COMPILATION OF TOPICS IN MARKETING

2
(FRANCHISING)

(A FINAL PROJECT REQUIREMENT OF MARKETING 2)

Submitted by:

BRIAN R. GANGCA
Student

Submitted to:

MR. MANOLITO M. MONTECLARO, MBA

Instructor
FRANCHISING

A start-up entrepreneur may decide togo into business by simpky buying a license to locallu
operate let’s day Jollibee or Pizaa Hut. This practice is known as franchising. The past years have shown
phenomenal increase in franchising all over the world. In the U.S alone, the sales in the franchising
industry in 1991 were $758 billion as compared to the $334 billion in 1980. Here in the Philippines, there
are projected sales of 82 billion pesos for year 2000 and 100 billion pesos for year 2001. There have been
significant numbers of Filipinos wanting to won or operate a franchise. This indicates the growing
acceptability of franchising business among Filipinos.

Colonel Harlan Sanders himself founded Kentucky Fried Chicken and made it a global business
through franchising. In his words “franchising is the quickest and mose successful way to become an
entrepreneur.” Another franchising expert, Andrew Kostechka, who works in the US Department of
Commerce, thinks that ‘franchising is considered a way of life.’

As a backgrounder, the term franchise came from the Old French franchir, which means freedom,
privilege or immunity from burden. During the feudal ages in Europe, the local landlords would grant
rights to the subordinates to hold or attend markets or fair. The landlords then were the first franchisor
and the subordinates the first franchisee.

One of the first franchise agreements was during the nineteenth century when Singer Sewing
Machine Company granted distribution franchises to their dealers. Singer was the first to have writtedn
franchise contracts. In the late 1880’s, cities began giving franchises tot he newly established electricity
companies. After World War II, there was the expansion of motels, drugstores, variety shops, and
employment agencies which exhibited franchising principles. In 1950’s, products and services started to
franchise in the U.S. In 1955, Ray Croc started to franchise a fast-food chain called McDonald’s. The
franchising boom came in 1960’s and 1970’s when fast-food outlets started to franchise. In the
Philippines, the 70’s were marked by the introduction of Jollibee and McDonald franchises.

1. FRANCHISING CONCEPTS

There are common concepts that pertain to the discussion of the topic on franchising. These are
the following:

Franchise - it is anagreement whereby an independent person is given exclusive rights to sell a specified
goods o service.

Franchising – is a marketing system based on a legal agreement wherein one party (franchisee or
franchiser) is given the right to handle business as an independent owner but is required to abide by the
terms and conditions specified by the other party (franchisor). For the franchisor, therefore, franchising
means selling the franchise, while for the franchisee or franchiser, the franchising is understood to mean
buying a franchise.

Franchisor – refers to an entity that ownd the franchise name and distinctive elements (such as patent,
trademark, signs and symbols) which grant others the right to sell its product.
Franchisee or the franchise buyer – it is the entity that buys to operate the business using the name,
product, trademark, service mark, product and business format of the franchisor under the terms and
conditions of the franchise contract.

Franchising Contract – it refers to the legal document involving two parties (franchisor and franchisee)
specifiying the obligations, primarily of the franchisee and the conditions under which the latter will
conduct business.

2. BENEFITS OF FRANCHISING

According to Megginson, both the franchiser and the franchisee can benefit from franchising.
For the franchiser, this guarantees faster expansion and greater market penetration for his business. In
effectm this can result to lower operating costs. For the franchisee, getting a franchise gives him better
brand recognition and less-costly share in local and national promotion of the product. Furthermore, the
franchisee can avail of management training at less cost. In somes casesm the franchisee can also enjoy
financial assistance from the franchiser.

WHAT ARE THE TYPES OF FRANCHISING?

Generally, franchising is divided into two types: the Product and Trademark Franchising and the
Business Format Franchising. The former is further subdivided into Manufacturer-Retailer Franchise, the
Manufacturer-Wholesaler Franchise and the Wholesaler-Retailer Franchise.

The Product and Trademark franchising involves an arrangement wherein the franchisee is given
the right to manufacture and/or distribute a widely recognized brand or product. The franchisor has very
little control over how the business is operated but it demands that the franchisee maintain the integrity of
the products. Examples of these are franchises in the soft-drink industry, gasoline service stations and
automobile and truck dealerships. There are three types:

1. Manufacturer-Retailer Franchise
2. Manufacturer-Wholesaler Franchise
3. Wholesaler-Retailer Franchise

• Manufacturer-Retailer Franchise. This is a franchise in which the franchisee buys from

the manufacturer (franchisor) and then directly sells it to the end consumer. The franchisor gives right to
the franchisee to use its name, trademarks, logo and other identifying marks. The franchisee meanwhile
maintains a distribution outlet that sells and stocks the franchisor’s products.

• Manufacturer-Wholesaler Franchise. In this type, the manufacturer (franchisor) sells

to the franchisee partially completed products. The franchisee is given the right to complete the products
using the manufacturer’s name, trademark, logo and other identifying marks then distribute and sell the
product to the retailer.
 • Wholesaler-Retailer Franchise. It is a type of franchising in which the wholesaler is the
Franchisor that grants the retailer (franchisee) the right to retaile the product but use the wholesaler’s
name, trademark, logo or other identifying marks. At times, the franchisee may be permitted to carry
other products and distribute to other companies.

