Two ways to start a business in the Philippines: build a startup brand or start a franchise business.
Franchising, as the second option, is an all-time high opportunity for many aspiring entrepreneurs in the Philippines, with projected revenue growth rates of 10% to 13% in the next five years.
In this guide, I’ll explain the realities, pros and cons, costs, and steps for starting a franchise business for franchisees.
Pros of Franchising
Let’s look at the upside of franchising a business.
First, it offers a proven profitable system. Compared to starting a business from scratch (a startup brand of your own), where you’ll take the entire burden of making it fly, franchising gives you significant success at the start.
Several business studies show that only one out of ten businesses succeed in the first year of operations. This benefits you as a franchisee, given that you can bank on the success rate of a franchising company.
A tried-and-tested operational system eliminates the guesswork of creating a product, knowing how to do customer service, and tracking product inventories. You can rely on an existing process to ensure you deliver high-quality products, removing high friction if you’re a beginner in the industry.
Another advantage of franchising is brand name recall. Strong branding attracts customers who already trust the franchise. It reduces the effort of franchise owners to build a reputation and ensures a steady flow of new and repeat customers as soon as the store opens.
Lastly, franchising’s overlooked advantage is the comprehensive support franchisors can offer their franchisees. These include employee training, mentorship, and ongoing advice and consulting, which equip the franchisee with the knowledge and skills to run their business effectively.
The support covers everything from marketing, operations, HR, finance, and other essential facets of the business.
For instance, our coffee shop franchising at Hills and Valleys Coffee includes everything you need to start your own business.
Cons of Franchising
Like any other option in starting a business, franchising also has disadvantages.
Franchisee fees can be substantial, particularly if you want one from a reputable franchisor. These fees exclude other charges such as royalties, advertising fees, and other recurring expenses. Depending on the franchisor, the monthly amount you pay consists of operational costs for the franchisor to advertise your stores better and conduct store audits to ensure product quality.
You’ll also find yourself strictly following the franchisor’s business model, which means your ability to earn more income highly depends on the next moves of the franchising company. You cannot add new products outside your menu unless the franchisor approves.
Realities of Franchising
One of the best things we’ve done as franchisors is setting and managing expectations with our franchisees. As soon as we talk to them before contract signing, we explain the realities of franchising and what to expect from running a business, especially if they are first-time business owners.
Here are some key factors to consider in franchising.
Location, Location, Location
I can’t stress enough how important location is in a franchise business. Unless you’re doing business online, finding a prime location for your brick-and-mortar store helps you succeed in the first half of the battle.
Most franchise businesses fail not because of the lack of processes or poor product quality but because they chose the wrong location for their store.
Franchising is Not Passive Income
While you’ll be earning money from your business, running a franchise is an active income where you must be hands-on as a franchisee. Do not entirely rely on all the work of your franchisor, as they will only be guiding you toward achieving your business goals.
You should be wholly concerned about every challenge and issue that may arise as you run your franchise. Be hands-on in managing operations, ensuring your staff adheres to protocol rules, and, significantly, ensuring the quality of products based on business processes.
Ensure Collaboration with Franchisor
You should maintain a good working relationship with their franchisor. Treat them like your business partners to create harmony in achieving your business objectives.
Collaboration in franchising requires that franchises attend training sessions, participate in store audits, suggest areas for improvement in marketing campaigns, and provide regular performance updates. These measures can help drive sustainable growth for your franchise.
You can check out these useful guides on why franchising is a smart business solution and why coffee shop is a good business.
How Much Does It Cost to Start a Franchise Business?
Short answer: Starting a franchise in the Philippines can cost as little as Php 300,000 to Php 5 million.
Long answer: Starting a franchise in the Philippines depends on the brand, industry, and location. Entry-level franchises start at around Php 495,000, while mid-tier franchises range from Php 1 million to Php 5 million.
Here’s a breakdown of typical expenses:
- Franchise Fee
This one-time payment grants you the right to operate under the franchisor’s brand and system. Fees vary depending on the franchise but generally include initial training and support. - Equipment and Inventory
Franchisors usually include essential equipment and initial stock in the franchise package. In best franchise packages, you’ll find them giving one month’s worth of free supplies like what we have at Hills and Valleys Coffee Franchising - Royalty and Advertising Fees
Some franchisors require monthly royalty payments, often calculated as a percentage of gross sales. Advertising fees may also be required to support nationwide marketing campaigns. - Miscellaneous Costs
These include rental deposits, renovations, and permits. Setting aside 20% to 30% of your budget as a contingency fund for unforeseen expenses and as an allowance for the first two to three months of operations is advisable.
How to Start a Franchise Business in the Philippines (For Franchisees)
Step 1: Do Your Research
Like any business venture and investment, you must thoroughly research. Before committing to a franchise, widen your options by finding franchise packages in industries you’re passionate about or have experience with.
You may want to check out this list of best food franchises in the Philippines.
This would also help you learn more about the business, as you already have some interest in the industry, which is a significant factor in growing your franchise.
You can also research consumer behavior and market trends in your chosen industry to evaluate market demand. The more demand for your desired product/service, the higher the likelihood of achieving franchise success.
List down all potential franchisors or franchising companies.
Quick plug: consider best coffee shop franchises as your option.
