So you want to be a franchisee of Brand X some day? Many Pinoys are really inclined to give franchising a try, maybe because they see it as of lesser risk compared to starting out on their own. Previously discussed the pro’s and con’s of franchising, in my humble and limited opinion, as well as the starting capital needed for some of the famous franchise brands.
Operating a business, whether franchised or not, is also part of our financial goals, the charitable Ilocana and I. That’s why, aside from attending property trippings the past weekends and months to learn more about real estate and condominiums as quote unquote “investments,” we’ve also been attending seminars of some famous and some upcoming franchise brands. And here are a few new things we learned, so far. Things that otherwise we would not have known, if we did not get in touch with the actual “insiders”. Caveat, we have attended seminars of around 8 different brands, so while that’s a good number, it will not be a representative of the whole franchising world.
#1 SHOW ME THE MONEY FIRST
The whole process will not start without money. What I’m saying is, during the seminars, most brands (we attended) showed sample ROI, sample costing and how much you need to sell in order to break-even, etc. But these were rather general topline numbers. Not all of them disclosed how much the profit margins are for this and that product, the usual rent for this and that mall, etc. That’s understandable and fair. After all, we were just seminar attendees, not yet franchising applicants. They cannot disclose it since it is company internal and confidential information. After all, we are not potential investors, we are mere potential franchisors. So we need them more than they need us.
From the uninitiated Juan though who’s trying to dip his toes in the business world, it is but normal to want to see as many information as possible, before committing that hard-earned money (around quarter to half a million at the very least). From the side of the franchisor, these are all but estimates from prior experience so that’s as good as it gets. Meanwhile, from the side of the potential franchisee, we were like can you show us more information that will make us more comfortable to take the risks?
Well if Juan wants to know more, he will have to commit. Meaning, show and pay them the money, and sign a letter of intent or a franchise agreement. Then you can talk about the nitty-gritty details. Don’t worry, not all this money is lost. Once you agree to be a franchisee, put up the down payments etc, then the process gets going. You get a Letter of Intent or Franchise Agreement which you can show to possible lessors of a commercial space. Location assistance can now run (though for the most part you still have to look for your own location, they just assist you in assessing the viability of such location). Then you can start processing the permits while they start building the foodcarts, signages, and other marketing paraphernalia. You start looking for people as well to hire, whom they will train with their trademark practices and processes. The whole period from sign-up to opening day can take as much as 30 to 45 calendar days. But first, you will have to commit.
Lesson here is choose a good brand that you trust, then attend the free seminar, if all looks well and good, spot a location then commit, take a leap of faith. The franchise agreement (usually 3 to 5 years) will not start anyway until you’re operational, but at least you’re a step ahead of mere spectators.
#2 SHOW ME THE FRANCHISE DOCUMENTS
Speaking of locations, franchisors admit that location is key, so Juan should not compromise on the location just to get the business rolling. Some have signed-up to be franchisees but it has taken them 6 months or more to spot that ideal location. Worry not, the franchise agreement remains in force despite these delays, which according to them, are actually pretty common. It turns out, there are many Pinoys (such as OFWs) who have the P-roduct, the P-uhunan, but not yet the P-westo (Read more on 3 Crucial Ps to Start Your Business).
We mentioned to one of the owners during one of the orientations that spotting a location per se is half of the time easy, but we become iffy whether such location is perfect for a certain business we have in mind. We then become unsure and hesitant about that location. Normal. Then weeks after, we get surprised that someone is already occupying that potential location, someone took the leap and gave that location a try. Worse, we had the same product in mind. We get bitter. LOL! He’s answer is that what we feel is normal, but in reality, the location decision can sometimes boil down to gut feel, and Juan tends to have analysis paralysis and end up not acting on it. If your gut tells you this might be something good, and there are similar businesses in the area that seems to be thriving, then reserving that location might be an ideal move.
Speaking of locations, the approach varies. Malls will not entertain inquiries on lease rates unless you show them Letter of Intents from the franchisor and other documents, which proves that you and the franchisor have actually agreed to pursue a business. That you are serious about it and not merely mystery shopping. But for the risk averse or newbie, the question is why would you sign-up with a franchise already if you don’t know yet if you can handle the rental rates for your desired location? Well that’s a risk you’ll have to take. After all, business is about taking calculated risks. If you later on find out that rent is not feasible and within the budget for location A, then you and the franchisor will have to look for location B, C, D etc until it works!
Meanwhile, smaller commercial spaces are upfront when it comes to rental rates which makes it easier for you to do some computations and feasibility studies, before bothering to submit documentations, or even commit to a franchise.
