Francorp - The Franchising Leader in the Philippines
Francorp - The Franchising Leader in the Philippines

Franchise Hotline : (+632) 8638.3149 to 50

Avoid these 3 pitfalls when investing in a franchise

“This article first appeared on www.entrepreneur.com.ph200451597-001 Figuring out the business you want to get into is finding out the things you are passionate about.

One of our greatest successes as a country is having over a 150,000 franchise outlets with thousands of happy franchisees. With its high-acceptability and 90% success rate over traditional do-it-yourself businesses, it has been a pretty typical case that a franchisee can own two or more franchise stores. Another great story is that a franchisee can actually own two franchise concepts, differing in category, because of the great business experience with the first. Although there are a lot of success stories, there have still been a few that have failed, and it almost always starts with their mindset. Here are the three common pitfalls you have to avoid when plunging into franchising:

 

1. Wanting fast returns.  In starting up a business, most Filipinos are more enticed on how fast the returns can get. The mindset is “I don’t care about the brand and products, I just need fast returns.” Some are frenzied by one to two months return on investment, without thinking about long-term sustainability. We tend to generally think that it is safer to get your capital back 100%, the fastest way possible, than thinking about how long the business can compete in its industry and its potential to be a market leader. When thinking about the franchise business you have been waiting to have, it is a good exercise to do a long-term, big picture way of seeing things. It may not necessarily protect you from a whole list of failures, but it will surely give you the morale to just keep going and be more equipped as a franchisee. Returns may took a longer time to come back, but would not it be a lot better to have a sustainable business for five to 10 years versus six months?

 

2. Dispassionate about the franchise.  Every time we dive into franchise consultations, we often tell aspiring franchisees to franchise a brand or industry that they love. If they have that zeal for food, then try not to invest into a car parts retail or a salon business concept. Your brand should be something that makes you your first and last customer. Figuring out the business you want to get into is finding out the things you are passionate about. Thinking of it as a hobby that you soon do and soon forget will make things more perplexed for your franchise. Your passion for the business will supply you with more reasons to work harder, bring up your a-game, makes you a better employer, as well as you share the passion with your people.

 

3. Lacking understanding on franchising.  One question we always get asked with our inquiries is if the franchise fee is all they have to pay to start the business. The franchise fee is the upfront fee paid to the franchisor for the use and privilege of using the former’s business name, system, and support. Capital is the total amount of money to be invested for putting up the physical store and making it operational, which may sometime already include the franchise fee. More often than not, aspiring franchisees get a little uncomfortable once they see the numbers towering higher than they expected. And they will soon get uninterested to the entire business structure of the franchise concept they are inquiring about. But the franchise would be more than just about the initial numbers. It is appreciating the professional system model, financial structure, and how it contributes to grow the business exponentially. If you really plan to get a franchise—or any business for that matter, it is indeed important to be aptly educated about your planned venture. Meet with franchise consultants to help match the right franchise concept for you. They should be able to unlock more insights, the pros and cons, financial and market feasibility studies, among related matters, to boot your confidence to engage in the business.

 

For more information on investing in the right franchise, U-Franchise is organizing “How to Invest in the Right Franchise” seminar on Tuesday, March 15, 2016. U-Franchise also offers free franchise matching consultations. For inquiries, please contact (02) 634-0586, e-mail franchising[at]ufranchiseasia.com, or visit www.ufranchiseasia.com.

***** Chris is the senior vice president for marketing and strategy of Francorp Philippines; president of U-Franchise Sales & Management; and chairperson and director for special projects, ASEAN integration-Philippine Franchise Association.

Tags: , ,

Franchisor Concern: Will My Franchisee Compete With Me?

By Manuel V. Siggaoat, CFE

Managing Director, Francorp

As a consultant, I talk to several people a week who are thinking about expanding their business through franchising. For sure, there are many advantages if done correctly. After all, franchising has already helped many companies grow. However, one of the most common fears would-be franchisors have is whether or not they are just teaching franchisees the business know-how that will eventually be used to compete with them.

