The Perils of Franchising

As my wife and I continue to work on our franchising system for Suds (www.suds.com.ph), I continue to learn a lot about franchising. Franchising changed the way business worked in the world. The most popular model now is called business format franchising started with Ray Kroc and McDonalds. Now, franchising is one of the most successful models driving businesses to succeed.

But, not everything is nice and rosy though (and I don't mean to be bad news bringer, I just want clarity). Franchising has its pitfalls also. Here are some we should watch out for:

1. Pseudo franchises - Also called fake franchises. These franchises are not really franchises because they just treat the initial investment as an income stream for them. One of the most common signs of pseudo franchises is (get ready): no royalty fees. You might say, "but some of Royale's franchisors don't charge royalty fees!". And you would be correct. But this problem is not limited to Royale, it is actually a big problem in the Philippine franchising industry, most especially food carts. Most food carts do not collect royalty fees as a marketing come on. This is ok if they earn enough to provide good support to the franchisee. But in most cases, even outside Royale-accredited franchises, the support is just so and so.

The problem then becomes a question of support. Since most food carts are affordable and royalty fees are not collected, the franchisor does not have enough funds to support franchisees well. This is a case of you get what you pay for.

The take home message? Please be careful when advertising No Royalty Fees. It is a double edged sword and is becoming a common practice especially in food carts.

NOTE: Some Royale franchises DO charge Royalty Fees. Examples are: Laundry Gallery, Chickco Chicken among others

2. Generic Franchise Agreements - Another common practice. You wont believe how similar some franchise agreements are to one another and this is dangerous because each business is supposed to be unique. The franchise agreement is the synthesis of the unique points tailor fitted to a specific franchise. It is a franchise's main selling point.

It takes months to formulate your own unique franchise agreement and it is dangerous to use just someone else's to save on money. As a franchisee, you need to know how the franchise fee and royalty fees are computed; what are the potential capital demands while operating, what the franchisor obligations are and how the agreement can be terminated.

The franchise agreement is the source of the sales presentation materials so make sure you read the agreement before signing.

3. Hard Selling - franchising is and will always be a relationship-based business. Thus the franchisor should make sure to screen the franchisees. A good franchisor should reject some franchise applicants. Having enough capital does not mean you can automatically be a franchisee. One interesting tip a franchisor told me is that I should not approve anyone having a much higher net worth than me, a franchisor because of the danger of spying and technology theft.

Unfortunately again, most food carts do the hard sell. And this is the reason why there is a higher proportion of food cart franchises that fail. It is either they lacked support, lacked training, lacked focus or believed that the franchisor has the sole responsibility to make them succeed. All of these are warped illusions of franchising and is tarnishing the good franchises.


So what's going on here? Am I discouraging you when I should be inspiring you? My intention is to educate always. Here are my tips when selling or presenting franchises:

1. Learn to screen franchisees - If the person you are talking to just has money but has no interest, let it go. Make sure they really have the interest and focus to franchise and run their own business. If the applicant is too strong-headed (or hard-headed), stop. It's not worth it.

2. Show both sides - let them know the good and the bad sides. Don't promise magic bullets. Remember: Sipag + Tiyaga + Systema, they need to have the required sipag at tiyaga.

3. Stay away from franchisors with bad support - applicable anywhere. The best thing to do is to talk to many franchisees. If they are satisfied, then recommend the franchise. If not, stay away.

I hope, as always, that I have helped you through my experiences. Til next time!