The Business Format franchising, on the other hand, is a relationship wherein the franchisee is
granted the rights to use the franchisor’s entire marketing system along with the continuing assitance and
guidance. Aside from marketing, this will also include advertising, strategic planning, training, production
of operations manuals and standards and quality control guidance. This is the most popular franchise
structure which may be seen in a multitude food and non-food franchises.

ADVANTAGES AND DISADVANTAGES OF FRANCHISING

Like any other business, franchising too has its advantages and disadvantages. Any start-up
entrepreneur should carefully weigh the options based on the gains and drawback before making the
decision.

The following are the advantages when an entrepreneur engages in franchising; meaning, he
obtains a license to operate a franchise locally:

1. Possibility of failure is lessened.

2. Increase in new market location through urbanization of loca areas.
3. Customers tend to patronize a specific franchised service or product.
4. Customer loyalty and rpeference for a successful brand name.
5. Better amangement through training provided by the franchisor.
6. Technical and other assitance is easily accessed from the franchisor.
7. It is easier and faster to build good reputation and gain recognition.
8. A better assuance that the business will be profitable.
9. Obtain greater purchasing power.
10. High performance standards.
11. Advertising cost is less.
• Lesser Possibility of Failure. This is perhaps the most important reason why one
contemplates on franchising. Franchises have a high degree of resiliency in the industry. According to the
Philippine Franchising Association (PFA), out of the 177 foreign franchises that was include in the
studies, only nine hace ceased operations. This translated to a 95% franchise success rate in the
Philippines.

• Increase in new market location. There are areas that have been targeted as key areas
for development. There are key provinces like Calabarzon (Cavite, Laguna, Batangas, Rizal, and Quezon)
and the Mimaropa (Mindoro, Marinduque, Romblon, and Palawan), certain parts of Mindanao, etc. that
has been identified as potential economic “boom” zones. The growing numbers of the population has
resulted to the creation of several establishments like ew roads, schools, malls, and subdivisions.
Businesses are looking at these areas for the potential of supplying the demands of people.
 • Customer preference for a franchised product or service. Franchise possesses certain
unique characteristics.These are what their regular customers look for because they like it. Transportation
developments make it easier for people to reach from one place to another. In these places, people look
for a tried and tested business that will satisfy their needs. Fro example, there are a lot of travelers from
Manila who lookk for Jollibee or McDonald’s when they reach the provinces. They find a sense of
security in the ambiance and quality of food offered by these fast-food outlets. The uniformity of the
products as well as the services offered by the franchise gives the customers a ‘homey’ feeling.

• Advantage in using a successful brand name. The franchisee acquires the franchisor’s
advertised trademark or brand name.Trademarks and brands are not just sybols or designs printed on the
product. It communicates to people. The reputation enjoyed by a widly accepted brand or trademark es
enough for people to buy the product. Here in the Philippines, there are people who have actually
interchanged the product type with their brand name or vice versa. For example, i a avariety store, it is not
uncommon for people to ask for Colgate in purchasing toothpastes. If a person asks for a beer, also ina
variety store, the attendants will give San Miguel Beer’s Pale Pilsen unless the buyer specifies what he or
she wants. People ask for a Pentel Pen when actually they want marker pens, or calling a photocopied
material a Xerox. Having a successful brand name ensures the business on certain degree and customers.

• Better Management through training provided by franchisor. The franchisee receives

training from the franchisor. This is one prerequisite of a franchisee-franchisor agreement. Fro example,
McDonald’s requires its franchisees to attend an extensive course and obtain the dgree in hamburgerology
in Illinois. Likewise, the Holiday Inn University was created in 1972 to teach and train franchisees the
hotel operations. Sir Speedy requires an intensive two-week course at Sir Speedy University in California
where Business and Financial Management, Marketing and Sales Management, Operations and
Production Management, and Employee Management will be taught. The training will help the franchisee
develop the managerial skills and help alleviate the lack of it to ensure the success of the business. It will
also help the franchisee obtain the necessary and relevant information (accounting, advertising,
purchasing, human relations, etc.)needed in the over-all operation.

• Better access to technical and other assistance. The franchisor gives the needed
support to make the task of start-up and continued operation easier. Site selection advice, facilities layout,
employee selection, management training are just some of the help the franchisor’s give. Perhaps an
important assistance it gives is the financial aspect. There are cases where the payment for the franchise is
staggered thereby helping the new franchise cope up with in the start-up period. Furthermore, traming up
with a franchising operation increases the possibility of financial assistance to be granted to the
franchisee.

• Ease in building reputation. In franchising, the franchisee does not have to worry about
the much-sought reputation unlike in establishing a new business wherein there is the possibility of lean
sales becanuse of lack of recognition. The franchise will reap the benefits of joining an organization
whose safety, efficiency, quality, strength and prduct have been established. The franchisee will enjoy
immediate recognition as a part of big organization.

• There is a higher uncertainty of profit in a new business as compared to a franchise.

In franchising, onemay be able to use the sales of an existing franchise in a nearby place to project the
sales of another franchise that is about to be put up. Plus, the existing franchise outlets wil guide the
prospecting franchisee to select one, which attracts buyers.

• Greater purchasing power. Franchisees are able to get supplies, equipment, services,etc
at a lower price Better assurance that the business will make money, simply because they are a part of
a big organization. Purchasing power is achieved due to volume discount on purchases made collectively
by the organization. In addition, suppliers may provide them with better service because of the
importance of the organization in which the franchisee is a part of.

• High performance standard. The franchise organizations have operating manuals and
Procedures given to franchises that permit the efficient operation from the start. This manual is a product
of thorough research based not only on theories but also experiences of the other franchises which has
been previously bought.

