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The business format franchising, also identified as a name and process franchise, features a broader and ongoing relationship between
the franchisor and the franchisee, wherein aside from granting the right to use the name and market the products and services of the
franchisor, the franchisee is also provided a complete plan for managing and operating the business a transfer of the proven way of
doing business that has been developed by the franchisor. This plan often includes a full range of services, including site selection,
training, product supply, marketing plans and even assistance in obtaining financing. All of the franchisors operating systems, technical
expertise, marketing systems, training systems, management methods and essentially all relevant information, are transferred to the
franchisee.
With the means of distributing goods and services perfected, rapid expansion of a successful business concept occur more quickly.
Modern day franchising is primarily in the business format mode, accounting for around 90% of franchise businesses worldwide. PFA is an
association of franchisors who are into business format franchising.
Challenges
Control
As franchising involves the use of a proven business expertise, trademark, knowledge and training, the franchisee is required to follow the
system. Some franchisors impose on a certain degree of control that makes following the system difficult.
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On-going costs
Aside from the franchise fee and royalty, franchisees pay a certain percentage of their franchises revenues to the franchisor each month.
Additional fees for services provided, such as advertising costs, are also charged regularly to franchisees.
Failed expectations
Conflict may arise in a franchisor-franchisee relationship due to incompetence. Franchisors can destroy its franchisees by failing to give
ample support or by squeezing them too aggressively for profits. On the other hand, franchisees who tend to be lax in adhering to
franchise agreements create dents on the established system, later on creating damage to the business or the brand.
A good franchisee is an important part of a successful franchise chain. Evaluate your ability to be a good franchisee with these qualities:
Avid learner. Someone eager to learn will be receptive to the training and knowledge a franchisor will impart.
Effective communicator. A franchisee with good communication skills will be effective in conveying their thoughts and ideas to different
individuals in their course of work.
Ample experience. General business skills, such as marketing, sales or administrative expertise, will come in handy for a franchisee.
Financially capable. Financial capability is essential in making a franchise fruitful. The required money should be complemented with
proper financial planning to run the business till it breaks even.
Awareness of the brand. A prospective franchisees ample knowledge about the product or a service indicates whether he is really
serious in getting a franchise or not.
Open to new ideas. A good franchisee must be open to new ideas in order to make it easy for the franchisor to introduce changes in the
system that can be beneficial for both of them.
Ready to follow. A franchisee must be ready to follow the prescribed set of rules and regulations contained in the franchise agreement.
This is important in maintaining the proven business system developed by the franchisor.
Original thinkers. Though its necessary that a franchisee be a good follower, he should also be able to think for himself. However, it
must be made clear that franchisors are to be consulted first at every stage of introducing a new change in the system.
Renewal - Renewal period grants the franchisor the chance to review the FA thus enabling him to decide whether to renew the agreement
or not. The franchisees good performance is the most common of all criteria. However, a renewal does not guarantee the retention of the
original terms and conditions of the agreement. If applicable, a renewal fee is also charged by the franchisor.
Investment Amount and Fees - This part of the FA explains the total investment cost and its inclusions, as well as the date a franchisor is
to be paid. Included in these are:
Franchise fees - The initial franchise fee, which may be non-refundable, is paid at the start of a franchise relationship thus giving the
franchisee the right to engage in the business using the franchisors name and business system.
Royalties - Royalties are usually a percentage of the franchisees sales and are typically paid weekly, biweekly or monthly.
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Marketing contribution - System-wide marketing contributions are also based on the percentage of franchisees sales.
Training and Support The FA should state the kind of training and support the franchisor will provide.
Purchase of Products - Products and supplies used in the franchise system should maintain consistency. Hence the FA specifies that the
franchisee may only buy from suppliers accredited by the franchisor. A detailed list of approved suppliers is also provided in the
Operations Manual.
Territory- The Territory determines the geographical boundaries a franchisee may operate, or within which no other unit of the
franchisors businesses may compete.
Termination - The FA carries in it the grounds for termination of the contract. In some cases, violations of such conditions may still be
remedied, however if repeated over time or failure to act on them will still lead to termination of the contract.
THE ADVANTAGES
Advantage #2 Training
A franchise system will provide training for the new franchisee. This is usually done at the home office and at the franchisees place of
business. This training should prepare the new owner in all facets of the business.
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effective ideas come from franchisees who in turn share their ideas with the corporate office and with other franchisees.
