All About Franchising 20121

ALL ABOUT FRANCHI SI NG 2012
BY RUDOLF A. KOTI K
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LEARN EVERYTHING YOU EVER WANTED TO KNOW ABOUT FRANCHISING.
WRITTEN BY A MULTI-AWARDED EXPERT WITH MORE THAN 30 YEARS OF
FRANCHISE MANAGEMENT EXPERIENCE IN 3 CONTINENTS.

BY RUDOLF A. KOTIK

BY RUDOLF A. KOTI K
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RK FRANCHISE CONSULTANCY
G/F MINNESOTA MANSION
267 ERMIN GARCIA STREET, CUBAO
1109 QUEZON CITY
TEL. / FAX (02) 912-2946, 912-2973, 911-1966
EMAIL: rk@rkfranchise.com
VISMIN OFFICE:
UNIT 11 ST. PATRICK SQUARE
DON RAMON ABOITIZ STREET
6000 CEBU CITY
TEL./FAX (032) 253.5010, 254.0473
EMAIL: rkcebu@gmail.com

WEBSITES:

Franchise Development: http://www.rkfranchise.com

Franchise Webportal: http://www.franchise.ph
FranchisingPH Magazine:

http://www.franchising.ph

FIFA Franchise Association: http://www.fifa.ph

Cebu Franchise Expo: http://www.cebufranchise.com

Mindanao Franchise Expo: http://www.mindanaofranchise.com

Franchise Schedules: http://www.filfranchise.com

BY RUDOLF A. KOTI K
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Content
PAGE

What is Franchising 5
History of Franchising 8
Franchising 101 10
What does a Franchise provide 26
Franchising Questions 33
Benefits of buying a Franchise 40
How to select a Franchise 44
Defining Franchising 47
Advantages and Demands 50
Mistakes by Franchise Buyers 58
Area and Multiple Units 60
Buying a Master Franchise 64
Franchising your business 71
Fees 83
Franchise Legal Requirements 86
Franchise Relations 89
DTI Bureau Order 10-24 regulating Franchising 93
The Future of Franchising 98
RK Franchise Consultancy 100
FIFA Filipino International Franchise Association 106

All rights reserved. No part of this publication may be reproduced
without the written permission of the copyright owner.

BY RUDOLF A. KOTI K
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ABOUT THE AUTHOR

RUDOLF A. KOTIK

Born in Vienna, Austria, a graduate of HRM and Marketing. Got into
Franchising 1978 by joining the Franchise Division of McDonald's Europe
and stayed with the fast food giant for 6 years, prior to joining a Hotel
franchise chain.

Developed in the USA Franchises for an International Franchise
Consultancy prior to settling in the Philippines. From 1995 to 1998 he
operated RAK Franchise Consultancy in Cebu and transferred 1999 to
Manila to open RK Franchise Consultancy, Inc. with Company offices in
Quezon City and Cebu City, and seasoned Franchise Agents in Tacloban
City, Butuan City, General Santos City and Zamboanga City, as well as
two international representations in Vienna, Austria and in California, USA
to promote Philippine Franchises abroad.

BY RUDOLF A. KOTI K
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I .
WHAT I S FRANCHI SI NG

Franchising is the most successful business system in the world. Yet the
vast majority of people, including many who are involved in this segment
of free enterprise, don't have a true understanding of what franchising
really is.

Whenever you hear the word "franchise" you think of fast food restaurants
like "J ollibee" or "McDonald's", but there is more to franchising than the
two giants.

Franchising is simply a special type of licensing arrangement for the
distribution of services and products.

Franchisors allow another entity - the Franchisee - to use their business
system, trademarks and corporate identity for a certain period of time. It is
based on an interdependent relationship between the two parties. Both
must work as a team and accept responsibility and accountability for the
success of the system and business. In other words, it's like a marriage - it
should last forever or at least 5-10 years.

The job of the Franchisor is not to make a Franchisee successful, as the
Franchisee must take an active role in marketing the brand, working the
operating system, etc.
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Being part of the system does not guarantee for personal success. The
Franchisee has to work hard as well, enduring long hours and sacrifice
sometimes.

Franchisors must provide the best operating system possible and assist
Franchisees in getting efficient, effective and profitable by providing
support services throughout the relationship.

Business format franchises offer the Franchisee not only a logo and
trademark, but also a complete system of doing business. The word
"system" is the key concept to franchising.

A Franchisee receives assistance with site selection of the business,
personnel training, business set-up, advertising and product supply.

For that, the Franchisee pays at the start of his franchise an up-front
payment called the "franchise fee", and on-going "royalty" which enables
the Franchisor to provide more research and development, training, and
support for the entire business.

In a few words, the Franchisee purchases someone else's expertise,
experience and method of doing business and does not have to go
through the "labor pain" of a new start-up company.

The basics:
Franchising is a method of distributing goods and services
A Franchise is a privilege granted to an individual or a Corporation
A franchise is a legal agreement between two parties
The owner who agrees to grant the privilege is called the Franchisor
The individual or group to whom the privileges are granted by the
Franchisor are called the Franchisees
The system under which Franchisor and Franchisee operate is known
as Franchising.

Companies choose to grow by granting a license to others to sell their
product or service and this has advantages for Franchisees too: A
Franchisee does not have to come up with a new idea - the Franchisor
had it and tested it and continues working on new ones.

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If properly executed, franchising is a win-win situation. There are
significant advantages to Franchisor, Franchisee and the consumer. For a
prospective Franchisee, it represents an opportunity to own and operate a
business involving a proven concept, product, or business format with a
minimum of financial risk. For potential consumers, franchising provides a
way to receive goods and services in a reliable and predictable manner.

A Franchisee also benefits from consumer recognition of the Franchisors
Trademark and products.

The big advantage of franchising shows this statistic: 75% of all
independent owned businesses don't survive the first five years, in
franchising only 5% have the same faith.

BY RUDOLF A. KOTI K
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I I .
HI STORY OF FRANCHI SI NG

The word Franchise comes from the Old French meaning freedom or
privilege. In the middle ages of Europe, the local lord would grant rights to
hold markets or fairs. In essence, the monarch gave someone the right for
a certain type of activity. They were the first Franchisors - and did not
know it.

In 1851, Isaac Singer accepted fees from independent salesmen to
acquire territorial rights to sell his recently invented sewing Machine. The
Singer Company began granting distribution franchises and was the first
Company to write franchise contracts.

In the late 1880's Cities began giving franchises to newly established
electricity companies. Around the turn of the Century oil companies and
automobile manufacturer began to grant rights to sell their new inventions.

White Castle was the first fast food hamburger franchise chain in America,
opening 1921 and sold since then over 12 billion hamburgers.

A&W started franchising their root beer stands in 1921.

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Business format franchising, which is the dominant mode of franchising
today, started after the Second World War. In the 1950's all kind of
services and products started to franchise in the USA.

In 1955, a certain Ray Kroc came to the idea of franchising a then little
known fast food place named "McDonald's" - and in the meantime they
sold more than a 100 billion of hamburgers worldwide!

Many well-known restaurant franchises started during this time. Colonel
Harlan Sanders initiated his first KFC franchise, so did Dairy Queen and
Dunkin Donuts.

Franchising has powerfully transformed the entire perception of business
culture and practice. In the USA over a trillion $ in revenues is generated
by more than 5,000 Franchisors and their Franchisee yearly.

The "American Dream" is becoming a dynamic reality for hundreds of
thousands of additional entrepreneur around the world.

In the Philippines, where Business Format Franchising started in the
1970's (except A&W, who was earlier here), one of the first was again was
"McDo", who opened its first outlet in 1981.

To that time, a small chain of ice cream joints began selling burgers -
"J ollibee", which is today our number one Franchise Company in the
Country. The success of J ollibee is a mystery to the top guys of
McDonald's in Chicago, since they are the number one in fast food in
every Country they operate - except the Philippines.