• Lesser Advertising cost. An advertising scope of a franchise organization is nationwide.

Franchisees get quality advertisement for a little amount they shed. Fro example, there is no Jollibee
commercial that encourages people to patronize a specific branch. Its media advertisements promote the
name which in turn is enjoyed by the franchisees.

Franchising also pose some disadvantages.These are:

1. High cost of franchise.
2. Operation is controlled by the franchisor.
3. Presence of fierce competition.
4. Pressure to continuously make the product acceptable to the market.
5. Problems associated with expiration of the franchise.

• High cost of buying a franchise. Franchise fees in the Philippines may range from
P20,000 to 50 million pesos. Of course, the well-known franchises charge higher franchise fee. The initial
capital may also include expenses for pre-opening, training, personal ang other predicaments depending
on the franchise contract.

• The operation of the business is controlled by the franchisor. One of the main
characteristics of franchises in uniformity. It is quite common for franchise to state the franchises that
follow whatthe operating manual. Franchising restricts the movement of the entrepreneur because actions
and decisions that may be taken, with regards to the franchise, it must be within the parameters set. For
example, a franchise owner of McDonald’s cannot offer another food product even if he/she sees that it
will make tremendous sales. Thus, you will not find any McDonald’s outlet selling dumplings or
dimsums perhaps. The franchisee is obliged to follow management devised by the franchisor. In effect,
the entrepreneur losses a degree of independence because of the direct supervision.

• Fierce competition. The franchise service is an attraction to customers. That is why a lot
of newly created businesses imitate what an established venture offers. Other competing organizations are
also quick to react if a certain strategy has been proven to be great “Come-ons” to customers.
 • Pressure to continuously meet market expectation. The franchise organization needsto
develop and continue on retooling its strategy to differentiate it from its competitors. It must continue to
encuse its unique chareacteristics that set it apart from the other competitor.

• The expiration of the franchise. Franchise contracts have expiration dates. When the
Termination date is reached, the franchise will have to renegotiate once again the contract. Termination
may be an advantage or a disadvantage depending on the condition of the business. This is a disadvantage
because, let’s say that the franchise contract is for 5 years, there may be times when the franchise is
currently enjoying a big sales during the period when the contract is about to expire. Instead of
concentrating on the sales, the franchisee will now have to divide the time in renewing the contract while
at the same time managing the outlet. Also, renewing contracts means spending. In addition, applying for
a new contract dows not mean that the franchise contract may be renewed. There may be grounds wherein
the franchisor might have seen the incapacity of the franchisee in maintaining the outlet. Or maybe there
have been grave errors committed that warrants the renewal not to be granted like delays of royalty fees,
poor sanitation and maintenance of the outlet, etc. The approcal depends on the assessment of the
franchisor.

WHAT DOES A FRANCHISE PROVIDE?

Like other businesses, franchising also requires commitment. The time, effort and themoney taht
one would spend on franchising would surely merit an investigation by both the franchisee and the
franchisor. The franchisor not only looks at the location of the outlet but also, usually, on the financial
and management capability of their prospective partners. In return, the franchisee has to make sure that it
is able to meet the expectation of the franchisor. The following factors or considerations that both the
franchisor and franchisee always look intom in the process of negotiationg and finalizing the franchise
undertaking. In each of these factors, the franchisor’s preference or perspective carries a bigger weight in
order for the franchising relationship to materialize.

1. Business Name
2. Market research
3. System ideals and the Operating Manual
4. Proprietary marks
5. Experience
6. Good judgment of the franchisor
7. Training
8. Location assistance and approval
9. Store layout and construction supervision
10. Exclusive area coverage
11. Procurement programs
12. Hiring assistance
13. Grand opening assistance
14. Marketing strategies
15. |Effective field service
 16. Research and development

♥ Business Name
The franchisee may have a different company name but its products should have the names that
are patented by the franchisor. The name and the way it is written designed or printed should be uniform
with the other franchise outlets.

♥ Market Research
The marketing research of the franchisor should benefit the franchisee. It will serve as
guide to help the franchisor in evaluating the proper location, promotions, personnel, distribution and the
target segment.

♥ System Ideals and the Operating Manual

The system ideals are written on the operating manual which shuld be provided by the
franchisor. It describes how things should be conducted in the operation of the system. The operating
manual communicates the complete operating procedures necessary to maintain the standards of the
franchise.

♥ Proprietary Marks
Proprietary marks include the logo, slogans and other printed signs that show distinction
of the franchise. The franchisee is allowed to use the patented marks of the franchisor.

♥ Experience
This is an important service that the franchisor provides to the franchisee. With the vast
experiences of the franchisor, the franchisee avoids mistakes committed by a new and growing company.
It will help reduce losses brought about by the miscalculation of risks.

♥ Good Judgment of Franchisor

Along with the exprience comes the knowledge gained through past mistakes and
succeses. The franchisor, especially thse whose franchise organization have been existent for along time,
has been endowed with the wisdom to judge circumtances. The franchisee may be able to get sound
advice from the franchisor regarding the business.

♥ Training
Franchisors provide training assistance to the franchisee. This is a critical aspect of the
franchise because training does not only provide knowledge of the operation but more importantly, it
highlights and emphasizes the contextual framework for the franchisee. Furthermore, the continuous
training provided by the franchisor organization avoids poor management.

