do so).

Choosing A Franchise

If you determine that franchising is a good avenue to business ownership, one of the most important considerations is this: don’t let your excitement about going into business for yourself, or about a certain concept, cloud your judgment or make you skip a proper investigation of the concept. There are thousands of franchises in the United States. Be open minded when first investigating types of franchises, and don’t have tunnel vision about which one you think interests you. Once you narrow down your choices, investigate more than one at least semi-thoroughly.

The franchisor is required by law to provide you with a Uniform Franchise Offering Circular (U.F.O.C.). It should contain a list of existing franchisees. Contact as many as you can! See what their experience has been. If possible, get them to let you review their financial statements and see how they are really doing. If you can’t review actual numbers of other franchisees, don’t rely on the franchisor’s projections. Franchisees typically like to share their success—if they are doing well. Plus, getting a new franchisee in the system is good for the chain, which should motivate them to share. Some will be sensitive about the confidentiality of the information, but if no one will let you see their books, that’s a warning sign that the franchise may not be doing well in your market or overall.

Never get hasty—you will strongly regret it if you do, and end up making a bad choice. Also investigate resells of existing franchise units—they can represent a great opportunity and a smaller financial investment. Franchising can be an excellent avenue to business ownership. Investigate carefully, make objective judgments, and make sure the franchise is delivering value to its franchisees for the royalties and independence they require you to give up—and then get started! Conclusion

There is value in both new and existing franchise concepts. Obviously, the newer a chain is, the more untried and risky it is. Early entrants into one that becomes successful will enjoy higher returns, but don’t deceive yourself about the risk just because it’s a franchise (with either new chains or established ones). Franchise chains can and do fail, just like individual units do.

One of the big benefits a chain offers is brand recognition. The training and systems are of only nominal value once you know what you are doing. You may even find that your abilities outstrip the franchise’s (but don’t forget it’s consistency with your fellow franchisee’s operations that builds brand value over time!). Brand value is a big part of what you are paying for over the life of your relationship with the franchise. So a more established chain will have less risk (both as a chain and an individual unit), and deliver more quickly on brand value due to their market presence.

Your first choice should be to go with a more established chain with proven successes and lots of franchisees that can share their financial results with you before you commit. There are thousands of franchises in the United States. Utilize the Internet and print publications on franchises to review as many as you can while trying to discover the one that seems like the best fit for you.

When it comes to expanding your business overseas, franchising has become the Modus Operandi of the day. In Singapore, many businesses including restaurants, café chains and fashion chains have shown interest in and considered setting up overseas franchises. It makes sense financially for them in the sense that the franchisor (the business owner that grants the franchise) can charge an initial fee to the overseas franchisee (the person who takes the franchise). Franchising in effect provides an almost cost-free expansion since the original business receives royalties and a constant stream of income from the franchise. But there are pitfalls to avoid. Franchising may not be suitable for all businesses and an overseas operation can fail for a number of reasons.

This article sets out briefly some of the challenges a franchisor venturing overseas may face and how to overcome and resolve them.

Franchise Systems

Companies that wish to enter into a franchise agreement should familiarise themselves with the franchise system. There are three different ways to operate a franchise:

Unit franchise:

The business owner allows only one franchise outlet, and licenses all trade marks and other proprietary rights to only that one outlet.

Area franchise

The franchisee is only allowed to operate under the trade mark or brand name in one designated geographical area, such as the province of New South Wales as compared to the whole of Australia.

Master franchise

The franchisee is entitled to operate in the whole country, sometimes with a right to create sub-franchises and appoint sub-franchisees within the country.

Costing would differ for each of the above types of franchises and is also affected by the potential market size and share in the targeted country.

Regulations and Other Legal Issues

The next things to look out for when considering whether to franchise are the laws and local regulations in the targeted countries, which will impact on the franchisor. In countries such as the USA, the franchisor must comply with stringent disclosure requirements while in countries like Indonesia, the franchisor may be required to register the franchise agreement with the relevant authority before commencing operations. These requirements do not really present too much of a problem to the franchisor, but they have to be complied with nonetheless. The franchisor should also pay particular attention to laws and regulations in various other countries that directly affect the business of the franchise. One example of what we mean here is that, since February 2005, franchising has not been allowed in China for foreign retail brands which do not have a minimum of two shops and more than one year of operations in China. This amendment to the franchise regulations has made it difficult for established local brands to franchise to China.

Of course there are perfectly legal solutions to avoid the problems that may be encountered. The rules differ from country to country and, therefore, any prospective franchisor must seek legal advice when venturing into a foreign jurisdiction for the first time to ensure that all such regulations and formalities required under the laws of the targeted country are complied with.

Of course in some cases, it may still not be advisable to commit to a franchise agreement even though all the indications are positive. Some product lines may simply be unsuitable for franchising.