Today, more than 1,100 Franchisors, 200+ foreign and 800+ local,
operate in the Country and the number keeps growing to the advantage
for the consumer - more competition, more choice, more bargains. Almost
all of them in the food business offer some kind of value meal
combinations. Some of them are exporting their Franchise System to other
Countries. As example, 25 of the more than 400 Franchisor clients of RK
Franchise Consultancy are already franchising in foreign Countries
throughout Asia, the Middle East, Europe and America.

BY RUDOLF A. KOTI K
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I I I .
FRANCHI SI NG 101

In a world in which business strategies and techniques are continually
improving, superior customer relations and outstanding supplier
relationships are critical. In many ways the franchise relationship is the
definitive expression of this principle.

A Franchisor and its Franchisees jointly contribute to a supply system for
products or services focused on the customer. They obligate themselves
to each other under an agreement and endeavor to establish a durable,
long-term relationship that will impact virtually every aspect of their
respective business and protect that supply system. Few other business
arrangements are so all encompassing. Unless a Franchisor and its
Franchisee deliver to each other what they have promised, the supply
system to the customer will be compromised.

The mutual commitment of the Franchisor and Franchisee to their network
and resulting consistently high level of customer approval of their products
or services easily recognize good franchise systems.

A Franchise Relationship must have an effective Structure

Franchising is a contractual relationship. The Franchisor and the
Franchisee each make commitments and agree to operate under certain
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constraints. In the aggregate, these commitments and constraints
constitute the structure of a franchise relationship. That structure must
protect the Franchisor and all Franchisees of the franchise network and
afford opportunity and security of the Franchisee. There are a number of
elements of the structure of a franchise relationship that are critical to its
effectiveness as the foundation for an expanding franchise network.

Control of products and services that Franchisees are permitted to
sell

Franchisors control the products and services that their Franchisees are
permitted to sell in order to control quality of the goods and services sold
by Franchisees. Limiting the scope of the franchised business to those
products and services that are within the scope of the Franchisors
expertise and to preserve a uniform image. It is common for Franchisors
to permit some Franchisee experimentation and variation because
Franchisees are an excellent source of innovation, regional variations may
be necessary and different customer bases may require variations in
product or service mix or different emphasis.

Control of operating assets, goods and services utilized and sold by
Franchisees

Franchisors controls the sources from which their Franchisees purchase
operating assets (equipment, fixtures, furnishings and signs) and goods
and services required to operate the franchised business for one or more
of four basic reasons:

to control the quality and uniformity of the goods and services sold
by the Franchisee,
to assure sources of high and uniform quality goods at prices that
are competitive with or lower than those available from other
sources,
to protect confidential information,
to be a profit center for Franchisor.

These are legitimate reasons for controlling the sources of supply utilized
by Franchisees, provided that the restrictions do not cause the costs
incurred by Franchisees to exceed what such costs would be for
BY RUDOLF A. KOTI K
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comparable products without such restrictions. Ideally, and in many
franchise networks, supply restrictions are part of supply programs that
lower costs to Franchisee.

As a general proposition, Franchisors should limit source restrictions to
those products and services that are important to the development and
operation of the franchised business and cannot be simply specified by
brand, model and/or grade.

A Franchisor also can derive revenue from supply programs. Franchisors
evaluate the total revenue produced by a franchised business from:
- Royalties and Continuation fees
- Advertising contributions or National Advertisement funds
- Sales of goods to the Franchisee
- Commissions paid by suppliers
Some Franchisors rely primarily on fee revenue and other Franchisors rely
primarily on the sale of goods to their Franchisees.

The aggregate revenue received from a franchised business must be
sufficient to support essential Franchisor services that maintain the
system, standards and keep the network competitive, and to produce a
profit for the Franchisor. The aggregate of the revenue a Franchisor
derives from a franchised business must allow the Franchisee to realize a
sufficient rate of return on its investment. Several franchised networks
have reduces or eliminated royalties and advertising contributions. Such
networks rely on sale of products to their Franchisees and the sale of
services at the Franchisees option. If Franchisees elect not to buy such
services, the networks competitiveness could be jeopardized.

When a Franchisor relies primarily on product sales to its Franchisees, its
revenue base may be less secure and competitors may target its
franchised network, but it is less dependent on monitoring its Franchisees
to insure proper royalty calculation and payment or may not charge any
royalties at all.

Control of the Franchisees business premises

Franchisors sometimes control the Franchisees business premises by
leasing or subleasing the premises to the Franchisee or requiring the
Franchisee to sign a collateral assignment to the Franchisor of the lease
BY RUDOLF A. KOTI K
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for his business premises. Control of the Franchisees business premises
gives the Franchisor more effective control of the Franchisee and his
business.

The premises continue to be part of the Franchisor's network even if the
Franchisee does not. However, such control increases the capital
requirements of the Franchisor or involves contingent liability and
administrative effort and cost, unless control is implemented by means of
collateral lease assignments.

This practice is common in the Philippines mostly with the 3 leading
Petroleum Companies only. In the USA, most franchise location are
leased by the Franchisor and sub-leased to the Franchisee. In the
Philippines Franchisee have to find their own location and sign up direct
lease agreements.

Another way to secure the location for the Franchisor in any eventuality is
to let Franchisee and Landlord sign a three party agreement called the
Agreement with Landlord, which secures the location for the Franchisor
in the event Franchisee defaults on Landlord or Franchisor. It is generally
difficult to secure consent to such assignments from malls and it may be
difficult to secure consent from any landlord without at least some
guaranty.

Mall chains such as SM even require Franchisor to sign a 3-party
agreement guaranteeing the payment of rent in the event Franchisee fails
to pay for it.

Grant of exclusive or protected territories

Franchisors grant exclusive or protected territories to their Franchisees to
facilitate sales of franchises and to motivate effective market development
by the Franchisee that, theoretically, will be more inclined to invest in the
development of his business if he has no competition of the same brand in
his area.

Many Franchisors have discovered that they made to large initial
estimates of the population required for a successful franchised business
(once their network trademark became more widely recognized) and that
large spaces between franchises only invited competitors. Large
BY RUDOLF A. KOTI K
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territories also may interfere with adjustment to changing markets and
inhibit the offering of additional franchises to productive Franchisees.

Structuring the franchise to enable the Franchisor to achieve greater
market penetration by granting limited territorial protection and reserving
rights to sell to some customers within the Franchisee's territory will tend
to result in more system expansion conflicts with existing Franchisees.

Control of the geographic area

The corollary of the exclusive or protected territory, a right granted to the
Franchisee, is a restriction on the area within which the Franchisee may
conduct his business.

If Franchisees have the ability to sell outside their immediate markets and
are able to market and sell in the territories of adjacent Franchisees,
restrictions on such marketing may be necessary to make exclusive or
protected territories meaningful.

Franchisors also impose such restrictions to force a Franchisee to fully
exploit his assigned territory and to maintain the quality of the product or
the service sold by the Franchisee.

Confining Franchisees to their specific markets can result in troublesome
enforcement problems for the Franchisor. The Franchisor will be expected
to enforce the restriction against the invading Franchisee and may have a
legal obligation to do so. The invading Franchisee may be highly
productive, have effectively penetrated his own market and invades the
territory of the adjacent Franchisee primarily because that territory has not
been effectively penetrated. Disciplining a productive Franchisee to aid a
lazy or ineffective Franchisee is not an enviable task. Some competition
among Franchisees may be beneficial to the network.

Exclusive relationship

Franchisors typically prohibit their franchises from having investments in
or performing services for a competitive business. This prohibition is
intended to protect confidential information, maintain the Franchisors
BY RUDOLF A. KOTI K
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revenue, prevent the use by competitors of the Franchisors know-how
and focus the Franchisees efforts on his franchised business.

Such prohibitions are sometimes limited to the Franchisees territory or a
larger territory, but frequently have no geographic limitation. Prohibited
competitive business may be defined broadly, including related types of
business. Such prohibitions are a deterrent to the Franchisee and a risk to
termination of his franchise if he does not comply. We call that the
COVENANCE clause in the Franchise Agreement.

Transfer of the franchise

Franchisors restrict transfers of their Franchisees in order to maintain
control over the persons who operate them. Such restrictions should apply
to the franchise agreement, ownership of Franchisee and the assets of the
Franchisees business.

