There are two different types of franchising – product franchising and business format franchising.

Product franchising, also known as trade name franchising, is that type of franchising wherein a manufacturer grants a franchisee the right to sell its products, but with no method of doing business. Examples of this type of franchising are car dealerships and service stations. Product franchising usually peg royalty collection on a product basis and not on gross sales as compared to business format franchising.

A more complex form of franchising is the business format franchising. Also identified as a name and process franchise, this format features a broader and ongoing relationship between the franchisor and the franchisee. 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 franchisor’s operating systems, technical expertise, marketing systems, training systems, management methods and essentially all relevant information, are transferred to the franchisee.

Business format franchising offers franchisees the advantage of a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch. Franchisors are also able to expand rapidly across countries and continents. Franchisees are offered significant training, which is not available for free to individuals starting their own business.

In this arrangement, franchisors typically control how franchisees conduct business to ensure uniformity. Though these controls may significantly restrict the franchisee’s ability to exercise its own business judgment, the end result is to the benefit of the consumers because certain standards are maintained. To this end, franchisors may require the franchisee to operate in a particular manner - operation during certain hours, using only pre-approved signs, employee uniforms, and advertisements, or abiding by certain accounting or bookkeeping procedures. The franchisor may also require the franchisee to purchase supplies only from an approved supplier, in order to ensure that the consuming public does not suffer from inconsistency in product quality.

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.

Advantages for the Franchisor

Franchising one’s business is the key to rapid growth. By using other people’s money, time, and organization, you can significantly expand your business into its optimum size and maximum profitability.

Start-up Capital
In growing a business, raising enough capital always poses a problem. On the other hand, the capital needed to expand the business through franchising is provided by the franchisee.

Management
Trained and motivated management is an integral part of franchising. It is difficult to find and keep competent experienced managers who are necessary to expand a business. With franchisees, you have people who are well-trained in the franchise system and who are also very motivated because their capital is at stake.

Efficient
With the franchisee’s capital as an effective motivating factor, franchises tend to be better run, thus becoming more efficient and profitable than company-owned branches

Bulk Purchasing
Franchisors enjoy great buying power. With a large number of units, the company buys for the entire system and at great savings to the individual franchisees. This enhances profit margins and gives the franchisees a very strong advantage over its competitors.

Securing prime locations
As a franchising business grows, it begins to establish a reputation in the market of its size and success. As such, prime commercial centers would like to have popular and successful franchises in their areas, therefore making it much easier to secure viable locations as a franchisor than it would be for a non-franchise business.

Cooperative advertising
Franchisors can achieve market dominance through extensive advertising because the cost is spread among many franchise units. Through pooled resources from a large number of franchisees, top quality advertising materials give franchisors a competitive advantage.

Maximum income
Franchisors are assured of more profit as franchises generate revenue in a number of ways such as franchise fee; franchise royalties; equipment, supplies, service and materials sales; property rentals; and, rebates from vendors of equipment and supplies. These income-streams from franchisees equal big profit.

Franchise is a robust business model that allows tremendous success over other investment vehicles.

High success rate
A franchise is a business model based on proven ideas and implementation. As opposed to having to build a new business from scratch, a franchise business comes Recognized brand and trademark
A franchise offers a product or a service that has become a household name. The powerful brand names that your franchise carry will guarantee your success.

You are not alone
Franchisors discover and perfect operating and management efficiencies that they pass on to their franchisees.
These powerful and superior training and coaching system offered by the franchisors are designed either to help a franchisee overcome his lack of experience in running a business, or polish an acquired business sense, all done with the intention to make the franchise a success.

Ease in financing / Re-saleability of the franchise
Financial help for businesses with established good reputation come easy. Businesses with high success rates get nods for loans from banks and financial institutions. Moreover, a good franchise is an appreciating asset, thus maintaining its re-saleability at all times.

Huge profit
Through the franchisors, obtaining lower-cost materials and supplies is possible. This benefit, coupled with the right marketing strategy, brand positioning, and growth of the customer base, could only translate to increase in sales and immense profit.

Franchise sales
Growth in franchising is of prime importance. There will always be variables that will thwart franchise sales effort, such as limited pool of people with ample resources. If your franchise system is not expanding, soon it will be out of business.

Control
Franchising entails a more extensive evaluating process of potential franchisees than hiring a direct employee would require. A franchisee, in a way, controls his unit, and to varying degrees runs it his way. Incompetent franchisees – including those who fail to adhere to the operating system and franchise agreement – can easily ruin a franchisor’s brand by providing inferior products or services.

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.

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.

Not all businesses can be franchised, but most business concepts with the following characteristics are franchise material:

Unique.
A fresh or unique concept that has the potential to expand nationally, and even internationally.