♥ Location Assistance and Approval

Unlike in other countries, particularly in the United States, prospective franchisees have
to look for suitable location where the business establishment will be built, Franchisees have to be critical
in assessing the location. Franchisors, however, can guide the franchisee by giving ideas on where a
franchise would likely get more sales. They will be the ones to inspect the location and judge if it is
deemed fit for the business.

♥ Store Layout and Construction Supervision

Franchisors give the franchisee the specification for the construction of the store. These
specifications are based on careful planning that would bring about the efficient operations. It also
includes how the store facilities will be installed, the color of the walls, decoration and other pertinent
materials necessary to bring about the ambiance and the distinction of the store.
♥ Exclusive AreaCoverage
Franchisors provide exclusive territories to franchise holders. Exclusive territory means
that no other franchise coming from the same organization may overlap territorial limits set by the
contract. The franchisee may enjoy a wider coverage depending of the type of franchise applied for.
Usually, the area is about 500 meters in radius for unit franchises, a province or a city for an area
franchise and the whole country for a master franchise. Exclusive areas provide the outlet with the needed
target population without the threat of competition coming from the same organization.

♥ Procurement Programs
Franchise organizations share the system of procurement with the franchisees. It provides
the list of authorized suppliers for different needs of the franchise outlet. The suppliers give franchisees
the products at discounted prices.

♥ Hiring Assistance
The franchisor usually gives the franchisee the guidance needed in hiring personnel that
would fit the nature of the organization. Ensuring qualified personnel is an important preparation prior to
opening of the outlet. The assistance is helpful especially to those who are just beginning to run their own
business. The organizations commonly sets aside some of its personnel to help the franchisee in selecting
or screening of applicants.

♥ Grand Opening Assistance

The opening is a highlight event of the franchise outlet. It is common to see businesses
employing propaganda so that many may know of their opening day. Also, the opening day is whn all od
the training and plans will be operationalized. It may be possible that some glitches may occur at the
operation. The franchise organization’s management and staff lend a helping hand to make sure that
everything goes smoothly starting at day one.

♥ Marketing Strategies
The franchisor is generally familiar with tested and proven strategies to guide the
franchisee to remain competitive. It includes aspects of advertising and different promotional tactics
designed to ensure continued profit.

♥ Effective Field Service

Franchisors also provide well-trained and knowledgeable salespersonnel to help the
franchisee resolve difficulties in the workplace.

♥ Research and Development

The franchisee must see to it that the business does not remain stagnant. The franchisor
spends time to ensure that improvement in products, services, equipment, operation processes, etc will
happen. Research and Development is necessary to beat the competitors.

CHOOSING A FRANCHISE

1. Why an Entrepreneur may buy a Franchise.

There area many reasons why an entrepreneur may decide to go into business by
Acquiring a franchise. These are:

1. Earning depends on the effort

2. Opportunities for unlimited income
3. Personal Satisfaction
4. Tax Benefits
5. Freedom to pursue the job you want
6. Assurance of continuous employment
7. Eliminates the difficulties in starting-up
8. Ease in operationalizing the business plan
9. Benefits of having an established system
10. Benefits from quality research and development
11. Quicker start-up
12. Probability of Success is High

• Earning depends on the effort

A lot of people feel restrained by working in a company. They are not contented with the
salary they receive. The amount of compensation they receive does not reflect in the income they get.
When you operate your won franchise, the success depends in how hardworking you are. It is very
different in wrking in a company wherein even if so much effort is exerted, the income cannot exceed the
salary cap. Owning a franchise opens an opportunity to have unlimited income.

• Opportunities for unlimited income

A common similarity among wealthy people is taht they own business. Owning a
franchise gives one the chance to earn relatively large sums especially if the franchise is a real crowd-
drawer. Succeed in running a business and gain financial strength.

• Personal Satisfaction
Success may be measured in two ways: by the amunt of money and property one acquires
and by the amount of personal satisfaction gained indoing certainmatters. There are alot of wealthy
individuals that will declare that although having money bring benefits, personal fulfillment brought
about by achieving dreams, making a management turanaround, employing people etc. are more self-
gratifying.

• Tax Benefits
Owning a business venture may spell a lot of perks foir the entrepreneur. The
entrepreneur can spend substantial amount for cars, travel, etc. and reflect it as company expemditure.

• Freedom to pursue the job you want

Owning a franchise allows a person to choose whatever type of work he/she wants todo
in the operations. Having a franchise merits that the entrepreneur will never be laid off, fired or
transferred. This allows certain degree of flexibility unlike in working for a company wherein you are
confined to a rigid description of your job.

• Assurance of continuous employment

Unlike working for a company where there is uncertainty of tenure, the entrepreneur has
say on the continuity of the venture. The entrepreneur’s capability to manage is a big factor in the
business process. Good management allows quality time with the family, friends or for recreation.

• Eliminates the difficulties in starting-up

The franchisor’s experience puts the franchise in middle of the race. In starting a
business, the entrepreneur starts from scratch. Franchisin eliminates those start-up years that are very
crucial stages of the venture.

• Ease in operationalizing the business plan

Starting a franchise eliminates the nitty-grityy of a business start-up. The entrepreneur
does not have to worry too much about the business plan because it has been done. All the entrepreneur
needs to do is to actualize what the franchisor has provided.

• Benefits of having an operationalized system

This is an advantage for the entrepreneur as a lot of time may be saved for just thinking
of effective systems for the business. Franchise organization, with all its experiences and resources,
provides a big plus factor in business success int he form of its business methods.