Typically the Franchisor reserves the right to approve the transferee and
the terms of transfer. The right to approve the terms of transfer is
important to insure that the buyer of the Franchisees business does not
substantially overpay for it, or accept burdensome payment terms, which
could jeopardize his ability to operate the business in compliance with the
terms of the franchise.

Some franchise agreements merely provide that the Franchisor will not
unreasonably withhold approval of a transfer.

Others specify in considerable details the criteria for approval relating to
the proposed transferee and the terms of the transfer.

It is common for Franchisors to reserve a right of first refusal to buy the
Franchisees business on the same terms as are offered by a bona fide
purchaser.

Franchisors exercise this right to acquire franchised businesses as
company-owned outlets and, occasionally, in lieu of denying approval of a
proposed transfer when the Franchisor is unsure that it has sufficient
grounds to disapprove a prospective transferee.

BY RUDOLF A. KOTI K
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Expiration

Franchises are granted for a definite term, usually between 5 to 10 years
for local franchises and up to 99 years for master franchises and therefore
will expire at the end of such term.

Franchise agreement should deal with this significant element of the
franchise relationship, providing for the preconditions for the grant of a
successor and the terms on which it will be granted.

If a franchise is not renewed, the restrictions on the business activities of
the Franchisee and its owners and members of their immediate families
are an issue.

Some franchise agreements provide for a post-expiration covenant not to
compete. If the Franchisee is prohibited from operating the same type of
business in the same market under a different trademark subsequent to
expiration he will lose whatever going concern value his business has
apart from value of the expired franchise. Such value may consist of
location value and the personal goodwill of the Franchisee in his market.

A good Franchise Agreement contains a renewal provision, which gives
the Franchisee the right to renew if he followed the rules of Franchisor
during the original term of the Franchise Agreement and he may have to
pay a small renewal Fee upon renewal of the Franchise Agreement.

Some Franchisors reserve an option to buy the Franchisees business
upon termination or expiration of the franchise. The purchase price may
be determined by a formula or may be the fair market value of the
business, without any value attributed to the expired franchise.

A Franchisors Management Philosophy and Culture must be
consistent with the Franchise Relationship.

The management philosophy and culture of a Franchisor is manifest in a
variety of attitudes and interfaces between Franchisor's management
personnel and franchise owners. Though the franchise relationship is
governed by a contract, a contract cannot anticipate all contingencies or
problems. It is essential for a successful franchise relationship that mutual
BY RUDOLF A. KOTI K
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trust and respect develops between Franchisor and Franchisee to
supplement the contract.

Initially, management must develop criteria for identification of high
potential Franchisees and the patience to select qualified candidates.
Management must include good motivators with the commitment and
patience to develop and cultivate sound, durable and positive franchise
relationships.

Such franchise relationships require real two-way and regular
communications with Franchisees. A Franchisee must believe that his
opinion is respected and management must be sensitive and responsive
to Franchisee concerns and problems.

Management must have a flexible approach to Franchisee problems and
willingness to assist Franchisees in solving them. A franchise network
should have impartial internal dispute resolution procedures and genuine
efforts should always be made by the Franchisor to resolve disputes
amicably.

Franchise networks also need systems for obtaining, evaluating and
sharing ideas developed by Franchisees scope for creativity and decision-
making and permit some degree of innovation by Franchisees who, may
be the networks best source of ideas and productive innovation.

Management must have a commitment to Franchisee profitability and
equity growth and the creativity to maintain the value of the franchise. A
Franchisors management must sometimes be willing to sacrifice short-
term profitability of the Franchisor to ensure Franchisee success.

A Franchisor and its Franchisee each assume a responsibility to support a
network of business that operates under a common trade identity as the
performance of one reflects on all of the others.

In the most successful franchise networks, the Franchisor and the great
majority of the Franchisees do not view their responsibility and
commitment as limited by their contract. They think of it as being whatever
level of effort is required to assure that the network continues to be a
leader in its industry.

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A Franchisor must expand its network at a manageable rate

Initially, a Franchisor must determine the markets in which the franchised
business is most likely to be established successfully. These usually will
be markets that meet of the following criteria and markets in which:

Franchisees can be effectively monitored,
Franchisees can be effectively supported,
Which good sites are available at affordable costs,
Areas that are not saturated with competitive business,
One or more large competitor does not dominate that area,
In which suppliers can effectively and economically deliver
essential products and materials,
In which the network trademark is recognized.

It is generally advisable to concentrate expansion in one or a few markets
where critical mass can be achieved quickly in order that the network
have in such markets effective advertising, support and assistance and
effective monitoring of Franchisee performance. A Franchisors ability to
expand is limited by its financial, management, supplier and field service
resources.
Franchisors who fail to understand the limitations on their ability to
effectively expand are more likely to fail in improvidently selected
expansion markets.

In mature franchise systems, decisions by the Franchisor to establish
additional outlets in proximity to existing Franchisees is seen by those
Franchisees as encroachment on their business.

Franchisees resent and resist such perceived encroachment and the
Franchisor is confronted with a choice between fully penetrating the
market and preempting competition, at the cost of impairing existing
relationships, and accepting a lower level of market development.

Encroachment problems also arise when a Franchisor attempts to
penetrate franchised markets through nontraditional outlets or distribution
channels in department, grocery, convenience or general merchandise
stores, on school campuses, through mobile carts and kiosk facilities and
in combination or dual branding arrangements.

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Achieving the optimal balance between effective market penetration and
good franchise relationships is difficult. Even the best-managed franchise
networks have difficulty resolving the problem of balancing the imperatives
of network expansion and competition with perceived interests of existing
Franchisees.

A Franchisor must develop and implement effective Systems to
secure high quality and consistent operations at Franchised Outlets

A Franchisor generally has less control over franchised outlets than it
would have over company-owned outlets. Maintenance of high and
relatively uniform standards throughout a network is of significant value to
those Franchisees that voluntarily maintain system standards and
perceive system standard as a valuable element of their franchise.

If a Franchisor fails to establish and maintain system standards, its
competitive position and the value of its franchise will decline. The most
productive and successful Franchisees may break away and the ability of
the Franchisor to sell franchises and to expand will be impaired.

The franchise relationship can be inflexible. Franchisees may resist
changes needed to adapt their businesses to changing markets by
upgrading their business facilities, changing the products/service mix,
modifying operating procedures, adopting different marketing strategies
and modifying the standards at company-operated outlets.

A Franchisor must implement policies, systems and procedures that help
maintain standards by rewarding compliance and enforcing system
standards where positive motivation proves to be insufficient. Many
Franchisors make effective use of peer pressure by other Franchisees to
achieve compliance with system standards.

Inspection reports should be reviewed with Franchisees and realistic
timetables should be determined and agreed upon for correcting
appearance and operating deficiencies. Follow-up inspections should be
timely conducted and a Franchisor should be prepared to offer assistance
to a Franchisee who is making a bona fide attempt to bring the
appearance and operation of his business into compliance with system
standards.

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The tension between a Franchisors need to control the appearance and
operation of the Franchisees business and the heavily promoted
independence of the Franchisee is not always satisfactory resolved.
Independent business ownership is promoted as a positive aspect of the
franchise relationship, but the requirements of quality control and uniform
image impose limits on such independence.

If a Franchisor fails to secure voluntary compliance from the great majority
of its Franchisees, it faces potentially difficult and costly enforcement
obligations. Longstanding neglect of system standards can results in loss
of ability to effectively implement those standards.

Non-complying Franchisees may damage the reputation of a franchised
network. Termination of franchise relationships can be difficult and
expensive. In some instances, a Franchisor may have to buy a non-
complying outlet to achieve a quick end to substandard appearance and
operations.

Maintain the Value of a Franchise

The benefits and services furnished by a Franchisor must have continuing
value to Franchisees relative to the cost of the franchise. Franchisor faces
several obstacles in achieving a general perception among its
Franchisees that the value of the services furnished by the Franchisor, are
equal to the fees they pay. Fees payable to a Franchisor typically increase
with increases in franchise revenue.