“What if I train my franchisee and he uses that knowledge to put up his own business and compete with me? Am I digging my own grave with franchising?”

This is a valid concern. To be honest, I have seen cases where this has happened. I have seen franchisees, disgruntled and disillusioned with their franchise investment, put up a competing business and go head-to-head with their franchisor.

However, this is something that is preventable. Here are some safety nets to discourage franchisees from turning against their franchisor.

 

1. Include a Non-Compete clause in the Franchise Agreement

A Franchise Agreement should include non-compete provisions within the contract. Basically, this provision states that the franchisee should not put up or invest in a business that competes with the franchisor’s business. The franchisee is bound from doing so (a) while the franchise agreement is in effect, and (b) some years after the franchise agreement has expired.

 

While including a non-compete provision will help, it is not enough. I will not go into details but there are several ways a franchisee can circumvent this provision. So in other words, a non-compete clause is a necessary but insufficient provision – it should be found in a franchise agreement, but by itself will not prevent franchisees from competing with a franchisor.

Besides, non-competition provisions are not in effect forever. They expire a few years after the end of the agreement.

 

2. Give Continuing Value

A better way to keep franchisees from competing with a franchisor is by providing continuing value. This means that aside from use of the name, the franchisee benefits from products and services that the franchisor provides during the course of the business.

 

2.1 Proprietary Products

Not teaching franchisees everything about the business is one way to keep them from using what they learn against you. The franchisee is dependent on the franchisor to supply proprietary products and services. Proprietary means those relating to the ownership of the brand or business. These are usually related to the franchisor’s intellectual property, like recipes and branded merchandise.

Instead of giving the entire recipe to the franchisee, franchisors may provide ready-to-use sauces, mixes, marinades, etc. to the franchisee. For retail concepts, franchisors provide branded merchandise, meaning those products that contain the brand’s logo.

Since these are proprietary items, they are available only from the franchisor and cannot be bought in the open market.

 

2.2 Killer Support Services

Franchisors are supposed to provide ongoing support to franchisees. For the purposes of this discussion, killer support services are those that are so outstanding and very critical to the franchisee’s business, yet very expensive or difficult to do on his own (in the computer industry, a killer app is a software so compelling it makes consumers want to get the hardware just to be able to use the software).

For example, a topnotch business intelligence software that provides data for making critical business decisions at the unit level can be a source of competitive advantage. Since it may be very expensive to install on his own, a franchisee would be discouraged from scaling this high barrier to entry.

A world-class marketing program is another example of a killer support service. Especially if the program is highly effective and brings business to all units on a consistent basis.

If franchisees rely on these killer support services for their business but find it difficult or very expensive to replicate on their own, then a franchisee will stay within the fold.

 

3. Keep Franchisees Happy

There are several legal and structural ways to keep franchisees in the system. But I’ve seen that the best way to keep franchisees from competing with their franchisors is by keeping them profitable and happy. If a franchisee is profitable and is happy with the relationship with the franchisor, he would not think about bolting the system and putting up a competing business. He may, in fact, even invest in an additional unit, become an area franchisee, or encourage other investors to become franchisees themselves.

Financial and strategic planning for the franchise business is therefore very crucial. The franchisee fees, royalties, markups, advertising contribution and other fees charged by the franchisor should be well within reason. Considering expected sales and relevant expenses, the profits and return on the franchisee’s investment should be attractive. The way a franchise is structured should result in a win-win arrangement, where both franchisor and franchisee benefit.

Sometimes, not all plans come to fruition, though. As the saying goes, the best-laid schemes of mice and men often go awry. The most well-thought-out business plan may not work because of unforeseen circumstances. What is important when that happens is how the franchisor will go the extra mile to help the franchisee cope with the crisis, or how fair his exit strategy for the franchisee is.

To summarize, a franchisee can be a franchisor’s worst enemy or best business partner. It depends on how the franchisor structures his franchise and how he manages the relationship with the franchisee.

 

Tags: , , , , , , ,