• Benefits from high quality research and development

Franchise organziations, especially thse enjoy a degree of success, has a responsibility
To develop itself to maintain that status.Thus, research and development is a part of thier operations.
Franchisees obtain the benefits of this research. This is what the royalties, advertising, and other annual
fess bring to the business, This is very different in starting own business because the entrepreneur may be
tied to making profit and neglects the research and development aspect.
 • Quicker start-up
The preparations prior to start-up are less time-consujming for a franchise as compared to
starting a business. The initial preparations for franchising have been made by the franchisor.

• Probability of success is high

There are surveys that franchising increases not only in the Philippines but in other
countries as well. The Philippine Franchising Association cites that 95% of franchises have made profit.
Projection of sales in franchising is as equally promising.

CONSIDERATIONS IN SELECTING FRANCHISES

Though franchising offers to certain degree, smaller amount if work in comparison to starting a
new business, it comes with it, nonetheless, significant preparations. The prospective franchisee should
take the initiative to investigate the franchise. The entrepreneur shoudl study the franchise well before
buying. One should ask questions about the franchise and it is imperative that all doubts be sufficed. One
may ask the owner of an existing franchise to answer all the questions the entrepreneur has. Or, one may
also ask professional advice especially in contracts offered. Never commit the mistake of buying a
franchise without a thorough evaluation. In evaluating what franchise to acquire, the following points are
important to consider.

1. Cost of investments
a. Franchise Fee
b. Set-up operation
c. Operational expenses and purchases
d. Royalties
e. Advertisements
2. Franchisee’s preference and interest
3. Location of the franchise
4. Reputation of the franchise organization
5. Franchise support and assistance
6. Possibility of obtaining a master franchise

• Cost of investments. The amount to be shed for a franchise is substantial. There area
franchises that may cost to just over P20,000.00 to an amount of 50 million pesos. The prospective
franchisee must ahve knowledge of how much money he/she has and the amount he/she wanted to invest.
A franchise requires more than the franchise fee to be spent. There are usually the financial cosniderations
of owning a franchise in the Philippines.

- Franchisee Fee. Depends upon what type of business. Here are of some franchise fess asked by
franchisors. Note: all amount are in Philippine Peso. Data are from the brochures handed out by
the companies given.
 Majestic Ham – 500,000 Spped Drinks – 300,000
Candy World – 690,000 Candy Bouquet – 500,000
Korean Palace – 500,000 Business Depot – 500,000

- Set-up operation. These are expenses incurred for the renovation or the construction
of the building. This also includes those that will be spent for the arrangement and decoration of
the building. There are franchises that have this in the franchise contract but there are lots that do
not. The set-up operation fees depend on the size of the location and the facilities required.

- Opreational expenss and purchases. At the start, the franchisee may have to shell out some
amount to ensure the flow of operation since the initial sales may not be enough to cover the
needed expenditures.
- Royalties. This is the amount paid to the franchisor periodically. Usually, royalties are per year
bais. Franchisors ask for 5 to 15% from the franchisee. This is the mode of income of the
franchisor.

- Advertisements. Franchisees are required to pay some designated amount for advertisements.
This is a relatively small amount compared to the benefits the franchise outlet would get
especially if the advertisement is good. Advertisement also covers the promotions in the grand
opening that usually cost about P10,000 to P20,000. The gross sales should be alloted by the
franchisee to its local store marketing.

• Franchisee’s Preference and Interest.

Though not a very important factor, having a business that fits the entrepreneurs’
personality amy help entice him/her to do the job extraordinary well. The entrepreneur may find the work
not as a work but as a way to enjoy hin/herself. There are businesses that require the presence of the
owners. If the franchisee is interested in the line of work and operations, then there should be no problems
on this. Nevertheless, it does not mean that one has to be good cook or an experienced restaurateur to
have a food franchise since adequate training will be provided by the franchisor.

• Location of the Franchise.

This is the extremely important factor in the business. One hsoul dhave look for a
location that has access to a sizeable number of people, has floor area that may accommodate customers
has available parking space for customers and for srvice vehicles. But sometimes, even of the location has
these, the franchisor may not approve the franchise application. In the Philippines, there is no study yet of
the correlation of the amount of sales versus the number of people passing in relation to a location. This is
simply because business owners will not disclose the amount if income they make thereby, making it
difficult to forecast the sales with respect to a location.
Also, lcoation is important on the type of franchise onw considers to take. Le
Coeur de France, fr example, rejects a lot of franchis eapplications because of location. It looks not for the
amount of people passing by the area but the class of people in the area. This is understadable since the
AB crowd may only appreciate the products.

• Reputation of the Franchise Organization

One should check the franchise organization before joining in. It is not a joke to have a
franchise. Check if the franchise organization provides what is listed in the previous discussion. Don’t
jump unless you know where you’ll fall.

• Franchisor Support and Assistance

Prospective franchisees should check whether the franchise organization has continuing
services offered like product and service development, promotion and public relations design, quality
control programs and financial and administrative programs.

• Possibility of obtaining a master franchise.

A master franchise is a franchise that is offered by a foreign franchisor to asingle party in
the Philippines. It may also apply to a local company that has plans of extending its operations to other
places and wants to apply their management style in all the stores. They are the ones that offer sub-
franchises to other people interested in the business. Usually, the cost of master franchises are smaller
than the sub franchises. For example, McDonald’s, an international food chain has a master franchisor
here in the Philippines in the person of George Yang. Prospective franchisee must approach Golden
Arches Development Corporation to be able to be granted a McDonal franchise in the Philippines.

