Luke Roxas

FILIPINO BUSINESSMAN
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Basic Business 101: Pros and Cons of Buying a Franchise

Pros and Cons

Many Filipinos dream of owning their own businesses. Why not right? You handle your own time, profits can exceed your annual salary, and you can finally take that vacation without asking permission from anyone.

This is where you have a choice of starting your own business from scratch or franchising.

Investopedia defines franchise as a type of license that a party (franchisee) acquires to allow them to have access to a business’s (the franchisor) proprietary knowledge, processes and trademarks in order to sell a product or provide a service under the business’s name.

In layman’s terms? In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees. Are we all on the same page? Great! Let’s discuss the pros and cons.

THE PROS

Brand recognition is probably one of the most important features of franchising.  If you have a franchise of a popular brand, you can almost be sure that there is already a market ready to accept you. However, the most popular brands are also the most expensive franchise.

Correct operating system – one of the hardest part of running a business is developing the correct operating system. How should you run collectibles? Should you extend credit to customers? How much flour should you order? Which equipment should you purchase? With a franchise, the franchisor will teach you the correct way of running the business so that you don’t need to experiment on the methodologies and procedures.

Higher opportunity of holding two jobs at the same time – Since a franchise already has a system running, it is more possible to continue being employed and run another business.

Marketing and advertising supportOwners of small businesses have no economies of scales. Being part of a franchise chain means that if the franchisor decides to put up a billboard or run a promo, your store, which already has the brand recognition, also benefits from the campaign.

Higher success rate – Studies worldwide show franchises are more successful than start-ups. But be careful though, because your overall success largely depends on your type of franchise and how you nurture it.

THE CONS

High start-up costs – Most franchises require twice the amount of investment you need for starting your own business.

More expensive supplies – Most franchisors require their franchisees to purchase through their accredited suppliers for quality control. This can be costly as you cannot canvass for cheaper suppliers.

Royalty fees and other charges If you start your own business, all profits go to you. However some franchises require you to pay royalty fees on top of the initial start-up cost.

Less freedom in operations – If you have a brilliant idea to counter a competitor, you would need approval from the franchisor. In fact, any drastic changes you want will need approval. This may be frustrating for some.

Franchisor’s problems become your problem too – Just as you benefit from the good brand name, if the brand becomes tainted, so will your franchise.

Before everything else, make sure you are ready to handle a business. Franchising is not like buying a property and expecting income to flow in. You still need to spend time, blood and money to keep it running and going.

Franchising is not a passive investment – it is a business that must be run on a daily basis. Ultimately, the choice is yours as it depends on your capital, free time, and appetite for risk.

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