In both cases though, the usual approach will be to put up money as reservation if you want to secure your slot in that area. So there will be times when you’ve already paid the reservation, the usual 2-month deposit and 2-month advance for the rent, but your business is not yet operational since the franchisor is still finishing up the business paraphernalia, or you’re still working on the permits. Worse, the franchisor does not approve of that location you have reserved. You might be able to get the deposits and advances, but not the reservation fee anymore. Again, another cash flow risk you’ll have to consider.
Lesson here is that Juan will need a sizable cash war chest to get started. And bold, decisive moves. The amount of money needed and prepared should be more than the initial franchise fee — Juan also needs to consider that first few months of rent even if the business is not yet operational. And of course, the daily operational expenses to keep the business running while profits have not yet materialized. So, in taking a leap for a business, make sure you have extra money and ideally, you don’t risk all your money in it.
#3 SORRY, ONLY THE BIG BOYS PLAY
We asked, will the franchisor help us in securing good locations in malls such as SM, Ayala Malls, Robinson’s, Vista Mall etc because that’s where great foot traffic is. It gives the business a chance to be more profitable, while well aware that rental rates here are much bigger. Unfortunately, the answer is more often than not, a ‘NO’. Why?
For one, malls prefer company-owned stores in their malls (and not franchisees) because, as a seminar explained, malls want “continuity” and “financial muscle.” Every year, malls increase rates, and most malls even have % share in the gross sales of the businesses. So most malls would prefer that their tenants are company-owned who have the financial capacity and stability to stay in the malls for the long haul, versus franchisees who might just pull out should the rent become unbearable. Well that’s how the seminar explained it. Mind you, not all malls though. Looking at it from a mall stand point, it might indeed be easier to communicate constantly with fellow established companies, with known reputations, versus communicating and collecting rent from many sole proprietors operating businesses inside their malls, most of whom they are working with for the first time.
Another is that while the new malls are still being built, they already send out lease offers to their usual tenants. If a mall is opening in Davao for example, chances are they are already communicating with their usual tenants here in Manila, should they be interested to open a another company-owned store in Davao. So if one is a small-time entrepreneur trying to get inside the mall as tenant, chances are he’s already too late if he will franchise the common and known brands given the mall-to-company tie-ups. Plus there can be a few more challenges along the way.
But say you have a small start-up business that’s a fairly new concept, and a mall invites you to sell in their commercial spaces, then this is something worth grabbing and giving a shot. This might be the shot you’ve been waiting for. Remember, all big businesses now started small many years ago.
Just an aside, we also hear stories where the big boys inside malls can sometimes bully smaller stores, especially those occupying commercial spaces adjacent to theirs. For example, a big boy brand wants to expand and have a bigger commercial space but does not want to leave the present prime location. So the next move will be to ask the adjacent stores to move out and find another space somewhere. I’m not saying all mall managements allow this but if you think about it, this can happen, especially for those malls who have % share in gross sales. The big boy brand can just say, look, how much does that small brand beside me give you in terms of % share per month? If you give me his space, I will be able to sell this, and you in return, will have a much bigger % share, way bigger than the small player can ever give you.
I hope this is not prevalent, but lesson here is money talks. The sooner you accept this, the better. Another lesson here is, if you can, build your own commercial space in a good commercial area. That way, you can be the lessor and the lessee, you can dictate your own terms to other potential lessors.
#4 MLM, NETWORKING, UP-LINE, DOWN-LINE
We were surprised to find out that a company carrying 5 famous franchise brands, with much less franchise fee and needed capital, is actually engaged in multi-level marketing (MLM) and networking. Now you have to keep an open mind about this. If competitors offer P500K franchise say for a siomai or fries, they only offer it at less than P300K, plus you can earn more through referrals of downlines, and if you sell the other items that come with your franchise (but not related to the foodcart such as whitening soaps, food supplements, sanitary napkins, etc.), you earn much more. Neat huh?
Personally, we were surprised to learn this. All along we thought we were attending a franchising seminar (and we did) but when we got there, on the side, networking people also oriented us on “other ways to earn.” Good thing we were open minded. Well, the more income sources, the better right? Plus they will gladly give you a Letter of Intent and some more templated documentation without you paying a single peso, not yet, so you can show these to your potential commercial spaces and get the ball rolling. At least they’re trying to make it easier for franchisees to get started and actually operate a business.
Word of caution though. Juan has to be observant. Juan can sense from the seminars whether the franchisor is really concerned about the well-being of the franchisee and the brand reputation, as they are careful in accepting and selecting from the many franchise applications. Or whether they are more concerned about volume, on getting as many franchisees as possible while possibly compromising on the feasibility studies and location assessment. Quality versus quantity.
I hope that with these 4 new learnings we got, you also learned something new. Got your own franchise stories? Please do share them here.
Opening a business is just one of the many ways to achieve financial freedom. Investing your hard earned money in other assets can also do the trick. Find out more in #10Steps to a Richer Life.
Make your money work harder for you. May you have a richer life!