Small Business Tips

Franchise – Riskless business or money trap?

Want to set up a business but afraid of starting it alone? Have you ever thought of going into a franchise? From a food cart or kiosk franchise to an education and training franchise there are lot of opportunites. All of them offer great benefits to the franchisee. However, there are like everything in life some disadvantages linked to it.

But first, what is a franchise? A franchise is an agreement between the franchisor, the owner of the franchise and the franchisee, the business buying into the franchise. Within a franchise agreement the franchisee can sell products and/or services under the name of the franchise. The franchisee has to use the logo, name, brand and other requirements from the franchisor stipulated within the franchise. She or he should strictly abide by those requirements set by the franchisor. The most common types of franchises are restaurants or cafes like McDonald’s, Jollibee or Starbucks.

Top 5 Benefits and Risks when setting up as a Franchisee

Benefits
#1 Ownership by You
The franchisee receives the independence of small business ownership by receiving benefits of a big business network. For example, Mc Donald’s Philippines offers “Access to world class suppliers that provide the necessary goods and services that go into great tasting food and excellent services that customers enjoy.” *
#2 Less Experience Required
As franchisee, less experience in the business world is necessary as you do not start your business by yourself. The franchisor helps and guides you through the start.
#3 High Rate of Success
By operating as franchisee, the chances of success are much greater than as start-up. The franchisee gains from the experiences of the franchisor, while also leveraging the learnings from the whole franchise network. As franchisee of a 7 Eleven store you receive a “Well established retail operating system which has been proven for over 25 years of experience.” **
#4 Lower Investment Cost
The investment necessary to create a franchise is much less than creating a start-up. As start-up, you begin your business operations from scratch while as franchise you can use existing facilities, logos and designs.
#5 Established Reputation
The franchisee profits from the reputation and image the customer has from the franchisor. He receives product and brand awareness at the start without having any marketing investments.

Risks
#1 Agreement
The franchise includes a formal agreement between the franchisor and the franchisee. This inhales dependency and regulations the franchisee should follow. There are even set up lawyers in the Philippines who are specialized in dealing with legal acts around franchises. They are called Philippine Franchise Lawyers.
#2 Dictating Business Activities
The franchisor has the right to dictate how the business is operated. The franchisee has to use the logo and the products of the franchisor. Depended on the sector no own creativity or influence in the product is allowed.
#3 Dependency on Other Franchises
The franchisee is depended on other franchises as they are all responsible for the reputation of the franchise. If one franchise creates bad news it has an impact on other franchises. For instance, in Germany, there was a case where an undercover reporter published massive violations of the hygiene regulations in some Burger King franchises across the country. The pictures went through the news causing revenue losses for Burger King Germany and the franchisees in the country. ***
#4 Share of Profit
As the franchisee can use the products, brand and name of the franchisor she or he must give up a certain amount of profit. This could be a burden especially in the beginning of the business operations when owners are often having to pay off loans associated with starting the franchise.
#5 Cancel Contract
It could be the case that when the contract between the two parties expires the franchisor does not want to continue with the franchisee. The franchisee could not run their business without a valid contract as they could not use the same products and/or services in line with the franchise.
 
When weighing up the Benefits and Risk associated with being a franchisee, it’s important for any entrepreneur to understanding their appetite for risk and what type of risk they want their business to be exposed to. As a franchisee, you will find a reduction of some risks with key benefits while being exposed to risks you would not necessarily experience as a start-up. Becoming a franchise is weighing up pros and cons when starting the business.
 
* https://mcdonalds.com.ph/content/page/franchising
** http://franchisephilippines.org/how-to-franchise-7-eleven-franchise-philippines/
*** http://www.faz.net/aktuell/rhein-main/wirtschaft/dramen-vom-grill-hygiene-skandal-bei-burger-king-12938230.html