The scope and frequency of the services furnished to maturing
Franchisees may remain level or decrease and Franchisees may perceive
a declining need for and value of the services furnished by their
Franchisor.

This problem can be compounded by the tension inherent in a fee based
on gross revenues. The Franchisors interest is perceived to be to
maximize profits.

Services designed to increase sales may not be perceived by Franchisees
as likely to increase profits, especially when the sales enhancement
program involves a capital investment by the Franchisee or higher
operating costs.
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Even a high level of benefits and services will not always overcome
disaffection of some Franchisees with the franchise network. Over time,
some Franchisees are likely to lose interest in the franchised business or
be satisfied with a low level of market penetration.

The profits of a franchised business may be invested in other businesses,
leaving the franchised business with insufficient capital, and the attention
of a Franchisee may be diverted to other business interests.

Though no level of service or benefit may entirely prevent such problems,
the Franchisor that fails to maintain valuable services and benefits will
encounter Franchisee disaffection including breakaway Franchisees on a
greater scale.

A franchise network is at some risk when it loses an effective Franchisee.
Each Franchisee is a potential competitor when the relationship ends. The
Franchisees know the Franchisors business.

It is difficult and expensive to enforce covenants not to compete.
Confidential information of the franchise network are difficult to protect and
vulnerable to disclosure and use by competitors.

Dispute Resolution

A franchise relationship has high potential for disputes. A Franchisor has
business relationships with sources, in some networks hundreds of
Franchisees of a network entered into their relationships with the
Franchisor at different times and with differing expectations and goals.

The Franchisor must operate its business for the benefit of its owners and
its Franchisees and steer its network in what it determines to be the right
direction.

Some Franchisees are likely to disagree with the balance the Franchisor
chooses between its owners and its Franchisees or with the direction that
the Franchisor charts for the network.

Therefore, it is essential that a franchise network develop effective dispute
resolution procedures may include any combination; an ombudsman;
internal dispute resolution procedures involving participation by neutral
BY RUDOLF A. KOTI K
22
Franchisees and members of the Franchisors management; and third
party, non-binding mediation.

These are all non-binding methods used to resolve a dispute without
resort to some form of binding dispute resolution like litigation or
arbitration.

Non-binding dispute resolution methods are generally effective in
resolving disputes, but will not always produce a mutually satisfactory
resolution.

A Franchisor should consider arbitration as the method of binding dispute
resolution instead of relying on litigation. Though arbitration is not without
problems and costs, it is, on balance, a faster and less costly method than
litigation of resolving a dispute that cannot be otherwise resolved. Cases
in Philippine Courts can easily take five years or longer.

The accelerated resolution and lower cost of arbitrated dispute results
from the elimination of most discoveries and various techniques commonly
used in litigation to narrow the issues to be resolved. Cost is further
reduced and a final result achieved more quickly because an arbitrators
decision may only be appealed in limited circumstances.

However, inability to narrow the issues in dispute and learn by pretrial
discovery the other sides theories and factual support, and the limited
scope for appeal of an arbitrators decision, is viewed by some as a
significant disadvantage of arbitration.

Nevertheless, if a franchised networks formally decided disputes are
projected over an extended period, and assuming that the Franchisors
management has the good sense to informally resolve disputes in which
the Franchisees claims or position is reasonable or the facts do not
strongly support the Franchisors claims or position, arbitration is likely to
prove an effective dispute resolution method from the respective of cost
and minimizing the strain of disputes on the franchise relationships.

To assist Franchisors or Franchisees in disputes, FIFA Filipino
International Franchise Association offers arbitration services at very
affordable rate.

BY RUDOLF A. KOTI K
23
The 4 P of Product Marketing

Four elements play a role in a customers decision to buy a product: the
product itself, the price of the product, the place and the promotion of the
product.

Product:
What is the physical product?
What additional features are needed?
What are the functions or uses of the product?
What services need to be provided?
Does the customer expect guarantees or warranties?
How should the product be packaged for shipment?
How should it be packaged for the consumer?
What images should the product project?
What brand name should be used?

Price:
What price is needed to make a profit?
What price will customer be willing to pay?
Who determines the price customers will pay?
Should discounts and allowances be provided?
Should coupons, rebates, markdowns or sales be used?
Should credit be extended to customers?
How should the business respond to competitors prices?

Place:
How will the product reach the customer?
How will products be handled, stored, displayed and controlled?
How will orders be processed?
Who will be responsible for products that are damaged or not sold?
What kind of traffic pattern fit the buying patterns of target customers?

BY RUDOLF A. KOTI K
24
Promotion:

What information do customers need?
Should promotions be informational or persuasive, or merely reminder
messages?
Do all customers need the same information?
What combination of advertising, personal selling, sales promotion,
and publicity is needed?
Will mass or individual promotion be most effective?
What media should be used?
How often must information be communicated to franchisees and
customers?

Finding and developing good employees

Some Franchisors do offer some assistance in recruiting employees, at
least you find job descriptions in the Operations Manual, however in most
cases the Franchisee has to hire his own employees, and Franchisor
provides initial training for them.

As a rule, the Franchisor expects you to bring appropriate human resource
skills to the business along with your business management skills.

If you need a lot of semi-skilled or unskilled employees, a Temporary
Employment Agency can be of help providing you with the employees,
then you need to hire directly only the key personnel, who shall be
especially good trained so they can help also in training the people
provided by the agency.

In the job description section of the Operations Manual shall be listed the
knowledge an applicant shall have, together with the interpersonal skills
required.

Once you select the employees, a detailed interview is necessary to
determine weather the applicant possesses those attributes you are
looking for. Use a mix of close-ended and open-ended questions. A close-
ended question can be answered with yes or no while in a open ended
question the applicant have to give the details.
BY RUDOLF A. KOTI K
25
Finding the right employees is just the beginning. Your long-term success
will depend on your ability to manage and motivate your staff.

The type of work your business offers will also impact how you manage
and motivate employees. In a restaurant or service business most
employees will not be in career positions. You may often be the first
employment experience for many of your employees. Having complete,
detailed instructions and clear, straightforward rules will be important.

The most important part of managing your employees is to remember you
are the leader. The buck stops with you. J ust as the coach is a role model
for players on the team, you are the role model for how things get done in
your business. You set the example for how things get done how the
business operates.

BY RUDOLF A. KOTI K
26

I V.
WHAT DOES A FRANCHI SE
PROVI DE

The advantages of a franchise over an independent business are aplenty.
A Franchisor must furnish valuable services to its Franchisees.

Business Name

Franchisee will have his own corporate name as Incorporation or
individual business owner but the franchised business operates under the
Trade Name of the Franchisor.

Market Studies

Franchisors should knows where franchised businesses should be
opened, which locations are good for a Franchisee and which not, which
may be determined generally by location, most important with food
franchises or other aspects, like purchase power of a certain area, etc.

BY RUDOLF A. KOTI K
27
System Standards

Sensible and complete specifications, standards and operating
procedures, the so-called system standards, effectively communicated to
Franchisees and readily understandable.

Operational Manual

The "How To" documentation of the business operation and the
implementation of the system.

Proprietary Marks

The right to use the logos, signage, slogans and Trade Marks of
Franchisor. It is not enough that a Franchisor has a DTI Business Name
registration or a SEC registration, he has to obtain a Trademark from the
Intellectual Property Office, which is located at Sen. Gil Puyat Avenue in
Makati.

Experience

Transfer of business experience is transferred from Franchisor to
Franchisee

Wisdom of Franchisor

The Franchisor went through the "labor pain" of opening the business by
himself some time ago. For a new Franchisee that trial and error period is
eliminated.

