Franchise Scams

FiIed under: Franchise ArticIes, franchising guideAuthor: JIp

Dreams of owning your own franchise can turn into a nightmare once you fall prey tofranchise scams.
Here's what every potential franchisee should know.
Franchise Philippines success stories are often more written or talked about, like Mang nasal
Franchise Success Story, but there's another aspect of franchising that seldom gets enough media
attention the franchise scam.

People who get scammed in the franchising business naturally don't want to talk about the experience.
After all, it is proof positive that their "gullibility has made them lose not just their money but also their
self-respect. ndeed, it would be foolhardy for anyone to publicly admit that they have been scammed in a
franchising deal.
But people will continue to be victimized by franchise scams unless they are forewarned that other than
legitimate franchisors, there are unscrupulous operators who are only after their hard earned money
rather than their participation in a supposedly successful business formula.
Would-be franchisees should keep in mind that if they aren't discerning and cautious enough, nothing can
protect them from falling victim to a well-laid franchise scam. Thus, for those being propositioned to buy a
franchise, we have gathered pointers from knowledgeable people to help them decide whether to sign
that franchise contract or just politely walk away.


FaIIing Victim
Ma. Alegria Sibal Limjoco, chairperson of the Philippine Franchise Association says that the two major
reasons why peopIe are victimized by franchise scams are the foIIowing:
O Lack of awareness and information about the franchising business
O People's attraction to putting up only a small capital for a business
"Prospective franchisees should know that a business that hasn't proven to be successful can't really
franchise itself legitimately, she says. "n particular, the public should beware of businesses that require
a franchise capital of only P10,000 to P20,000. Not all businesses that require such low capital could be
genuine.
This concern over very low priced franchises is shared by Rudolf Kotik, a franchise consultant..
"Franchise sellers who offer franchises for as low as P10,000 will often tell you later that this amount is
just a down payment, he says. And Kotik says that not all scams are confined to franchises in the
P10,000-range. He particularly cites the case of a halo-halo cart operator who succeeded in running off
with P330,000 from a prospective franchisee. Once the later had paid the franchise fee for a similar cart
that he intended to put up in another mall, the supposed halo-halo franchise and his cart simply
disappeared.
To guard against being taken by such scams, Kotik advises prospective franchisees to check first if the
franchisor is legitimate and for real. A good indicator, he says, is a franchisor's affiliation with any of the
three franchise associations in the country, namely, the Philippine Franchise Association, the Association
of Filipino Franchisers nc., and the Filipino nternational Franchise Association.
arning Signs
n a recent seminar for overseas Flipino workers, Armando Bartolome, president of BMG Franchise
Developers, nc., identified three telltale signs that a seemingly great franchise opportunity is a scam. The
franchise agent wouId make you beIieve:
O that the franchise comes very cheap
O that you can recover your investment in such a short time
O that you would become a millionaire as a franchisee and could then afford to stop working.
Bartolome warns that all these simply can't be true with legitimate franchises. "one more thing, people
pushing a franchise scam won't even let you know who owns the franchise, he says. "Often, the agent of
a franchise scam will simply give you a three-page franchise agreement to sign. When this happens,
simply ask yourself: How can you put down all of the franchisor's and franchisee's obligations in just three
pages? A real franchise agreement will probably be as long as 35 to 45 pages. n fact, some very
thorough agreements can have as many as 200 pages.
n a legitimate franchising arrangement, Bartolome explains, the franchisor and franchisee have to work
together in running a specific business. Their relationship will be defined by a contract called the franchise
agreement. Without this agreement, there's no franchise to begin with.
Staying Protected
Bartomolome suggests that to avoid being victimzed in a franchise scam, the prospective franchisee
should do the following:
O Evaluate the prospective business franchise
O Check out the longevity of the product to be sure that it isn't just a fad
O Appraise the product's competitiveness with other products in the market
O Find out how profitable the product is
O dentify the business model (s it a cart investment? Will it be located inside or outside a mall?)
O Determine the total investment a franchisee needs to put up
O dentify the various support programs that will be extended to the franchisee.
"When you buy a franchise, you're actually buying the experience of the franchise owner in running the
business, and you'll be selling the name of the franchised product, he says. "Obviously, you can't get all
of these for cheap. These days, you may be able to get a legitimate franchise for as low as P150,000, but
you should be suspicious of these being offered for only P10,000 or P15,000. They are likely to be
scams.
This view about the pricing of franchises is shared by Richard Sanz, president and CEO of Tea Square
Food & Beverage nc. He suggests that for prospective franchisees to appreciate why a franchise can
cost so much, they should ask themselves this hypothetical question: f you're a franchisor who has spent
so much time and money to put up a system for an efficient and profitable business, and if it took you
several years to make your brand name well known, would you sell that business for only P10,000?
Sanz then explain the logic behind franchising: "A franchisor sells a franchise because the business has
proven to be successful, and one way to expand the business is to replicate it through a franchise. To be
able to franchise the business, however, the franchiser has to develop the whole operations system and
document it. This way, the franchisor can teach the franchisee every aspect of the business.- the product,
the marketing strategy, the accounting system, the customer service.
What surely marks a franchise scam, Sanz points out, is the absence of support to the franchisees. "Once
you have paid the franchise fee of, say, P10,000, you can be sure that the scam franchisor will be gone in
a matter of days. he says. According to Sanz, victims of a franchise scam usually will find themselves in
the following situations:
O They couldn't find the supplier for the franchised product when they start operating and the franchisor is
nowhere to be found as well.
O They will be enticed to sign the franchise agreement with the assurance that there would be no franchise
fee, but before they can begin to operate, they will be asked to pay hidden charges as much as
P200,000.
Paying Attention
Mercedes "Chedeng Anglo, a retiree from a paper manufacturing company, says that people get
victimized by franchise scams because they don't study their prospective business well enough. "Most of
them only think of how much they can earn big money fast and don't really pay much attention to the
business details, she says.
She herself got scammed once. That was when a friend invited her to invest in the selling of some very
popular brands of consumer goods. She readily shelled out P5,000 for the supposed franchise but
nothing came out of her investment.
Despite that experience, Anglo kept an open mind about franchising. n 2003, she decided to buy a Zagu
Pearlshake franchise. She did so because she had been impressed by the long line of customers at Zagu
outlets in the malls. So one day, bringing with her some of her reirement money, she went directly to
Zagu's main office to apply for the franchise.
She took note that there were many employees in the office, and that the company's officers were also on
hand to entertain prospective franchisees. This convinced her that Zagu was legitimate.
Based on this experience, she has this advice to would be franchisees: "Before deciding, observe several
outlets of the franchise to see for yourself if the product really sells well. Then once you have decided,
negotiate in the franchisor's office and don't pay for the franchise just anywhere. Do it in the franchisor's
office.
Still another strong indication of a risky franchise is when its owners are not selective in choosing
franchisees. This is a bad sign considering that the brand name of the franchise is greatly dependent on
the performance of the other franchisees in the system. As Sanz says, "t takes just one bad egg and
you're done for.
by Geraldine Bulaon-Ducusin
Entrepreneur