The hidden costs in a franchising business

With many appealing franchises to choose from, like a food cart business or a 24-hour convenience store, it would be no surprise if the thought of investing in a business has crossed your mind. These businesses advertise low or affordable investment opportunities, glossing over “hidden” fees that can drive up the real cost of owning a franchise business in the Philippines.

If you’re a first-time investor, familiarize yourself with the franchising business model before making any commitments, so that you know what to expect.

What is franchising?

Franchising is an investment venture that allows a franchisee to operate a business, which includes the brand, its trademark, and marketing strategies, owned by another entity, the franchisor. Most franchises work with an established system of operations set in place, allowing them to sell the business to other people.

Through a Franchise Agreement (FA) and other legal documentation, all specifics that determine the scope and limitations of the business relationship between franchisee and franchisor are agreed upon and bound by law.

How to start a franchise business in the Philippines

As a business investment, franchising can be a cost-effective option for you, especially if you prefer to work with a tried-and-tested formula. It can also serve as a good learning experience for first-time entrepreneurs.

That being said, before you invest in a franchise, here are the most common costs that come with a franchising business:

• Franchise fee - This refers to the one-time startup cost that comes with using the brand and business. The cost varies between franchises, and it covers a range of inclusions and benefits to the franchisee. Seminars and training on the organization and business strategy, which can include marketing and operations management, are often part of the franchise fee.
• Royalties - This refers to the cost that a franchisee pays to the franchisor for using the brand’s trademark. The formula or computation differs across businesses, but it’s about 5 to 7% of sales, on top of a weekly, monthly, or quarterly flat rate.
• Marketing fee - This refers to the cost of the franchisor’s advertising efforts. The marketing fee levels out at 2 to 5% of sales on top of a fixed monthly rate.
• Licensing fee - This refers to the cost that a franchisor requires to operate the business. It allows the franchisee to access products, materials, and tech crucial for running the business. Some franchises have this built into the royalties, while others have a separate licensing fee.
• Miscellaneous costs - This can cover other costs to get the ball rolling on your franchise business, such as possible travel expenses for attending conventions and discovery days. Some franchising businesses also include location-based costs, like leasing a building or construction. These involve expenses by way of legal paperwork and logistics. Other operational expenses, like sourcing raw materials for products or purchasing equipment, can also fall under miscellaneous costs.

Some businesses bundle these costs together, making it seem like the sum price of franchising.

The types of franchising businesses

Now that you know the different costs associated with franchising, here are the three types of franchising businesses:

• Product franchising - Also known as trade name franchising, this is the business of selling or distributing a product through the franchisor’s trademarked brand. As an example, a general retail store can be authorized to sell different soft drink brands, even if these brands are direct competitors.
• Manufacturing franchising – This is common in industries such as food and beverage, clothing, and automobiles. Apart from distribution, this type of franchising business enables the franchisee to also produce the goods.
• Business format franchising – This gives a franchisee the rights to access and implement the business model of a franchise, meaning a franchisee can own an established business and run it independently within the period specified in the FA, having full access to the system and methodology behind the business. A food cart business is an example of a popular franchise business in the Philippines.

Depending on your preferences, available bandwidth, capital investment, and awareness of franchising costs, you can narrow down your options to the type of franchising business that best suits your current financial goals.

Applying for a franchise business

Pushing through with your business plans to franchise in the Philippines can be straightforward. Here’s a list of the requirements and step-by-step procedure that you should accomplish for your application.

Franchising application requirements

You can seek out the specific franchise application requirements from the franchisor, but the most common documents needed include:

• A letter of intent
• Accomplished franchise application form
• Valid government identification
• Resumé or CV of the applying franchisee
• Site of the business, which can include details and photographs

Franchise application process

Here are the steps in the application process:

1. Submit the franchise application documents to the franchisor.
2. Schedule a series of meetings with a manager or representative from the franchisor.
3. For some businesses, a site inspection is required.
4. Upon evaluation and approval of a franchising application, the franchisee will be given a copy of the FA and contract for review.
5. If all the terms and conditions are agreeable to both parties, the franchisee can proceed with the signing of the FA.

If you want to pursue a franchising business, then it will also work to your advantage if you can partner up with a trusted provider of business loans.

With Metrobank’s personal loans and business loans, you can find the financial support you need to fund your franchising business, whether it’s to jumpstart your pre-operating capital, purchase manufacturing and processing equipment, or get on with store construction.

Grow your financial capability with Metrobank today.