DOES THE FRANCHISE HAVE WHAT IT TAKES TO BE SUCCESSFUL?

Table 4-6 below enumerates the factors necessary to ensure that the franchise chosen has the
otential for eventual success. They reflect the conditions needed to establish a long-term and stable
relationship. These are “must haves” that the franchisor-franchisee relationship should enjoy.In other
words, a successful franchise is dependent ont he share commitment of both the franchisee and the
franchisor to make the franchise succeed.

FACTORS NECESSARY TO A SUCCESFUL FRANCHISE

1. An effective organization
2. A clear regulation on products and services to carry
3. Policy control on operating assets, goods and services for quality and uniformity.
4. Regulation on the use of the franchisee’s business premises.
5. Territorial protection by the franchisor.
6. Geographical limits and restrictions to the franchisee.
7. Exclusivity and focus in business relationship.
8. Restrictions on transfer of the franchise.
9. Protection clause to the franchisee after expiration of contract.
10. A vision, philosophy and culture harmonious to both franchisor and franchisee.
11. Reasonable provision for expansion.
12. Continuous improvement and implementation of effective systems to guarantee superior
operations.
13. Franchise is recognized as something that provides value-added benefits to the franchisee.
14. Franchise disagreements are easily resolved between the parties.
 • An effective organization
The franchise-franchisor relationship is based on the parameters that have been set. The
structure then must reflect an operative system that guarantees communication and commitment within
the constraints arising from the contract. The structure should offer security to both the franchisor and the
franchisee.
• A clear regulation on products and services to carry
There is a justification as to why the franchisors only allow certain products and services
to be offered by the franchisee. They allowa limited scope that is within their expertise. It is also done to
ensure uniformity of all the franchise outlets. There are instances wherein the franchisor allows some
franchisee to experiment on adding some variants because the franchisor also knows that franchisees are
excellent sources of innovation. An example of this is the product Big Mac of McDonalds. This is an
innovation by the franchisee here in the Philippines. That is why you cannot see a product like this in
other countries.

• Policy control on operating asets, goods, and services for quality and uniformity
The reason for this is the same as the previous one. In addition control of equipments,
fixtures, signs, goods, and services makes possible that he high quality and uniformity of the goods sold
by the franchisee is maintained, taht the products and services are competitively or much lower priced
than the oterh sources, that confidential information be protected and to ensure profit for the franchisor.

• Regulation on the use of the franchisee’s business premises

There are times when the franchisor tries to lease or sublease the premises from the
franchisee. This is done so that the franchisor may have the control over the franchisee and effectively
control the business. This is an additional cost to the franchisro but then the fanchisor is sure that the
business continues even if the franchisee does not want to. Petroleum giants like Caltex, Shell and Petron
practice an example of this. These companies lease the location of the gas stations from the franchise
owner. If the franchise owner sees that he/she can not contniue with the business for any reason, the
companies will look for another willing franchise owner to continue the business at the same place. The
former owner will now receive only the monthly lease for the use of location.

• Territorial protection by the franchisor

The exclusive territories given by the franchisor is a great invitation to potential
frachisees to try their business. Franchisees are more inclined to join franchise organizations especially if
they know that they will experience no competition coming from the same brand in their vicinity.
Franchisor’s however may find a difficulty if they overshoot the needed population in the territory. It
might invite competition commingfrom other company especially if the franchise outlet cannot meet the
demands of th epopulation.
Furthermore, the structure of the franchise location provides order fro a strategic market
penetration. It allows futher system expnasion without arising conflicts among the franchisees.

• Geographical limits and restrictions to the franchisee

As an effect of the given exclusive territory, franchisors prohibit the franchisees from
engaging business outside their territorial limits. This allows the franchisee to fully exploit the assigned
territory the franchise outlet has.This is also done to prevent overpopulation which may compromise the
quality of the goods.
• Exclusivity and focus in business relationship
Also, the contract will include relationship exclusivity. Franchisors prohibit franchisees
to engage business with a competitive business. This prohibition is necessary to dafeguard confidential
information like the revenue and the product and service knowledge. This will also allow the franchisee to
channel all the efforts on the franchised business. The prohibition on exclusive relationship does not only
apply to the franchisee but may extend to immediate families. This would usually warrant contract
termination of violated.

• Restriction on transfer of the franchise

The franchise cotnract stipulates the details for approval of the transfer and the terms of
Transfer. It will also indicate that the franchisor shall not unreasonably withhold apprival of a transfer.
But in actual, franchisors usually restrict the transfer of franchises, unless in extreme cases, in order to
effectively manage the franchisee. The franchisor has the right of first refusal and denies the proposed
transfer especially if the franchisor has sufficient grounds that lead him/her to beleive that the transfer
will not benefit the organization.

• Protection clause to the frachisee after expiration of contract

This is critical element of the contract. Usually, franchise contract is from 5 to 10uears
for local franchise and 25 years for a master franchise of a foreign organization of the cotnract. There are
contracts that provide the conditions of rthe granting of succession.there are also contract that provide a
condition that the franchisee cannot establish a business that will compete with the franchise organization,
which he/she belongs to once.

• A vision, philosophy and culture harmonious to both franchisor and franchisee

The philosophy and culture are determinants of the actions of each party. These are the
Perspectives taht would reflect upon the action taken by each. Though the contract and guidelines exist,
there will be times these written documents will fail to address a particular instance. These moments call
for actions depending on the dicretion of the franchisee. It is important that both parties have the mutual
trust and confidence that thier moves is in accordnce to the thrust of the organization.
The franchisor has the responsibility toorganize activities that would allow for a regular
communication among franchise holders and all the participants of the franchise. There should be venues
where sharing of ideas, resolving of disputes, planning and creating of innovations is possible.