Training

Effective initial training is critical to achieve positive Franchisee attitudes
regarding system standards, the operation, the Franchisor and the value
of the franchise and depending on the business can take from 5 days up
to 6 month.
BY RUDOLF A. KOTI K
28
Inadequate training is a common cause of poor Franchisee performance.
Good Franchisors provide ongoing training on a regular basis.
The Franchisor is able to explain the concept, philosophy and
operation of the Franchise to the Franchisee
The Franchisee gets hands-on experience in operation and
management
Indicates the capability or lack thereof of the Franchisee to
successfully operate the business of Franchisor
Motivates Franchisees to perform at their best level once they
understand all aspects of the franchise business
Increases satisfaction of the Franchisee as well as the employee
working for the franchised facility
Reduces complaints from consumers and employees
Helps maintain quality of products and services based on the
standards set by the Franchisor
Promotes adherence to sanitation standards in all functional areas of
the business
Reduces breakage and spoilage within the Franchised facility
Reduces number of accidents
Creates an identity for the Franchisee within the franchised system and
fosters development of Franchisee loyalty
Improves operational skills of the Franchisee and employees
Establishes the Franchisor and the Franchisee as a team rather than
two separate partners

Site Selection Assistance and Approval

Franchisors in the Philippine usually do not provide locations and
prospective Franchisees have to find them by themselves. However,
Franchisors will know where a franchised business shall be located within
a certain area and will inspect the site prior to the start of construction or
operation, if the location is suitable for the franchised business.

Franchisors will require Franchisee to conduct preliminary research on
potential sites. In most cases, property owners, real estate brokers or
shopping mall managers provide the demographics and other commercial
BY RUDOLF A. KOTI K
29
information pertaining to a potential site. Franchisee or his employees
might have to spend some time at a location to do traffic or pedestrian
count and to study flow of people and traffic.

Franchisors should approve only suitable locations, those locations that
they would approve also for Company owned outlets. Plenty of
Franchisors approve also not suited locations just for the sake of getting
the Franchise Fee from Franchise applicants.

Good Franchisors turn down up to 90% of location applications to make
sure the location is profitable for Franchisee.

How to evaluate a location:
Accessibility and traffic patterns: Is it easy to exit and enter into traffic?
Are difficult intersections, major road construction or other
impediments? What time of the day is traffic heavy? Where is the
traffic going? Are people shopping or merely commuting to
neighborhoods where they can purchase your product or service from
a more convenient store?
Zoning: does your municipality or City allow that kind of business at a
certain location?
Visibility: Is visibility important to the success of your business? If your
product is an impulse item or geared towards mass markets, then you
need to be where customers can see your business.
Hours of operation: Do the hour of operation match the needs of your
customer?
Parking layout: Determine how much parking you need and select a
location that offers it.
Public transportation: Extremely important if it is a product for the
masses that your outlet is in front of public transportation. Also if you
have a lot of employee in the Franchised business who have to
commute to work.
Neighborhood development: Is the neighborhood stable or declining?
What kind of subdivisions or living conditions are in the neighborhood
of the outlet?
Competing outlets: Are competing businesses located in the immediate
vicinity? If so, the good news is that your location is attractive; the bad
news is that youll have competition.
BY RUDOLF A. KOTI K
30
Size: Do you require space for selling, storage, production, or
maintenance of equipment? The larger the space the higher the rent,
electricity and maintenance. The Franchisor shall recommend or
require certain square meters as minimum space. Dont rent more than
you need.
Lease term: Look for a lease whose term matches your franchise
contract but can be renewed.
Utilities: Water supply, electricity, sewage, telephone lines play an
essential role in determining the suitability of a location.

Store lay out

Franchisors will provide lay out assistance and supervise the construction
of a new franchised store.

Interiors, color schemes and other identifiable marks of the Franchisor
have to be followed in putting up the business. The same goes with indoor
and outdoor signage, lightning and decoration.

The entire construction cost is at the expense of the Franchisee, and has
to be paid as due to either the Contractor or Franchisor, depending on the
arrangement.

Exclusive Territory

Most Franchisor will award new franchises with an exclusive Territory,
which depends on the kind of business can be a certain radius in meters
or a floor in a mall, a whole City or a whole province or City or several of
them as Area franchise or even a whole Country as Master franchise.

Procurement Programs

Franchisor will provide a listing of authorized suppliers for equipment's,
goods, materials and services.

BY RUDOLF A. KOTI K
31
Pre-opening Assistance

Franchisor assistance in hiring personnel for the Franchisee by giving the
guidelines for needed staffing and training them, and set-up of the
franchised outlet.

Grand Opening Assistance

Franchisor's management and staff assist new Franchisee upon grand
opening of the franchised outlet to operate it smoothly from day one
onwards. Franchisors representative will remain in the Franchised Facility
for a period of time as determined by Franchisor to assist Franchisee in
the initial operation phase.

Marketing Strategies

Franchisor may provide advertising and marketing programs to maximize
the advantage of the common trade identity of the network with nationwide
advertisements, radio and TV commercials, etc. through a National
Advertisement fund, to which each and every single Company outlet and
Franchised Facility have to pay a certain percentage of gross sales.

Franchisee will be required to spend a certain amount for the initial month
of operation, so called Grand Opening Marketing. Those amounts are
spent directly by the Franchisee and not collected by Franchisor.

Franchisees have to take their part in implementing the so-called LSM
(Local Store Marketing) within their territory.

If there are several Franchisees operating in a certain area, they might be
required to operate a Co-Operative Marketing Fund, wherein they
advertise the business as a group (e.g. billboards).

Effective Field Service

Operational support is needed by Franchisees for occasional questions
and problems. Knowledgeable and well-trained personnel with positive
attitudes and a willingness to help Franchisees are provided by
BY RUDOLF A. KOTI K
32
Franchisors. Franchisors shall also be available to Franchisee via phone,
email, fax or text for urgent problems arising from the operation of the
franchised business. Important is also that Franchisor and his
representative regularly visit the franchised outlets.

Research and Development

Businesses face tough competition and new products are constantly to be
tested and introduced in the market. The job is with the Franchisor in
development of new products and service, improvements of equipment's,
formats, operating efficiency and trying to beat competitors.

BY RUDOLF A. KOTI K
33

V.
FRANCHI SI NG QUESTI ONS

How does a franchise chain start?

Imagine a store owned by an individual with a particular concept. If the
business is successful, the owner may develop a second store and hire
employees for the day-to-day operation.

At that point, if the entrepreneur still wants to expand but prefers not to
own and operate additional stores, he/she may decide to franchise the
store name and business system to an independent business person - the
Franchisee.

In return, the Franchisor may ask for an initial fee and continuing royalty
payment based on a percentage of that Franchisee's sale. The business is
now franchised.

When I visit a store how can I know whether that store is owned by the
Franchisor or a Franchisee?

It's difficult to tell just by visiting the store. Many companies have stores
that are owned and operated by Franchisees but also have stores that are
company-operated.
BY RUDOLF A. KOTI K
34
It's entirely possible that of two stores with the same name, one may be
owned by a Franchisee and the other owned by the Franchisor Company.

In both cases, the products, services and quality should be identical.

How wide spread is franchising?

There are more than 10,000 Franchisors around the globe, and alone
1,100 in the Philippines, operating revenues of more then 100 Trillion
Pesos yearly worldwide.

Where does franchise sale comes from?

Most franchised sales are still by product and trade name franchise chains
- food, automobile services, general retail, courier services, real estate
brokerage, building services and improvements, and domestic, business
and maintenance services.

What is BUSINESS FORMAT FRANCHISING?

In business format franchising, the Franchisor prescribes for the
Franchisee a complete plan or format for managing and operating the
establishment, not just product, service and trademark.

The plan provides step-by-step procedures for every aspect of the
business and, anticipating most management problems, provides a
complete matrix for management decisions confronted by the Franchisee.

It comes with marketing strategy and plan, operating manual and
standards, quality control, research and development and a continuous
process of training, assistance and guidance. The Franchisee is required
to comply with the Franchisors guidelines pertaining to all aspects of the
business, including operating procedures, the quality of products and
services, and the physical appearance of the business facility.

BY RUDOLF A. KOTI K
35
What are the major growth sectors in " business format franchising" ?

As we become a more service oriented economy, as more women enter
the workforce, and as larger percentage of the population grows older,
growth areas in franchising are responding to these changes.

While it is important to consider industry growth before investing in a
franchise, it is more important to analyze an individual franchise
company's track record, keeping in mind that quick growth does not
always spell success. A franchise organization that grows too quickly
might not have a service team in place to support all of the units properly.

