Your Guide to Franchising - Frequently Asked Questions (FAQ) and Terminologies

Just like any other entrepreneurs, franchisees’ first encounter with the franchising concept is overwhelming. They need to learn and understand the concepts without any hesitation and what if’s. It takes stringent learning and training for someone to grasp the terms, tips, and facts well and be prepared in managing the franchise.

Hence, it is useful to have background knowledge about the franchising concept, the nature of the business you are planning to have, and the do’s and dont’s of the industry. This guide intends to help you throughout your franchising journey, especially in familiarizing basic concepts and workflows as needed in the business.

You cannot learn everything about franchising in just one go. However, having this basic course in franchising terminologies, facts, and tips should make you start the business the right way.

Common Franchising Terminologies and Acronyms in the Philippines

1. Franchise - As per its common definition, the franchise is a method of doing business by which a franchisee is granted the right to engage in a certain business by offering, selling or distributing goods, and services. They follow a marketing plan of the franchisor which is associated with the franchisor’s trademark, name, logo, and advertising.

However, its legal definition defines the franchise as a contract or agreement, whether expressed or implied, oral or written, between two or more persons wherein i) a franchisee is granted the right to engage in the business following a  marketing plan prescribed by the franchisor, ii) the operation of the franchisee’s business must be pursuant to that plan only or system since it is associated with the franchisor’s trademark. The franchisee is required to pay directly or indirectly, a franchise fee.

2. Franchisor - A company/proprietor that is choosing to expand the business via franchising option. It is offering the opportunity for investors who want to run a business in the location or territory of the business.

3. Franchisee - An individual who chooses to invest in a franchise to become a business owner.

4. Master Franchisee/Developer/Sub-Franchisor - These terms are all the same. This refers to an individual or organization that is selected by the franchisor to be in charge of building out an entire territory of the business. This person is responsible for recruiting new franchisees and training them. In exchange, the franchisor shares with them a portion of the initial franchise fee and the royalty fee revenue.

5. Conversion Franchise - It is under the umbrella of a franchise system. It is usually an independent business that capitalizes on the brand and the systems.

6. Franchise Fee - The initial fee that a franchisee pays to the franchisor. This fee allows you to become a franchisee officially. In return, this fee secures you the right to do business as a franchisee.

7. Royalty Fee - It is an ongoing fee that a franchisee pays to the franchisor. Usually, it is a percentage of monthly franchise sales, but it can also be a predetermined fee.

8. Franchise Broker/Consultant - Consultants are important since their job is to help individuals select the right franchise based on what they want or their financial capability. There are many opportunities that exist in the franchising industry, and having an expert opinion is really helpful. However, before working with a broker or consultant, be sure that he or she is fully knowledgeable about franchising and considers your interests in mind.

9. Discovery Day - Usually, this is the day when potential franchisees are invited to visit the company headquarters and meet the franchise team of the brand. It plays an important role in the decision process since this makes you understand more the business. As a potential franchisee, you can find out more about the company culture, observe the operations, and get the answers to any remaining questions you may have.

10. Territories – The franchisee’s territory refers to the geographic area where the business operates. Remember that the franchisor may grant exclusivity to the business territory. This means no other business, whether franchise or company-owned outlet may open in that area. There is also the concept of the ‘rights of first refusal to the franchisee,’ which means that if the area can support other outlets, the franchisee is given the first option to decide. Moreover, the franchisor may give rights to the franchisee only where his location stands, nothing more.
11. Franchise Agreement – A written contract between the franchisors and franchisees. It is usually for a few years term, and once done, the contract must be renewed. Any franchise agreement may not be sold, transferred or otherwise assigned without the franchisor’s permission.

12. Operations Manual – A written document that explains the franchisor’s standard operating procedures (SOP). It also identifies the operational tasks required to establish and operate the franchise. Having an operation manual promotes the use of consistent daily procedures at each franchise unit within the network franchise. Hence, the quality of service and products in every franchise outlet is maintained.

13. Franchise Opportunity – A business opportunity that includes selling of goods and services. It enables a novice entrepreneur to begin a franchise business.

14. Initial investment – The total capital required to start a franchise business. It usually includes the franchise fee, renovation, equipment & fixtures, rent, deposits, and initial inventory.

15. Initial Term of Agreement – In relation to the franchise agreement, this refers to the length of time the agreement is in effect.

16. Philippine Franchise Association (PFA) - A voluntary and self-regulating body for franchising in the Philippines. It is the country’s pioneer and largest franchise association with members ranging from micro to large, both homegrown and international involved in the food, retail, services and other types of businesses.