THE CHALLENGES
A. Visit the corporate headquarters. Seek to get a feel for the staff and how smoothly the operations runs.
B. Talk to other franchisees. Ask what their relationship with the franchisor like.
C. Read as much about franchise as possible.
Statistics indicate that the success rate in franchising is 90%. Traditional businesses, on the other hand, will give you a 25% chance of
survival. While this points to the obvious that franchising is your best option in your dive into the ocean of entrepreneurship, you still here
accounts of people that fail in their endeavors.
This is the 10% that is hardly spoken about. This is the 10% that shatters dreams. This is the 10% that leads to disillusionment. Do we now
join the ranks of franchisings naysayers and avoid the industry like a plague? Or do we arm ourselves with knowledge that will lead us to a
point where we get to an informed decision with regard to franchising?
This article will be about the second option. We need to know what franchisings obstacles are and how to hurdle them. Better yet, we will
show you what they are so that you can avoid them altogether. Well point out the traps. Well give you the tips. Hopefully all of us will be
wiser because of this.
TIP: Do a self-assessment.
Do a self-check when considering getting a franchise. Can you work well into the night? Do you have energy for this endeavor? Are you
willing to go 24/7 for your business?
You have to answer these questions and it has to be very clear to you that you are ready and committed to running a business.
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sales and basically doing good business. You might have gone to the outlet during peak hours and ended up thinking that that was how
they performed for the whole day. On this, you have to go beyond that initial impression.
We mentioned earlier that franchising is a lot of work. What people sometimes fail to realize is that it also takes time to make a concept
work. You have to put in the hours, be hands-on and mindful of your operations.
Many people dream of being an entrepreneur. By purchasing a franchise, you can sell goods and services that have instant recognition
and can obtain training and ongoing support to help you succeed. But be cautious. Like any investment, purchasing a franchise does not
guarantee success.
To help evaluate whether owning a franchise is right for you, the following information will help you understand your obligations as a
franchise owner, how to shop for franchise opportunities, and how to ask for the right questions before you invest.
A franchise typically enables you, the investor or franchisee to operate business. By paying a franchise fee, which may cost several
thousand dollars, you are given a format or system developed by the company (franchisor), the right to use the franchisors name for a
limited time, and assistance. For example, the franchisor may help you find a location for your outlet; provide initial training and an
operating manual; and advise you on management, marketing and personnel. Some franchisors offer ongoing support such as monthly
newsletters, a toll free 800 telephone number for technical assistance, and periodic workshops or seminars.
While buying a franchise may reduce your investment risk by enabling you to associate with an established company, it can be costly. You
also may be required to relinquish significant control over your business, while taking on contractual obligations with the franchisor.
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Below is an outline of several components of a typical franchise system. Consider each carefully.
1. THE COST
In exchange for obtaining the right use the franchisors name and its assistance, you may pay some or all of the following fees.
Advertising Fees
You may have to pay into the advertising fund. Some portion of the advertising fees may go for national advertising or to attract new
franchise owners, but not to target your particular outlet.
II. CONTROLS
To ensure uniformity, franchisors typically control how franchisees conduct business. These controls may significantly restrict your ability
to exercise your business judgment. The following are typical examples of such controls.
Site Approval
Many franchisors pre-approve sites for outlets. This may increase the likelihood that your outlet will attract customers. The franchisor,
however, may not approve the site you want.
Franchise Terminations
A franchisor can end your agreement if, for example, you fail to pay the royalties or abide by performance standards and sales
restrictions. If your franchise is terminated, you may lose your investment.
Renewals
Franchise agreements typically run for 15 to 20 years. After that time, the franchisor may decline to renew your contract. Also be aware
that renewals need not provide the original terms and conditions. The franchisor may raise the royalty payments, or impose new design
standards and sales restrictions. Your previous territory may be reduced, possibly resulting in more competition from company-owned
outlets or other franchisees.
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Will you purchase the franchise by yourself or with partners?
Will you need financing and, if so, where can you obtain it?
DO you have a favorable credit rating?
DO you have savings or additional income to live on while starting your franchise?
Your Abilities
Does the franchise require technical experience or relevant education, such as auto repair, home and office decorating, or tax
preparation?
What skills do you have? Do you have computer, bookkeeping,or other technical skills?
What specialized knowledge or talents can you bring to a business?
Have you ever owned or managed a business?
Your Goals
What are your goals?
Do you require a specific level of annual income?
Are you interested in pursuing a particular field?
Are you interested in retail sales or performing a service?
How many hours are you willing to work?
Do you want to operate the business yourself or hire a manager?
Will franchise ownership be your primary source of income or supplement your current income?
Would you be happy operating the business for the next 20 years
Would you like to own several outlets or only one?