Common Problems Faced by Franchisors

There are a range of problems that could be encountered by franchisors and we have attempted to address the most common ones here.

Initial Investment

One of the problems when embarking on a franchise, especially for local companies or SMEs (small medium enterprises) seeking to expand overseas, is the costs involved in the early stages of a franchise. Preparation for franchising has to be done without the guarantee of payment and collection of franchise fees and royalties in the short term. The costs involved include:

• developing the franchise concept (normally done with the help of engaging external consultants)

• overseas market research

• legal matters

• providing support

• looking for suitable franchisees

• training

• product costs

• supply of products to the franchisees

For retail chains, financial problems with shipment and manufacturing (even after executing an agreement with the franchisee) have to be considered. The sizable initial costs plus the time lag (about half a year to more than one year for preparations) before the franchisor can recoup the money from the franchisee, may result in cash flow problems for the franchisor. This is especially so for smaller retail chains with a yearly turnover of say US$1m to US$5m as they may not have the financial resources to provide or compensate for any delays.

One example we experienced that illustrates this point is the case of a Singapore shoe retail chain (with about 5-6 shops) which embarked on a franchise for its shoe retail chain in Indonesia. In the contract, it was stated that the balance of payment would be paid after the goods had arrived at the Port of Jakarta. However, the payment was not made. Despite this, the franchisor had no alternative but to release the goods as they were already in the Port of Jakarta. He only received payment at a time much later than the agreed date. This delay caused him some cash flow difficulties.

Problems like this can and should be addressed legally in the franchise agreement just as they would be in a contract for international or cross-border sales of goods.

Financial concerns can also lead to the lack of adequate preparation in coming up with the franchise concept. This can, in turn, lead to inconsistency in the quality of the products and different levels of support or commitment by the franchisor in different countries. The food in a franchise outlet in say, Australia, where the franchisor is located, would taste much better than those in another outlet from the same franchise in China. Though the situation may improve after some time, this is the usual problem that local brands or small medium enterprises face at the onset.

The Trade Mark Problem

Usually, trade marks are the most important intellectual property rights in a franchise. Trade marks are territorial in nature and the franchisor will have to register its trade mark in the targeted country before it can be protected there. Registration in your own home country is not good enough and your local registration will not be recognised in another country.

The franchisor may sometimes find that his trade mark has already been registered in the targeted country by a local third party as was the case with a particular popular Indonesian fashion brand seeking to franchise in Korea and Thailand. It found out the hard way about stolen trade marks when it discovered, after entering into a franchise agreement with a local franchisee, that its own brand name had already been registered by other companies in these countries. To make matters worse, it decided to leave these issues to the local franchisee instead, thinking that the local franchisee would be more familiar with the situation. This caused him serious financial losses as he had already shipped his products to the franchisee. The franchisee subsequently defaulted on payment and did nothing to resolve the trade mark problem. From this it becomes clear that some initial market research in the targeted countries and legal advice are needed when you want to start your franchise.

Registering Your Trade Marks in Foreign Countries

The Madrid System for the International Registration of Marks (“Madrid Protocol”) and the Paris Convention for the Protection of Industrial Property (“Paris Convention”) are two very important international treaties regarding the registration of trade marks.

The Madrid Protocol provides a one-stop filing system so that the franchisor can file for trade mark protection in his own country as well as his targeted countries at the same time. It does not give you an international trade mark that is recognised by all its member states or all countries across the globe, but provides a convenience of filing in different countries at one go and also reduces the costs of filing.

The Paris Convention on the other hand, provides a very useful mechanism allowing the franchisor to file the trade mark in his home country first at an earlier date and subsequently, within a given time frame, when he decides to file his trade mark in his targeted country, he is able to claim priority or use his first and earlier filing date in his own country as the date of filing in the targeted country. The Paris Convention gives the franchisor time to source for funds before filing for trade mark protection in the targeted countries and the peace of mind that comes with knowing that he can be protected by filing first in his home country.

Take a real-life example of a Korean cosmetics company setting up its business in Singapore. It registered its trade mark first in Korea sometime in December 2005 before coming into Singapore. Upon entry into the Singapore market, it then filed for trade mark protection in Singapore under the Paris Convention sometime in March 2006. However, the directors quickly received notification from the Singapore trade marks registry that there was an identical trade mark filed by their competitor in January 2006. Taking advantage of the Paris Convention, the Korean company was able to claim the earlier filing date in Korea of December 2005 as their date of filing in Singapore and this allowed them to effectively override their competitor’s earlier application. This helped prevent a situation where the Korean company would either have had to shelve its plans in Singapore or embark on costly litigation to recover its trade mark.