Overall, long range trends indicate a steady, solid growth in business
format franchising. Some will fall by the wayside, as is natural with any
business, but others may well be the "household name" franchise success
stories of tomorrow.

What kind of business to franchise?

Virtually every business form you can imagine lends itself to franchising.
The International Franchise Association (IFA) lists more than 60
categories to describe its members.

Is the look-alike characteristic of franchises a disadvantage? Don't
consumers want variety?

The increasingly mobile consumer has come to depend on and appreciate
the consistent quality of franchised products and services. Today, no
matter where they go, people expect and want the same quality, which is
why consumers so often shop at franchised establishments.

The ability to easily recognize an establishment from the outside
guarantees there will be no surprises or disappointments on the inside.

What kind of investment is necessary to buy a franchise?

Investment requirements differ tremendously. It all depends on the
industry and the type of business. Discuss this with the individual
BY RUDOLF A. KOTI K
36
companies or with RK Franchise Consultancy. Franchises might be
purchased for a starting price of 100,000 Pesos and range right up to 27
Million Pesos for a single unit store and anything from US$ 20,000 to US$
5 Million for a master franchise.

Would I make a successful Franchisee?

A successful Franchisee should be suited to the industry, which he or she
intends to join, suited to the particular Franchise Company and suited to
the franchise system generally. Important questions to ask you include:

Am I suited to the industry physically and be experienced, education,
learning capacity, temperament and financial ability?

What type of work is most appealing to me? For example, do I enjoy
working with food? Mechanical things? People? Property? Books?
Computers? Sporting Goods? Etc.

Am I prepared to work hard and take a financial risk?

How do I react to controls?

Do my advisers, family and friends think I am adaptable and trainable?

Am I a loner, resisting authority and restraints, or can I accept
guidance and directions happily?
How do I personally feel about the company's image, products and
services?

The right answers to these questions help determine your potential
success as a Franchisee.

How do you explain the success rate for franchised businesses?

The franchising system is designed to provide a pre-tested formula for
success, plus ongoing advice and training.

BY RUDOLF A. KOTI K
37
The unavoidable business mistakes have been worked out of the system
through experience.

Most independent businesses fail because of lack of management skills.

With a franchised business, your Franchisor should be eager to help you
overcome problems. Your hard work and the Franchisor's expertise spell a
long partnership.

No one can be 100% sure of success. Although the majority of franchise
owners are satisfied, successful business people - some do suffer
financial loss.

Regardless of earning claims made by Franchisors, recognize that
success or failure ultimately depends on you.

What are some of the drawbacks of owning a franchise?

In exchange for the security, training and marketing power of the franchise
trademark, you must be able and willing to give up some of your
independence.

If you are a person who likes to make most decision on your own or to
chart the course of your business alone, a franchise may not be right for
you.

As a Franchisee, you will be required to comply with the various controls
and procedures established by the Franchisor. Then too, all successful
businesses require a lot of dedication and plain hard work. You must be
prepared to make that commitment.

Are there special franchise advisers and consultants to assist?

Franchising is a mature sector, which over the years has developed quite
a number of consultants who specialize in advising to the sector, among
them yours truly who assist in transacting the purchase or to develop a
new franchise.

BY RUDOLF A. KOTI K
38
For a good understanding of what you are getting into, you need to make
full use of a range of expertise a Franchise Consultant is the right answer
or you may contact FIFA Filipino International Franchise Association or
the other two Franchise Associations.

Otherwise it's do-it-yourself, which is cheap - in every sense of the word
and can become expensive if done wrong and a Consultant has to be
called in to straighten out the mess.

What is the best advantage that franchising has over independent
businesses?

Franchisees are never alone, which is one of the best benefits that one
could hope for in this tough business world. On one hand they have the
Franchisor to support them and on the other they have Franchisees, which
are having parallel business experience.

Furthermore, as franchise matures, the brand name and trademark
becomes more valuable. So as Franchisees consolidate in the market
place they are actually adding value to the group as a whole.

Similarly, as a franchise grows in numbers, the multiplication of sites
creates a stronger market presence, which benefits all Franchisees.

Buying an existing Franchise Outlet

J ust like any business, existing Franchisee can sell in many Franchise
systems their franchised outlets if they no longer want to operate it. The
Franchise Agreement has provisions when, how and to whom a
Franchised Facility can be sold. However you can only purchase the
remaining term of the Franchise Agreement.

In purchasing an existing franchise, make sure there is an assumable
lease and the landlord will consent to the transfer.

BY RUDOLF A. KOTI K
39
Questions regarding to Franchisors obligations from a Franchise
Applicant

What is the total investment we are talking about, beside of Franchise
Fee, rental deposit and utility deposits, such as renovation,
equipments, initial investment in merchandise, grand opening
marketing, etc.
What products have to be purchased from Franchisor?
What kind of training do you provide? If so, when, where and for how
long?
Do we have to pay for the training? In most cases training fee is
included in the Franchise Fee except Lodging, transportation and
allowances for Trainees.
Are we entitled to continuous training throughout the term of the
Franchise Agreement?
Will you provide us an Operational Manual?
Will the Franchisor provide advertisement or does have any
advertisement schemes, such as National Advertisement Fund, Local
Store Marketing or Co-op advertisements?
What continuing service do you provide after starting the operation?
What are the terms for renewal and is there any renewal fee to be
paid?
Payment of initial franchise fee? Usually to be paid upon signing of the
Franchise agreement.
When do we pay royalties? Most franchise systems have monthly
royalty payments.
Shipment of goods, who pays for it?
Can I sell my franchise if I want to migrate or lost my interest in the
business?

BY RUDOLF A. KOTI K
40

VI .
BENEFI TS OF BUYI NG A
FRANCHI SE
Earn what you are worth

Thousand of franchise owner report they were handicapped in their
corporate careers by Company policies and Superiors that put a cap on
their earning. When you own your own Company, your efforts are
rewarded and your personal income shows it!

Build equity

Financial strength comes to those who succeed in running a business.
Approximately 95% of all millionaires in the Philippines own their own
business. If great wealth is one of your goals, entrepreneurship is the
answer.

Satisfaction of achievement

Much business owner report that seeing their actions turned into realty
without stagnating for month in committee meetings as so oft happens in
big companies is a major reward of owning their business.
BY RUDOLF A. KOTI K
41
Choose your own job description

When you're the owner, you can delegate certain aspects of the business
to others and create a job description that suits your personality, skills and
interests. Naturally, the industry you choose and the size of your operation
will affect your flexibility in this area.

Control your future

Business owners live the scripture "you reap what you sow". You can
manage your work schedule against family needs and recreation - if you're
willing to share some profits with additional employees.

Never transferred, laid off or fired

Major companies are notorious for relocating their employees and
downsizing their staff at the most inopportune times! When you run your
company, you'll decide when and where to operate.

Why a franchise?

There are many reasons why franchising is the best type of operation for
the majority of first time business owners. Most revolve around the
increased probability that the business will succeed and provide profits to
the owner in a shorter time frame than an independent business. This
allows the owner to address her/his personal goals both financially and
personally.

Lower costs than an existing business

When buying an existing Company, you often don't know what you are
buying or if the price is right or the existing business profitable. Starting a
franchise is almost always less expensive.

BY RUDOLF A. KOTI K
42
Less risk than an independent start-up

One spends up to 5 years as an apprentice in an industry before
considering owning a venture in that field. Buying a franchise eliminates
this need and puts you on the road to success quickly.

Gain advice on site selection, design, operation, capitalization and
marketing.

A good Franchisor provides instruction and support on all aspects of
running a business in its industry.

It's as though you are hired and trained to open a branch for a major
national company - except that you own the "branch"

Receive a proven profitable system for doing business

When you've had a chance to talk to other Franchisees, you'll recognize
how important it is to have a system to follow for your venture.

This plan is easily worth a few hundred of thousands of Pesos or more.