• Reasonable provision for expansion

Expansion is a factor in determining the success of a franchise organization. It is an
indicator of progress because it reflects that more and more people are patronizing the product or services
that the franchise organization offers. Expansion, however, is only good if the franchise organization can
maintain the franchise integrity vis-a-vis the added responsibilities of effective monitoring and support
backed by excellent marketing studies. Expansion must show that hte new outlets will eran without
compromising the income of the existing franchises of the franchise organization.
 • Continuous improvement and implementation of effective systems to guarantee superior
operations
The franchise system is one of the attractions why one considers franchising. The policies
and procedures implemented, more or less, give the franchise its character. Though, franchisor has less
control over franchisees compared to companies, he, nontheless, should improve the system, through
marketing tools, to ensure the excellent performance of the franchise outlets. Moreover, the franchisor
should be opent ot he suggestions of the franchisee on upgrading the system. Like any other business,
franchises must be adaptable to the constant change of market environment wihtout losing its character.

• The franchise is recognized as something that provides value-added benefits tot he

franchisee
The actions of the franchisor regarding the franchise organization must provide the
franchisees with value satisfaction from the capital they have invested. They should create the perception
that the franchise organization is giving the franchisees enough services that would more or less equal the
amount of their investments. There should ways to address the dissatisfaction of franchisees with regard
to the notion that they do not get enough for what they spend. If the franchisor fails to check this aspect,
the franchisee amy loose interest witht he franchise and may most likely divert their attention to other
business ventures.

• Franchise disagreements are easily resolved between the parties

There was news that came out regarding a case filed by a franchisee against the
franchisor. The franchisee filed a case in court against the franchisor that terminated the franchise
contract because he brought into their attention the apparent shortcomings they are committing. The
franchisor, on the other hand, contrued the criticisms as a “strange and unsual behavior” in finding fault
with the operations taht is why they terminated the franchisee agreement (See Tempo, September 10,
2010, p.5).
This incident will clearly show that in franchisor-franchisee relation, there is a high possibility
that disputes may happen. If either one lodges complaint against the other in court, it would take a
minimum of five years for the case to be resolved. The ligitation would prove to be a burden to all parties
concerned. It is therefore vital for the franchise network to have an effective process to resolve disputes.
Arbitration should be the first opiton rather that litigation. Not only does it cost less but also it is much
faster. Also, some concessions may be made in arbitration that my bring about mutual satisfaction in both
parties. Furthermore, in arbitration, depending on how the arbiter handles the proceeding, a flow of
communication that reduces antagonism may happen.

CAN YOU BUSINESS BE FRANCHISED?

Franchsing is a strategy that enables a business toe xpand with the franchsior spending minimal
for the startup of ranchise outlets. The result is an inflow of additional revenue and profit for the
franchisor. Nowadays, we can see significant number of Filipino-owned franchises. A lot of these started
as small business ventures that eventually found their product and system profitably into the market.
An entrepreneur who want to let other people use his business patent, trademark, system or
product should also carefuly evaluate the strong and weak points of his business. One should remember
that not all businesses could be franchised. A business should carefully assess itself and determine if it
can exist in a highly competitive franchise environment. Table 4-6 below gives some basic factors or
conditions under which a business or product may quality to be franchised:
 Table 4-6
Conditions Making A Product Eligible For Franchise

1. Business must be in operation for at least a year.

2. The business systems can be easily migrated and operationalized
3. The business has proven record of profitability.
4. There is need for the kind of business in other places.
5. The product or services is needed for a long time.
6. The prospective franchisor can cope up with expanding administrative job.

• Business must be inoperation for at least a year.

The products and system are critical element of any franchise. The business, during its
first year of operations, is the prototype. The one-year period will test the validity of the workability of its
system. It will test if the target market accepts the product. The period will be the trial period where
experiences are assumed to give the valuable lessons of marketing. During this period, the owner may
master the procedures and protocols and see if it operates well. This is the trial period where the niche is
clearly seen and the business character gains its definition. This is the period where the prototype is
perfected.

• The business systems can be easily migrated and operationalized.

The franchise relies heavily on the system. If the system can be copied then it is possible
that the business maybe franchised. A system that can be copied means that the business does not ned the
close supervision of the owner for it to be effective. The system should be teachable and can be
performed by other persons.
The franchise system must be able to bring the “feel” that the new franchise is a carbon copy of
the other existing outlets.

• The business has proven record of profitability.

The input of cash should serve as gauge for your business to be franchised. The profit
reflects the acceptance of the products and the over-all effectiveness of the franchise system.
Furthermore, fast, return of investments (ROI) is what franchisees look for.

• There is a need for the kind of business in other places.

Be sure that the product or services the business offers will find its use in other places. Its
usefulness should not be affected by regional boundaries. Businesses must be judged to have the potential
for its repeatability in other areas.

• The product or services is needed for a long time.

Never start a frachise if the product is on the decline. Franchising is a strategy for
additional income but resorting to it to be able to get you out of financial trouble is no-no.
Responsibilities come along with franchising. It usually entails cash. There is a need for a continuous
profit for a long time to make sure that those responsibilities are met and at the same time, the franchisees
get value for their investments.

• The prospective franchisor can cope up with expanding administrative job.