In general, it is usually not advisable to leave trade mark matters such as registration to the franchisee. The trade marks should always, where possible, be filed in the name of the franchisor otherwise the brand value or recognition of the trade mark may be diminished in the long run since the public in the targeted country may come to identify the trade mark with the local franchisee and not the franchisor.

Other Intellectual Property Rights

Copyright

This is another form of intellectual property rights which may be of interest to the franchisor. Copyright can attach to many possible mediums and is not confined to brand or logos alone. Instructional manuals, business forms, software and other items may all be protected by copyright. Unlike trade marks, copyright usually does not have to be registered and can be protected in many foreign countries at one time if these countries are all signatories to the same international copyright convention.

Patents

These do not quite fit into the business model of franchises since patents are, by their nature, confined to subject matter of heavy industrial application. This may change in the future as many countries such as Singapore have made or are making changes to their laws, allowing business methods to be patented. Like a trade mark, a patent has to be registered and have its own equivalent of an international system of registration by way of the Patent Co-operation Treaty. The Paris Convention also applies to patents.

Control over Franchisees

It is always advisable to exercise some supervision and control over a franchisee. The first step towards this is to incorporate the right clauses in your franchise agreement at the onset. The franchisor should insist on some form of reporting requirements and a right to inspect accounts. There should also be some provisions to safeguard the franchise concept and sometimes the franchisor’s business methods. Generally, the franchisor should be looking to protect, by way of contractual clauses in the agreement, what may not be protectable under intellectual property laws.

This helps the franchisor to prevent a situation where the franchisee acquires knowledge, copies the franchise concept and uses this to compete with the franchisor. This can sometimes happen at the end of the franchise period. Basically, there should be restrictions imposed on the franchisee when dealing with materials or other property of the franchisor, and these should be returned and accounted for by the franchisor upon the expiry or termination of the franchise.

See You in Court – But Which Court?

It may be at times necessary to take legal action against an errant overseas franchisee that is outside the jurisdiction of the courts and also beyond the control of the laws in the franchisor’s home country.

It is advisable to make some provisions for this in your franchise agreement. The two important considerations here are the place to sue and the law to apply. It is important to seek legal advice for these matters since your choice of place and law often determines success and directly affects the prospects of recovery as rules may differ from country to country. Some countries may have bilateral reciprocal enforcement regimes allowing their respective courts to recognise and enforce each other’s judgments while others may be signatories of international conventions to the same effect. It is important to know these in order to choose your place to sue and the applicable law.

Sub-Franchising and Exchange of Goods

Another problem with franchising is the inconvenience caused to end consumers when it comes to the exchanging of defective products. This is especially so where there is sub-franchising created in different places in the same country. For instance, in Australia, when a customer buys an item of clothing from an outlet in Sydney, he would not be able to exchange it in the franchise in Melbourne. This also happens in Indonesia, especially if the shop is owned by different people. That is why some retail chains like Hammer and Nail (Indonesia) prefer to own the business themselves. This can be used either as an alternative or a stepping stone to establishing a fully fledged franchise.

Raise Public Awareness First

It may be easier for local brands who want to expand overseas by franchising to consider setting up their own flagship store in the overseas country first. This would raise public awareness of their brand and product in the targeted country and help to attract more franchisees later on. Famous local brands such as BreadTalk in Singapore may not be known to anyone in overseas countries, such as Germany. As such, potential investors in Germany would be hesitant to invest in the brand. By setting up a flagship store, the franchisor can test the local market.

However, before venturing overseas, research should also be done on consumer behaviour to make sure that the consumers in that country would appreciate the product, bearing in mind that different countries have different cultures, tastes and market trends.

Franchising –

A Great Tool for the Right Business with the Right Knowledge
Franchising is a useful tool when it comes to expanding your business overseas. However, as we have shown here, there are also potential pitfalls and risks involved. This can be avoided or at least minimised if the necessary preparatory work is carried out before you venture into a franchise agreement with a foreign partner.

Acquiring knowledge of consumer behaviour patterns, local market conditions and regulations, developing a suitable franchise concept as well as paying attention to various details in your franchise agreements are just some of the more critical matters that you, as franchisor, should take note of.

Knowing your market and your rights as a franchisor or a trade mark owner lays down the foundation for the creation of a successful franchise.

Have you always wanted to go into business for yourself? If so, it’s possible that you’ve considered whether buying a business franchise is the right choice for you. Starting a business in any field is a significant life and professional decision, and, as with any major decision, it is important to weigh all of the pros and cons before taking the leap into a business franchise opportunity.

There was a time when someone wanting to start a business would follow the traditional route of selecting an industry, researching and establishing financing, and then hanging a shingle on the doorpost. These “mom-and-pop” businesses in many ways became the backbone of economic growth and development. Yet, as many entrepreneurs will readily tell you, independent businesses, even with their allure, often carry great risk, and the vast majority of small businesses fail within the first few years of operation.