Benefit from quality research and development

Most small business owner are just too busy making money to research
the future trends in the industry and develop new products or services to
meet the needs of their customers. A Franchisor will always be searching
for ways to make its network more successful.

Access to trained support personnel

Your royalties and advertising fees provide regular improvements in the
Franchisor's systems and these are provided to you for implementation in
your venture.

BY RUDOLF A. KOTI K
43
Quicker start-up than independents

A proper plan outpaces an independents hit and miss operation almost
every time. Looking at just independents that succeed - you'll find that
franchises grow quicker, reach break-even sooner and succeed more
regularly than others in the same industry as depicted in the
accompanying chart.

Survey

A recent Gallup poll in the USA of 994 franchise owners produced the
following snap shots of the field: 94% consider their franchise successful.
75% said they'd "do it all again" and only 6% reported unhappiness with
their Franchisor.

The Philippine Franchise Association reports a 95% success rate.

Buyer Beware

More and more relatively unknown Franchisors with little or no know-how
about Franchising offer their business system as a Franchise. Make sure
these Franchisees are properly developed. Ask the Franchisor who
developed the Franchise for him. If they had a professional Franchise
Developer, it might be good to proceed, if they did the entire Franchise
work by themselves without professional help, you are bound to fail due to
the complexity Franchising has which only professionals can understand.

There are only three successful Franchise Developers in the Philippines in
business since 1995, with RK Franchise Consultancy having the largest
network and the most clients. Take a look at www.franchise.ph on
available franchises and www.franchising.ph for Franchise stories and
Franchise Advertisements.

Beware of SCAMS in Franchising. Insist on reading the Franchise
Agreement first, talk to Franchisees, do not pay the Franchise Fee prior to
getting a Contract, thats the first rule of the scammers, get the money and
thats it.

BY RUDOLF A. KOTI K
44

VI I .
HOW TO SELECT A FRANCHI SE

Since Franchising is the most successful method of doing business, we
shall look at how to select and choose the right franchise. Since all
franchises require money, the first and foremost consideration is which
franchise you can afford. At least P 200,000 can buy a small franchise
outlet.

Then think if the preference is a food or non-food franchise. If you venture
in the food business, it is not necessary you have any experience as
restaurateur, since you receive a full training from your Franchisor.

The more critical factor in a food-franchise is the location of the business,
as the accessibility to a great number of people as well as parking space
for dine-in clients is most important, unless it is for delivery only, but still
then parking is needed for take-out orders and your own delivery vehicles.

Your active role in the management of the food franchise is more
important than if you chose a non-food franchise. Most Franchisors
require hand on Franchisees and do not allow absentee owners.

Provided you have a certain amount to invest in a franchise, let's say 20
Million Pesos, to put this money into a local franchise or in a master
franchise.
BY RUDOLF A. KOTI K
45
The advantage of a unit franchise is you can concentrate on that specific
location, however, at the same time you are limited to that single outlet.

By a master franchise we speak about the grant given by a foreign
Franchisor to operate that trademark and system anywhere in the Country
and are not limited to one outlet only.

Since a master Franchisee is factually the Franchisor in the Philippines,
most likely can resell franchises to third parties. Some International Master
Franchises cost less than a single local franchise from a popular fast food
chain.

Non-food franchises are available in almost all business directions and
again, one may chose between being a single unit Franchisee or to get a
master franchise from a foreign Franchisor. Franchises with an excellent
future are those in the business-to-business segment, in the Internet or
education business, and specialty retailing.

Before purchasing any franchise, investigate the franchise first. Some
franchise fees are priced much too high, others don't offer any support,
and some give you a short contract period, which should be at least five
years.

There are also some Master Franchisees, which have a very high
development program in the master franchise agreement with their foreign
Franchisor and if they will not be able to fulfill this target, their unit
Franchisees future is in limbo.

If you buy a single unit franchise from a local master Franchisee, ask him
about his development program to find out, if the local Franchisee will be
able to retain his master franchise grant in the future.

A good franchise in the eye of a Franchisee is one with an ROI of less
than three years.

There are three professional franchise consultants in the Philippines,
which can help find the right franchise; one of them is yours truly. We
advise not only on the available franchises, but also to which franchise
type you fit most from your financial standing, background and interest.

BY RUDOLF A. KOTI K
46
In assessing a franchise opportunity, consider the Franchisor's financial
position, how thoroughly has the business been market tested here or
abroad, asses how well the system works in practice, are existing
Franchisees pleased with their business and does the business have
staying power or is it based on something which is temporarily
fashionable.

When finding the franchise of choice, visit as may units as possible and
talk to Franchisees and closely examine the franchise agreement, which is
always biased in favor of the Franchisor, that's just the way it is.

Local Franchisors usually charge a higher royalty fee compared to
international master franchises, which are limited to a maximum of 5% of
the gross revenue.

Ask the Franchisor upon proper application with them for a Copy of a
Franchise Disclosure Information, which every Franchisor has to provide
to applicants in accordance to DTI Bureau Order 10-24 series of 2010.

Pay the Franchise Fee upon signing of the Franchise Agreement only and
not earlier. Scammers want the money from you without signing any
contract. Scammers are mostly in the Cart and Kiosks businesses.

BY RUDOLF A. KOTI K
47

VI I I .
DEFI NI NG FRANCHI SI NG
Some companies are selling an opportunity to investors under the
misguided notion that because they dont charge a franchise fees that they
are not a franchise. These companies are business opportunities. Some
even boasts No franchise fees or royalties, -no territory or expansion
restrictions. Worse yet, they make unsubstantiated earnings claims.

These Companies also forget to mention what else they dont have: No
ongoing support or buying power for you, no credible image or identity of
company products or services, no consumer awareness building power,
no ongoing research and development for you, no protected territory for
you, no substantial demographic or geographic considerations studies for
you, no proven and documented marketing plan for you, and much more.

General, whether or not a business opportunity is a franchise, can be
summarized s follows:
If you sell a business opportunity to any person and you;
-Allow the buyer to use your company name or logo;
-Charge a fee to the buyer;
-Provide any significant assistance or maintain any significant control over
any part of the business;
-Train the buyer;
-Include him in the system of the business;
Certainly then it is a Franchise.
BY RUDOLF A. KOTI K
48
Franchising, under a business microscope, has more meanings. There are
two types of franchising: Product franchising, like Pepsi Cola or Toyota,
and, business format franchising, like McDonalds. Product franchising is
very big business, but it is not an investment consideration for all but a
very few.

The true fame of franchise investments has come as a result of business
format franchising, which, from this point forward I will be referring to as I
speak of franchising.

Retail franchises require retail space, a store, a building or an office,
service franchise generally do not. Customers come to retail locations to
purchase franchise products or services. Virtually any product or service
that is sold to the public can be purchased through a retail franchise store
or mobile franchise service.

A generic use of the word business opportunity may be applied to
describe a franchise, but generic or otherwise the definition of the word
franchise cannot be applied to describe a business opportunity.

There are success stories in non-franchised opportunities as well. The
limited non-franchise businesses that succeed are owned by types that I
have classified into just two groups. The first group consists of genius
inventors of excellent and unique products or services that hire first class
salesmen. The second group consists of extraordinary hard-working
people willing and able to do everything by themselves.

The word success has two basic meanings: one; satisfactory completion
of something, and two; the gaining of wealth and fame. People are
attracted to franchising primarily because of the published fail-safe of
franchising. They were not foolish enough to trade their savings and their
ego just to open their own business. The glowing reports of franchise
success, being in business for yourself, but not by yourself offers a chance
to financial success.

In contrast, there are many people who have the same objectives and
expectations of owning their own business, but shun franchising. This is
the group who takes a dim view of accepting, needing or wanting anyones
help to succeed. They are not familiar with the infrastructure of franchising
and they usually dont care to learn. They perceive franchise fees,
royalties, control and restrictions to be unreasonable, costly impositions.
BY RUDOLF A. KOTI K
49
According to them, they can and do succeed, by both meanings, totally on
their own without the benefits of franchising. They exist in extremely small
numbers, as noted in the high failure rate of non-franchising business.

