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The Advantages and Disadvantages of Franchising
Over the past years, franchising has been booming in the Philippines.
In fact, for 2008 and 2009, the years when businessmen are mostly cautious because of the ongoing financial crisis, business experts have been advising would-be businessmen and entrepreneurs to go into franchising.
For one, franchising is a quick way to start a business. For another, the number of companies and business entities that have been offering to franchise their businesses has been growing for the past 10 years or so. This growth continued even during the global economic crunch. Lastly, franchising has been contributing a lot to the Philippines’ economy, making it one of the primary movers in our economy’s growth.
Just some of the information and statistics (in the Philippines) worth mentioning here:
- 1,000 brands are now franchised in the country;
- there are five principal franchise sectors: retail (specifically clothing); cafes; fast food; bakeshops, hospitality and wellness and food carts.
- 45% of the sales from retail outlets within shopping centers and malls are from franchised businesses;
- Franchising contributes around $6.6 billion of the Gross Domestic Product of the Philippines, which is around 5% of the GDP; and
- Franchised entities employ around one million Filipinos.
What makes franchising so attractive then that entrepreneurs are choosing this option rather than starting businesses from scratch? What are its advantages? On the other hand, what are its disadvantages?
One of the Fastest Growing Franchise in the Country
A Video About Franchising in the Country (some words are in Filipino)
Advantages of Franchising:
1) The business you are franchising is already successful and is a proven idea. Usually, before offering the business for franchising, the original owners have already build it up and have already made it successful. Franchising, for them, is a way to expand the business; it is not a way to build the business from a small one to a big one.
2) The brand name is already recognized and name-recall is already very easy. Plus the franchisor or the owner of the franchise will take it upon himself to promote the franchised name or product, which will benefit the franchisee.
3) You may have exclusive rights to market the franchised products in your territory. One example is Starbucks Philippines. This one is franchised, yes, but the franchise belongs to just a single entity in the whole country.
4) A franchisee will enjoy the benefits of being supported by the franchisor. This is part of the franchise agreement. In return for the franchise fee the franchisee pays the franchisor, the latter commits to support, to train, to share ideas and even manpower to the franchisee.
5) Systems are already in place. From getting the supplies to cooking the food (if you’re franchising a fast food or a food cart business) to selling the products or services to summarizing your numbers and producing your financial reports, the systems are already there for you. You just need to follow them.
6) You will get to leverage on the good name and purchasing power of your franchisor when it comes to sourcing your supplies from suppliers.
Starting a Franchise
Buying a Franchise
Disadvantages of Franchising:
1) You may be exposed to fraud. If you fail to investigate the background of the franchisor or you’re taken in by promises of quick profits with low franchise costs, chances are, you will just find yourself holding an empty bag (after paying the franchise fee).
2) Costs may be higher than if you start your own business from scratch. Other than the initial cost of acquiring the franchise, you may also pay an agreed percentage of your sales and marketing or advertising fees.
3) When you buy a franchise, you are not free to do your own thing. You don’t have much control on the products that are to be sold, the system that should be in place and, even, the location and general look of your business establishment. You are bound by the franchise agreement and you have to do everything to the letter. If you’d rather do things your own way, this may raise issues .
4) If something bad happens to your franchisor or if the franchisor will suddenly get a bad reputation for poor quality, undelivered goods or services, etc., you and your franchised business may also be affected. Worse, if your franchisor suddenly goes out of business, you will go out of business as well.
5) More legal considerations (which will drive your initial cost higher because you will need to hire a legal counsel for this). The franchise agreement is pages long (40 pages? 50 pages? 60 pages?) and you will need all the expert advice you can get to ensure that you are not getting the short end of the bargain. Costly or not, better hire your own lawyer when reviewing the franchise agreement.
Buying a franchise may be an easy way to enter your chosen market or business but it is definitely not a walk in the park. You need to consider well the advantages and disadvantages of franchising. Other than these advantages and disadvantages, the most important thing you need to consider is whether you have the appetite to enter into franchising. Can you handle being told what to do with your business rather than you thinking about and deciding on all these things? Can you handle the reporting requirements and the sales targets or goals? Can you handle the costs of buying the franchise and putting up the business? It’s all really up to you.