Check how many franchise stores they’ve established in their franchise journey. See clients’ testimonials and online reviews. You may even visit existing franchise locations and speak directly with current franchises to gauge franchisor support and satisfaction.
The key here is to establish confidence and information on what franchise packages you’ll potentially want to purchase.
By doing more research, you can avoid the risks of investing in something you don’t know.
Step 2: Create a List of Target Franchisors
You may have done it earlier, but do more due diligence to find reputable ones.
To meet more target franchisors, you can attend franchise expos to meet them personally and compare their offerings in one place. The Philippine Franchise Association (PFA) and Franchise Asia Philippines conduct franchise expos annually.
Of course, it requires a ticket to access, but seeing the exact available franchise options and making a better decision is worthwhile.
You can also visit forums and online communities and ask for reputable franchisees in your chosen industry. Be on the lookout for unbiased recommendations. You can easily discern if someone is hyping the franchise – as if they have been paid to review it. Be cautious when checking online reviews.
Step 3: Think of Possible Locations
As mentioned earlier, choosing the right location wins half the battle in your industry.
You can find a location where you want your franchise to be set up. If you don’t have one yet, you can ask your preferred franchisors if they can assist you with looking for a possible location.
Generally, it is the franchisee’s responsibility to find their preferred franchise location. However, it is best to do this beforehand, as the franchisor will ask for it.
Pro Tip: Choose a location with mid to high foot traffic.
Here are some examples of locations of high-traffic areas
- Near or inside office buildings (to target professionals)
- Near schools or colleges
- Near office spaces or government offices.
- Near marketplaces
- Transport hubs
Some would opt-in to rent inside malls but consider the cost associated with it. For instance, one popular mall in the Philippines charges either a fixed monthly rental space or a percentage of your gross monthly sales (whichever is higher). Knowing this helps you be prepared for the monthly overhead cost before making a choice.
Another pro tip is to check the locations of your target franchisee and see if the area (or city) you’re in is still available. Many (if not all) franchisors have exclusive territory agreements, so confirm if your desired location is available.
If someone has already located their franchise store in Lower Bicutan, you can’t have the same store set up 5 to 10 km near it.
Step 4: Inquire About Franchise Packages
You can only learn so much by reading online reviews and visiting the website. The best way to collect more information about franchise packages is to set up a meeting (virtual or face-to-face) to get full information and ask questions about franchise options.
Most franchisors opt for meetings to explain their offerings clearly. Maximize those free consultations or meetings to ask questions and gather details.
Most of what you should be asking falls in any of the following:
- Franchise fees and inclusions
- Monthly royalties and additional charges
- Marketing and operational support
- Potential return on investment (ROI)
There’s no hurt in asking questions, so be sure to have them ready. Here are a few examples of questions to ask franchisors:
- Is my chosen location or city available for the franchise?
- How long has the company been in business?
- How many franchises are operational, and how successful are they? How many have renewed their franchise contracts?
- What is the ongoing support, and what does it look like in real life
- Are there any hidden fees? Or is it just royalties?
- Will you give a discount for the contract renewal once we decide to renew?
- Will there be a change in franchise fees?
- Who will be our contact person for the supply chain? Will there be account managers?
- How long does it take to open the store as soon as we sign the franchise contract?
- Can I co-sign a contract with someone else (i.e., my spouse)?
There are a couple more questions at the top and bottom of this set, but that’s a good place to start to get more details on each franchise package.
Once you’re into the details of choosing your preferred franchise, the next step is:
Step 5: Choose the Best Franchise That Fits You
Trim down your options to two or three franchisors. Narrow even more to just one based on the following factors:
- Package Inclusions: Compare equipment, training, and marketing support across franchises. Which franchise program is giving you more benefits as a franchisee?
- Budget and Resources: Ensure the franchise fits within your financial capacity, including allowances for operational expenses. It is best to set a budget before doing your research.
- Cultural Fit: How’s your conversation with the franchisor? When you start working with them, can you sense or discern that you have a good relationship with the franchisor? Remember this franchisor-franchisee partnership will significantly impact your success.
Step 6: Review the Franchise Agreement Carefully
Once you decide to become a franchisor and apply, you’ll move on to the next step: signing the franchise agreement.
A franchise agreement is a legally binding contract outlining the terms and conditions of the franchise relationship.
Key components to review in this contract include:
- Duration and renewal terms
- Franchise territory exclusivity
- Fees and payment schedules
- Grounds for termination
Consider consulting a lawyer, if you wish to, to ensure you fully understand the agreement before signing. Conversely, you can ask questions to clarify certain terms of the contract.
Prepare your franchise fees (or payment) as soon as you sign the contract. Most franchisors will ask for full payment before the following initiative for franchising.
Step 7: Fully Support The Store Opening
Remember that franchising is not a one-way effort solely for the franchisor. You must work closely with the franchising team to set up and operate the store.
Consistent collaboration is key to succeeding in the franchise business, from interior design and construction to hiring and training your staff.
Seize the Opportunity: Build Your Franchise Success
Franchising offers an excellent opportunity for aspiring entrepreneurs to start a business with reduced risks.
By choosing the right franchise, understanding the costs and agreements, and leveraging the franchisor’s support, franchisees can build a successful and sustainable business in the Philippines.
