By Armando Bartolome
Franchising is a widely-accepted form of helping in the development of businesses today. It is a business concept that is being used in various countries. Franchising nevertheless plays a significant role in other countries as one of the strategies in speeding up economic development which is also responsible for the creation of new jobs. It has also been found out to have a lesser failure rate than conventional startup businesses.
Advantages of Franchising
- Franchising a business provides you with the support of the franchisor. This means that prior to opening the franchise business, the franchisor extends his help from choosing the right location, construction, design and training.
- The help of the franchisor does not (and should not) end as soon the business has been opened. An on-going support is provided to be able to maintain the quality of products and services provided by the business all throughout other branches of the franchise business.
- Every new entrepreneur has the fear of being trampled by other businesses. But with a franchise business, it gives the new entrepreneur an edge over his competitors. The fact that an entrepreneur has a franchise business means that it has somehow already penetrated the market.
Simply put, choosing to start a franchise business may mean having to deal with lesser problems than starting with your own business since the franchisor would just practically be throwing in all their ideas to you and all you need to do is to follow and implement what has been told to you.
Disadvantages of Franchising
Sometimes, no matter how perfect something is, there just seems to be some kind of a loophole that you need to deal with. And being in a business, you should always be prepared to face these challenges.
- Franchisees are required to operate the business exactly according to the terms set forth by the franchisor in the franchise agreement. Although it may seem easy to just start an “instant” business, the restrictions which include the products and services offered, pricing as well as its location. Moreover, no franchisee is allowed to make changes unless the franchisor decides on it to be implemented to all of its branches.
- Starting a business comes with a price. In addition to the initial franchise fee, franchisees are required to pay ongoing royalties and advertising fees.
- Franchisees have little or no say with regards to the franchise agreement. A franchisee could not just stop the business should he feel that the business is not doing good. If you are lucky enough to find a franchisor who is willing to pre-terminate your contract without having to go through endless debates, then you can be worry-free and may be able to start a new business which you deem can be more successful than the previous business you have started.
Understanding the Franchise Agreement
A franchise agreement is a binding contract between franchisor and franchisee. It is the “business bible” of franchisees in which everything written on it should be followed accordingly by the franchisee.
What is written on the Franchise Agreement?
- The Franchise Agreement states that franchisee receives no ownership rights to the system and that the franchisor has the right to terminate the franchisee’s license if franchisor finds out any breach of the franchise agreement.
- It describes the franchisee’s territory, store hours and location of the franchise business.
- Fees including franchising fees, advertising fees, and other fees to be paid to the franchisor during the term of the franchise, and fees for other purchases.
- It also spells out the term of the franchise agreement from the date the franchise agreement has been signed to the date that it expires. Prerequisites for renewal is also stated.
- The services offered by the franchisor.
- A very important part of the franchise agreement is the protection of proprietary information in which franchisor clearly informs the franchisee his limitations.
- Trainings, seminars or workshops are part of the agreement to ensure that the quality of products and services is maintained across all other branches.
- Any violation which can cause a breach of the agreement is listed.
- The obligations upon expiration or termination of the business. It comprises a list of steps that franchisees are required to “de-identify” them from the business and the association of the franchise from the system.
- The franchisor’s right to first refusal. The franchisor has the option to refuse to purchase the business or to purchase assets at the time of expiration or termination of the contract.
- Franchisees are treated as independent contractors and are required to pay their own taxes, responsible for their employees, and should be able to operate the business independently while carrying out what is written in the contract.
- It will also have an indemnification covenant wherein the franchisee must reimburse the franchisor for any damages or negligent act.
- A non-competition covenant stipulates that the franchisee is prevented from competing against the franchisor while the agreement is in force.
- The Franchise Agreement also includes methods on resolving issues between franchisor and franchisee.
Armando “Butz” Bartolome
Philippines’ Franchise Guru Armando “Butz” Bartolome is the president of GMB Franchise Developers Inc., a pioneer franchise development company established since 1993, co-founded and managed by his wife, Lyndah. The company has assisted numerous entrepreneurs whose brand names are now some of the most recognized in the Philippines, including Mang Inasal, Julie’s Bakeshop, Generika Drugstore, Gingersnaps, Potato Corner and a host of 880 others to date. He is one of the 34 “Angelpreneurs” of Go Negosyo. He is also part of the speakers’ pool of Truly Rich Club of Bo Sanchez.
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