Selecting a Franchise
Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the
demand for the products or services, likely competition, the franchisors background, and the level of support you will receive.
Demand
Is there a demand for the franchisors products or services in your community? Is the demand seasonal? For example, lawn and garden
care or swimming pool maintenance may be profitable only the spring or summer. Is there likely to be a continuing demand for the
products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service
generate repeat business?
Competition
What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the
franchisor have in your area? How many competing companies sell the same or similar products or services? Are these competing
companies well establishes, with wide name recognition in your community? Do they offer the same goods and services at the same or
lower prices?
Name Recognition
A primary reason for purchasing a franchise is the right to associate with the companys name. The more recognized the name, the more
likely it will draw customers to know its products or services. Therefore, before purchasing a franchise, consider:
The companys name and how widely recognized it is;
If it has a registered trademark;
How long the franchisor has been in operation;
If the company has a reputation for a quality products or service; and
If consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency.
Franchisors Experience
Many franchisors operate well-established companies with years of experience both in selling goods or services and in managing a
franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful
entrepreneur can successfully manage a franchise system. Carefully consider how long the franchisor has managed a franchise system.
Do you feel comfortable with the franchisors expertise? If franchisors have little experience in managing a chain of franchises, their
promises of guidance, training and other support may be unreliable.
Growth
A growing franchise system increases the franchisors name recognition and may enable you to attract customers. Growth alone does not
ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support
activities. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.
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Attending a franchise exposition allows you to view and compare a variety of franchise possibilities. Keep in mind that exhibitors at the
exposition primarily want to sell their franchise systems. Be cautious of salespersons who are interested in selling a franchise that you are
not interested in. Before you attend, research what type of franchise best suits your investment limitations, experience, and goals. When
you attend, comparison shop for the opportunity that best suits your needs and ask questions.
Comparison Shop
Visit several franchise exhibitors engaged in the type of industry that appeals to you. Listen to the exhibitors presentations and
discussions with other interested consumers. Get answers to the following questions: How long has the franchisor been in business? How
many franchised outlets currently exist? Where are they located? How much is the initial franchise fee and any additional start-up costs?
Are there any continuing royalty payments? How much? What management, technical and ongoing assistance does the franchisor offer?
What controls does the franchisor impose?
Exhibitors may offer you prizes, free samples or free dinners if you attend a promotional meeting later that day over the next week to
discuss the franchise in greater detail. Do not feel compelled t o attend. Rather, consider these meetings as one way to acquire more
information and to ask additional questions. Be prepared to walk away from any promotion if the franchise does not suit your needs.
Take Notes
It may be difficult to remember each franchise exhibit. Bring a pad and a pen to take notes. Get promotional literature that you can
review. Take the exhibitors business cards so you can contact them later with any additional questions.
Business Background
The disclosure document identifies the executives of the franchise system and describes their prior experience. Consider not only their
general business background, but their experience in managing a franchise system. Also consider how long they have been with the
company. Investing with an inexperienced franchisor may be riskier than investing with an experienced one.
Litigation History
The disclosure document helps you assess the background of the franchisor and its executives by requiring the disclosure of prior
litigation. The disclosure documents tells you if the franchisor, or any of its executive officers, has been convicted of felonies involving, for
example, fraud, any violation of franchise law or unfair or deceptive practices law, or are subject to any state or federal injunctions
involving similar misconduct. It also will tell you if the franchisor or any of its executives has been held liable or settled a civil action
involving the franchise relationship. A number of claims against the franchisor may indicate that it has not performed according to its
agreements, or, at the very least, that franchisees have been dissatisfied with the franchisors performance.
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Note to the Editors: The FTC Consumer Guide to Buying A Franchise is included in IFAs Franchise Opportunities Guide, a directory of
hundreds of franchise companies that provides information to educate prospective franchisees. News media representatives may get a
free copy of the guide by sending a request on company letterhead or by contacting IFA Media Relations at 202-628-8000. Visit the
associations Web site at www.franchise.org to view the IFAs Franchise Opportunities Guide Online.
EDITORS RESOURCE:
News Media Contact: Laura FENWICK or TERRY HILL, 628-8000
Buying a franchise is investing in your future. Because the International Franchise Association wants tomorrows business owners to make
educated decisions about their futures, it is providing the following information from the Federal Trade Commissions (FTC) Consumer
Guide To Buying A Franchise. IFA recommends enlisting the help of an attorney, business consultant and accountant when investigating
franchise systems before investing. For this and other information about franchising, visit IFAs Web site at www.franchise.org.
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