Profitability.
The business must be consistently profitable.

Systematized.
The business operating systems should be polished and efficient. These systems and Training.
The transfer of knowledge through training should be relatively easy for others.

Excellent margins.
The profit margins built into the concept should be viable enough that every franchisee who adheres to the franchise system can realize an attractive Return on Investment.

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. A franchisee who is willing to learn will be able to duplicate the business model only will consider himself a novice.

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. Moreover, the required money should be complemented with proper financial planning to run the business till it breaks even.

Awareness of the brand.
A prospective franchisee’s 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 it’s 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.

As with any other major decisions in life, going into business – whether traditional or franchising – requires due diligence in assessing several variables before coming up with a resolution. In buying the right franchise, careful considerations on the following is very important:

1. Ask yourself why you want to own a franchise.
2. Begin the search. Look for opportunities that are in harmony with you and that greatly interests you.
3. Research.
• Have a complete understanding of the business.
• Check on the business experience and track record of the franchisor.
• Determine the type of experience required in the business; the hours and personal commitment necessary to run the franchise; how much money is to be invested; and, the terms and conditions of the franchise agreement.
• Get information on the franchise by visiting stores; and interviewing the franchisors and existing franchisees.

Concept
Look into the product or service and discern what makes it stand out among other businesses.
Location, location, location...
Ask about the territory rights. Make sure that you get a good site selection.

Labor pool
Check on the depth and quality of the franchise’s labor pool, making sure that it provides strong and qualified workforce.

Training and Support
Determine the kind of training and support the franchisor will provide. Ensure that all levels of support are included, clarifying that support will continue after the grand opening.

Investment amount While the upfront cost of the investment can seem expensive, in the long run it is probably not. A more significant expense can be the ongoing royalty and marketing fees.

Exit strategy
Determine if there are resale options should the opportunity does not work.

Franchise Agreement
Finalize a franchise agreement. This formal deal should detail the rights and obligations of both the franchisor and the franchisee, including the length of term, the start and end periods of the agreement, the renewal provisions and the end of the contract.

The Franchise Agreement (FA) is the legal document that binds the franchisor and the franchisee together.

What is included in the Franchise Agreement?

Terms of Agreement
The FA carries a contract explanation detailing the type of relationship a franchisee is entering into with the franchisor. Since a franchise relationship is temporary in nature, the FA should specify how long the agreement will last. At the end of that appointed period, the franchise is considered null and void.

Renewal
Renewal periods grants the franchisor the chance to review the FA thus enabling him to decide whether to renew the agreement or not. The franchisee’s 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.

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.

Fees
This part of the FA explains the due cost and date a franchisor is to be paid. Included in these fees are franchise fees, royalties and marketing contribution. 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 franchisor’s name and business system.
Royalties are usually a percentage of the franchisee’s sales and are typically paid weekly, biweekly or monthly.
System-wide marketing contributions are also based on the percentage of franchisee’s sales.

Territory
The Territory determines the geographical boundaries a franchisee may operate, or within which no other unit of the franchisor’s businesses may compete.

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.

1. Philippine Franchise Association (PFA)
Unit 701 OMM-Citra Building
San Miguel Avenue, Ortigas Center, Pasig City
Tel. Nos.: 687-0365 to 67
Fax No.: 687-0635
Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

2. Bureau of Trade Regulation and Consumer Protection (BTRCP)
2/F Trade and Industry Building
361 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 751-0384 loc. 2221-2229
Fax No.: 890-4949
Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

3. Bureau of Domestic Trade (BDT)
2/F Trade and Industry Building
361 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 751-3227, 751-3228, 751-3229
Fax No.: 751-3224
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4. Bureau of Small and Medium Enterprise Development (BSMED)
3/F Oppen Building
349 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 976-5744, 976-5730 loc. 3144
Fax No.: 896-7916
Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

5. Philippine Trade Training Center (PTTC)
Roxas Boulevard cor. Sen. Gil Puyat Avenue
Pasay City
Tel. Nos.: 832-2397, 834-1341
Fax No.: 831-9988
Email: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

6. Securities and Exchange Commission (SEC)
SEC Building, EDSA, Greenhills, Mandaluyong City
Tel. Nos.: 726-0931 to 39
Fax No.: 725-5293

A Guide to Franchising in the Philippines
http://www.frannet.com/infobus.html
http://money.howstuffworks.com/franchising1.htm
http://www.franinfo.com/why.html
http://en.wikipedia.org/wiki/Franchising
http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sbp_isfforme.pdf
http://franchises.about.com/od/franchiselegalissues/a/franchiseagree.htm
http://www.allbusiness.com/buying-selling-businesses/franchising-uniform/2200-1.htm