Enter the franchise business opportunity. Although franchising is a relatively new business concept as measured against the scope of history, it is a business option that carries a much higher success rate than traditional independent businesses, and this is particularly true if you are a first-time business owner.

According to AllBusiness.com, a leading business information and resource portal, among the advantages of purchasing a franchise over launching a traditional independent company are “instant brand awareness and credibility, administrative and/or technical support, franchisor-provided training, quicker return on investment, strong management, and a network of other franchisees and associations dedicated to supporting franchisees.”

While as an independent business owner, you are solely responsible for costly promotion and marketing of your product or service, as a franchisee, you usually have the benefit of national media marketing and advertising done by the parent franchise company. In addition, independent local businesses often find themselves in direct competition with well-backed franchises that simply have more resources to promote and operate their businesses.

That said, however, the very ordered nature of franchise business opportunities may come as a disadvantage to some, as by an established franchise system the creativity of the entrepreneur is often curbed. Yet, given the support available to franchise buyers and the numerous low-cost franchise opportunities, for many, purchasing a franchise still holds noticeable advantages over starting a traditional business.

Thus far, we have focused on the benefits and drawbacks of purchasing a franchise opportunity as opposed to opening a traditional business. But perhaps your choice is between buying a franchise and remaining at your traditional job or, if you are just entering the workforce, between purchasing a franchise opportunity and getting a traditional job.

There are unquestionably distinct advantages and disadvantages of buying a franchise business opportunity, and if you are considering taking the leap from employee to entrepreneur, it is important to carefully weigh both the pros and the cons of purchasing a business franchise.

Benefits of Buying a Franchise
As reported by AllBusiness.com and the International Franchise Association (IFA), the benefits of traveling the path of business franchise ownership are many, and they include:

1) Probability for success – With an established support system, franchisees are often able to avoid many pitfalls that lead to the failure of numerous small independent businesses.

2) Brand recognition – Customers become familiar with the franchise brand and learn to trust that brand, thus increasing business for franchise owners regardless of location.

3) Availability of training and support – Franchisors offer training programs for new franchise owners prior to the “grand opening” of their franchise outlet, and once the franchisee’s new business is “up and running,” franchisors provide ongoing support in the form of meetings, networking, additional training programs, research & development, etc.

4) Joint purchasing power with other franchises – While many independent business owners lack sufficient resources to do extensive advertising or even to maintain inventory at bulk levels, franchising allows entrepreneurs access to the franchisor’s purchasing system so they can leverage outlay to achieve a greater return on investment.

5) Experience of the franchising company – Perhaps the most compelling advantage of franchising is the benefit of the experience of the franchisor. This significant “pro” minimizes risk among franchise buyers both by helping them avoid common mistakes and by granting them access to proven systems of business operation.

Drawbacks of Buying a Franchise
Even with their allure, however, franchise ownership also carries several cons that should be carefully considered before making the decisions to become a franchisee.

1) Risk – Although franchising significantly reduces the risk of business ownership, it does not eliminate it altogether, and as with any entrepreneurial venture, the success of a business franchise depends largely upon the efforts and determination of the franchise owner. It is by no means guaranteed.

2) Comparison with other franchises – While brand recognition is listed under the “pro” column, it also has the potential to be a “con” in the world of franchising. Just as consumers learn to trust a brand based on positive experiences, one negative experience can turn a buyer off to your franchise, even if your particularly branch was not at all involved in the negative scenario. Thus, the very nature of franchises and one of their chief success components also can present a primary drawback of franchise ownership.

3) Lack of independence – Again, although proven systems of business offer great benefit to the franchise owner, operating within the franchise system also imposes limitations on the entrepreneur. He or she is often is not free to pursue creative ideas at will, as the franchisor requires adherence to established rules and regulations.

4) Management responsibilities – When considering buying a franchise, it is vital that you are honest with yourself regarding your management expertise and capabilities. This is an area that many do not automatically relate to franchising, but the reality is that franchise ownership often requires human resources and business management and development. And this is often easier said then done. Although prior experience is not always required, honest evaluation of your current skills is paramount to measuring your potential for success.

5) False expectations – Franchising is by no means a “get rich quick” opportunity, but sadly many franchisees carry unrealistic expectations regarding their capacity to earn significant income in a short period of time. Just as any business requires extensive determination, hard work, and steady commitment, so, too, does franchising, and it is important that anyone considering buying a franchise business opportunity keep realistic expectations regarding the effort involved.

Inarguably, franchise businesses carry great potential for success. Yet they also present unique disadvantages to the franchise owner. Through carefully weighing all of the pros and cons, you will be able to determine if buying a franchise is the right choice for you.