17. Association of the Filipino Franchisers, Inc.(AFFI) - This association is the Philippines’ prime trade organization committed to promoting responsible micro small medium enterprise businesses through franchising.

18. Investment Capital - Sometimes refer as the initial capital investment is the total amount of money needed to put up and start a business, including the working capital. It may sometimes already includes the franchise fee or depending on the circumstance.

Do not confuse yourself between the investment capital and the franchise fee as the latter is usually a separate fee for you to gain rights in operating a franchisor’s business.

Franchising Facts

1. Franchising is a highly regulated industry.

2. To get needed information, especially those about the franchise’s earning potential, always talk to current and former franchisees.

3. The average length of a franchise contract is 10 years.

4. A regulated “business opportunity” is not the same thing as a business franchise format. Remember that while a franchise is a type of business opportunity, not all business opportunities are franchises.

5. Always use the Internet, franchise trade shows, and trade publications when searching for the right franchise opportunity. Much information about what the trending industries are monitored by this and considering trade shows where you can meet company executives may sound too exciting as well.

6. Be wary of “steering,” meaning just do not rely on everything that the franchisor has provided. There is always something about that.

7. Even if you are the franchisee, you still need a business plan. This is because it also enables you  to ‘own the numbers’ in relation to cost and revenue projections.”

8. Always learn from the training. Remember that a franchisor’s training program can teach you a lot about how to operate the franchise but can also reveal a lot about the long-term support you will receive as a franchisee.

9. Get your franchise agreement, lease, and bank loan on the same schedule.

Where To Get Funds?

1. Opt to In-House Financing - This happens when a franchise company offers to finance its own loan program directly to potential investors.

2. Third-Party Financing - Any financing that is offered by a third party, whether a bank or another lender. Today, many franchise companies develop relationships with third-party lenders that allow the lenders to become familiar with the opportunity, and increasing the chances for franchisees to obtain financing.

Commonly Asked Questions

Q1: Am I guaranteed success if I get a franchise?

Answer: No. A franchise gives the franchisee the opportunity to follow the business system that the franchisor has proved to be successful. Therefore, your success as a franchisee highly depends on the commitment you give the business.

Q2: Can I just invest without necessarily liking the franchise?

Answer: There is no room for investors only in franchising. Franchisees are expected to like the franchise business always.

Q3: Can I get partners to raise the money for the franchise?

Answer: As much as possible, avoid partnerships. If it is necessary, make sure you are the majority shareholder to speed up decision-making.

Q4: What does the franchise investment cover?

Answer: Basically, it covers the franchise fee, branch construction, furniture and fixtures, signage, and other items. It also normally covers the right to use the trademark, business system, all the pre-operating services including training, the opening team, dry runs, pre-opening, and marketing support. It is a must to check with the franchisor the extent of coverage of the franchise investment and franchise fee. Also, expect variations in the coverage.

Q5: Can I take the franchise agreement and show it to my lawyer?

Answer: Of course! It is your right as an applicant to seek legal advice.

Q6: Am I obliged to get all my supplies from the franchiser?

Answer: It varies from one franchisor to another. However, the franchisor could still oblige you to get certain supplies from them – particularly those items that carry trademarks and crucial to product quality and standards.

Q7: Do franchisors put mark-ups on supplies delivered to franchisees?

Answer: Yes. The mark-up covers their cost of locating, buying, and warehousing supplies.

Q8: Why do I have to go through an application process?

Answer: This process enables you and the franchiser to decide if you can do business together.

Q9: Can the franchiser tell me my profit margins and payback period?

Answer: In this case, the franchiser can only give you estimates and the figures will depend on how well you manage your branch.

Q10: Who will look for and choose my site?

Answer: It’s you. Remember to convince yourself that there is a market for the business concept in the site you choose.

Q11: Can the franchise be taken away from me?

Answer: Yes. You can always lose your franchise if you violate the agreement and ignore the operations manual. However, if this happens, the franchise fee will not be refunded to you.

Q12: Will the franchiser help me manage my branch?

Answer: An important part of franchising is the franchiser’s commitment to helping your business. Learn the best practices from your franchisor but remain open and take his or her words seriously. However, as a franchisee you have to be on top of managing your branch since the franchisor is there to provide support.

Everything mentioned above sums up the information about the basic franchising terminologies and FAQs. We hope that this guide helped you today on the journey. Learning is always a continuous process and this makes you appreciate more the wonders of the franchising industry.

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