Franchising a business means additional mamnpower, labor, promotions, etc. The
prospective franchisor must evaluate himself/herself if he/she has the capacity to lead a big organization.
The franchisor mest make sure that the franchise is developed on professiional mannerm that there is
peoplw-oriented environment , that he/she has the resiliency against the difficult start-up, and that he .she
can manage to establish an enduring lasting relationship with a team.

MISTAKES TO AVOID IN BUYING A FRANCHISE

If you are a startup entrepreneur who plans to buy or acquire a franchise, it is important to bear in
mind that a franchise is not a gurantee of success. You must always evaluate the cost of purchase, the
risks and other disadvantages and compare them againt the benefits you expect. Very often, buying a
franchise may help bring success in a hurry, since it provides successful management and operating
procedures to guide the business. But thishappens mainly because the franchise buyer has the necessary
ability, resources and determination to make it succeed. Furthermore, he is able to anticipate early the
possible risks, problems and mistakes and make provisions for addressing them to his benefit. Some of
these mistakes, in fact, can be identified as:

1. Buying a franchise with minimal capital left for operations

- After paying the franchise fee, a franchisee must have sufficient funds to sustain the operations
until it generates profit.

2. Being the first in the franchise system

- Unless you are very sure that the product will succeed, you are taking a big risj by being that first
to get a franchise in particular area. The first franchise outlet usually sufers great difficulties in
operations and this may cause the franchise to fail.

3. Not following entirely the business plan of the franchisor

- Some franchisers modify the business plan of their franchisor to suit their style. This can be an
unwise move since the franchisor has invested a lot to make its system, product or service gain
acceptability in the market.

4. Complacency on the part of the franchiser

- Franchising requires, hard work, determination and commitment. Success today may mean
failure tomorrow if the franchiser becomes complacent and indifferent to the rapid change going
on in the market environment.

FRAUDULENT FRANCHISORS TO AVOID

The prospective franchisee, before deciding to purchase a franchise and sign any contract, should
do a careful investigation first of the franchise organization. This is done as a precaution to avoid scmas
and the abundant fraudulent schemes present in the business world. But let us also face the fact that there
are certain limitations to our jedgment. We may not be able to recognize a fraud especially if the scam
artist are good. We might not know we are being taken for a ride. Here are some signs that the
prospective franchise investor must watch out for:

• The “too-good-to-be-true” impression.

These are sales representatives or people who hope to intimidate you into buying the franchise by
showing off. They wear expensive clothes and accesories when you meet them. They may even
drive you around in their up-to-date model car or treat you to an expensive restaurant. They try to
convey a message that whatever they have they got from the franchise. “You want to be like me?
Then buy the franchise!” is the statement that summarizes their set of actions. An unsuspecting
victim will naturally fall for this trap because of the perks the coy artist shows. Always chech the
authenticity of the financial statements and if possible, audit it.

• The make-it-fast-deal.
This is exhibited by people who insist upon you the franchise using the element of times as
leverage. They will give statements like they are leaving town, or that there are other prospective
buyers waiting, or maybe say that the franchise fee might go up, and so forth. They would
pressure the buyer and make them feel that not deciding at the soonest possible time is a sign of
incompetence. Always take your time and be aware that a deal like this is closing strategy that
aims to sell any product fast.

• We only accept cash.

Be on the lookout for these scam artists. It is quite obvious that the franchise organization
insisting in this deal is qither withour consideration to the franchisee or is going to the dogs. Cash
payments are difficult to recover. Therefore, if something goes wrong, the franchisee cannot get
what he/she paid for anymore. Insist to pay in check payable to the company , not any individual.
If possible try to ask if payments can be staggered.

• Come on, brag.

These are sweet-talking people who will promise you the heavens just for you buy the franchise.
They will fabricate stories of people eraning so much, regaining their return on investment at a
short period, and so forth. It is easy to spot this because most of the statements are exaggerated.
Always put reality on your head. Don’t get easily swayed by words. It is good if you stick to your
carefukky done business plan. Try to check with BIR or with the PFA if the claims are true.

• Living like a dream.

These are schemes that tell the investor that there is money in laziness. They will tell you of
procedures that show that cash will be earned for just a small effort and time to give. It is best ro
remember that no business succeeded without hard work. The first step to fulfill your dream is to
wake up.

• Works on any location.

 A claim like this is obviously a fraud. Business is always affected by its location. Be realistic in
the assessing the market available in choice of location.

• Secret!.
Ask about the amount being earned per month. If they couldn’t give you a supported financial
statement, better walk away. They would usually appeal to your emotions and ask you to trust
them. Don’t! Most likely the franchise does not exist.

• Exempted from registration.

It is illegal fro any business to operate without the necessary permits and registration. Ask for the
legal documents that will certify the existence of the franchise.

• Franchisor lacking in capital.

This is not necessarily a scam. This is a warning to the franchisee that the franchise organizationis
risky to take. Since the franchisor need to fulfill responsibilities tot he franchisee like research
and development, advertising, training, etc., money will surely be spent. A thinly capitalized
franchisor may not fulfill the obligations.

LIST OF LOCAL AND FOREIGN FRANCHISES

The boom in the franchising business has encouraged many aspiring entrepreneurs to enter the
franchising scene. In fact, this development is a boost for the country’s franchising potentials, and
success, making way for the industry’s expansion and maturity. To help potential entrants in identifying
and choosing what type of business franchise to buy, a list of the top franchises in the country is herein
provided.