COMPILATION OF TOPICS DISCUSSED IN MARKETING 2

(FRANCHISING)

Submiited 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
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

- Franchsiing