Generally, the prospective, in his enthusiasm, has been open to the
glowing reports of franchise success as reported by the media. He sees
the advertising of hundreds of well-known franchises and assumes that all
of these costly promotions are free. These self-preconceived notions,
along with many other misinterpretations, often lead him to assume
amenities that simply do not exist even though they were never offered by
the Franchisor. And, these expectations are the root of the problem that
breeds bad feelings between a few Franchisors and Franchisees.
Ambitious reporters and attorneys who are unfamiliar with the franchise
selling process fuel the distorted allegations that evolve from this dilemma.

The real confusion arises when the franchise is not a real franchise but
actually a business opportunity. The business opportunity is often
mistaken for a franchise because the difference is not known or
understood.

Investors, who desire to be in business for themselves, usually perceive
themselves as entrepreneurs. No Franchisee is an entrepreneur, but most
fancy themselves as such. Entrepreneur is another word that needs
further illustration, particularly in the world of franchise investments.

Entrepreneurs engage in high-risk venture. Franchisees do not have these
high-risks because Franchisors have provided a fail-soft opportunity. But,
this cushion is a fail-soft against business failure, not a fail-safe.
Franchisors have no such business failure cushion. There are companies
that enter the franchise format to form a franchise system and fail.

But once a company has properly formed a franchise system, then all the
benefits of franchising fall into place, for the Company and the
Franchisees of the system. Important is the development of the Franchise
system by a competent Franchise Consultant. Franchisors which fail
usually did their Franchise system without professional development
assistance from a Consultant, sometimes to save money; in the end it cost
them dearly. The initial investment in a professional Franchise Developer
is easily recovered with the sale of some Franchises.

BY RUDOLF A. KOTI K
50

I X.
ADVANTAGES, DRAWBACKS AND
DEMANDS

FOR THE FRANCHISOR

Advantages

Franchising provides the Franchisors company with a package of
commercial and financial means:

An increased global financial capacity to support the commercial
network;

A reduced capacity to react for the competitors of:
-a most rapid conquest of the market
-the overall financial power of the economic coalition of the
network (buying capacity)
-the coverage of the territory with prime quality sites.

A trademark considerably valorized and easily identified and an
enhanced fidelity of the customers thanks to the concerted actions
in advertising at the regional and national levels.

Control of the distribution
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51
Business expansion as more people will be aware of the brand
name, making it more valuable

Buying power if the chain purchases centralized

Operational convenience since the day-to-day operation is
delegated to Franchisee

Franchisee contribute valuable information on the operation, on
development of new products and pricing

Motivation and Cooperation by good Franchisee can be very
inspiring to Franchisors doing better and growing bigger

Drawbacks

Financial demands

The array of means and steps to take when a Franchisor exceeds
the immediate needs of this single company. From the very
beginning, the Franchisor must take the demands of his network
into account before he has even launched it, when launching it and
when the network has reached its maturity stage.

Strategic demands: The Franchisor ought to develop a strategy of
differentiation towards his competitors.

The Franchisor gives up the exploitation of a part of the territory to
the Franchisee(s).

Lack of Freedom: Franchisors have to consider now in all their
decision the operation of franchised facilities not only their own
outlets.

Franchisee selection and recruitment can become a difficult task
and Franchisors have to be extremely careful in their selection. The
glamour of franchising may attract several absentee investors who
BY RUDOLF A. KOTI K
52
are not interested in the operations. Those people should invest in
the Stock Exchange!

Many Franchisor-Franchisee relationship problems can be traced to
the communications between them. One common problem is the
misunderstanding of quality standards of the reasoning behind
them. Franchisees may not appreciate the methods used to
maintain those standards or the inspection procedures used by the
Franchisor.

Franchisee may also develop a sense of independence and may
not take advice of the Franchisors. They may feel that they are
better qualified than staff the main office.

Franchisees may be reluctant to disclose gross sales on which
royalty fees are dependent or may not report accurately. Non-
cooperation from Franchisees may require adequate policing or
may end up in legal battles that may adversely affect an otherwise
healthy business.

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53
FOR THE FRANCHISEE

Advantages

The Franchisee owns his own company and is legally independent.

The Franchisee profits by the brand image and the reputation of the
trademark with regard to the consumer.

Established Concept: The Franchisees gain by a system of
commercial management devised by the Franchisor in the first
place and already tested, so he saves time in using this existing
know-how and faces a minor financial risk.

The Franchisee takes advantage of the overall competitive
advantage of the economic coalition of the network and of the
capacity of innovation of the Franchisor.

The Franchisee comes to a better professional control, far superior
to its initial position, because of regular training and support offered
by the Franchisor.

The Franchisee gets a higher profitability on the capital invested
than the sole trader, because of the scale economies achieved
through the standardization of operations and the overall
optimization of the capital.

Major advantages of Franchising include the technical and
managerial assistance provided by Franchisor and the continuation
of assistance to Franchisee.

Standards of quality control.

Minimal risk, as it is tested and proven profitable.

Less Operating capital compared to independent businesses.

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54
Benefits from Research and Development.

Access to credit from suppliers of Franchisor.

Drawbacks

The Franchisee has to put the commercial strategy of the
Franchisor into operation.

The Franchisee ought to respect the norms attached to the
concept, especially the quality standards.

The Franchisee has an obligation to follow the evolution of the
concept and know-how.

The Franchisee often has to buy directly from the Franchisor or any
other referenced supplier.

The Franchisee needs to pay the Franchisor in exchange for his
contribution at all levels, for instance under the form of:
-an initial development payment or franchise fee;
-royalties in return for: the trademark license, the permanent
assistance, the training, research and innovation.

Overdependence on the advice of Franchisors in areas such as
operations and pricing strategy.

Monotony and lack of challenge

Franchise Termination is an important issue for franchisees due to
the power of Franchisors to terminate, to decline to renew or to
deny the Franchisee the right to sell or transfer a Franchise.

BY RUDOLF A. KOTI K
55
Do you have what it takes to be a Franchisee?

Motivation
It is commonly found in people who have worked hard on the job
before but never quite fulfilled.

Maturity
Motivation gets you going; maturity helps you persist as you work
long hours without complaining, get along with your personnel,
handle money responsibly and handle crises with patience and
good judgment. A Franchisee must be a dreamer and realist at the
same time. You need to set goals and plans to achieve your
dreams while being realistic and planning the attainable. You need
to accept your limitations as short term handicaps and hunt for
ways to grow beyond them. Thats maturity.

Money
Starting a business takes money. You must be willing to look
honestly at your financial situation and determine how much you
can put into your business. You also need to determine whether the
business you are considering can provide enough income
especially if you are accustomed to a high income.

Knowledge and Experience
To gain the confidence and loyalty of staff and customers, you must
provide a quality product or service at a competitive price. That
means knowing your business well, which you will learn how to
during the training program, which every Franchisee should take
just like the employees of a Franchisee. For Franchisees,
Franchisor training is the source of knowledge. Because
Franchisors know that how well the new owner applies their system
depends on how well the new owner is trained.

Even Temper
A Franchisee must be able to make decisions logically and with
good judgment. That means handling pressure, conflicts and crises
calmly and thoughtfully. If you are impulsive, you may make poor
decisions. If you are hotheaded or have a quick temper, you may
BY RUDOLF A. KOTI K
56
alienate customers and employees alike, putting your business at
risk.

Tenacity
Stick to the business is a must for every Franchisee. When a job
needs to be done, an employee needs feedback, or a customer
needs special attention, you will need to see that it gets done.
When faced with setbacks, you must draw on experience and
maturity to make the best possible business decisions. It takes
tenacity and determination to weather the bumps on the road to
success.

Family Support
Strong family support is invaluable to a Franchisee. Your family
must understand that business will come first.

Franchisors Game Plan
A happy Franchisee wants to follow the game plan that is in place
and doesnt mind taking directions. When he or she sees room for
improvement, the Franchisee speaks up but isnt disappointed
when the suggestions are not implemented. A Franchisee needs to
be able to accept things as they are.

Tolerant
As Franchisee you have to have the ability to tolerate different point
of views with Franchisor and accept consensus. You can express
your opening but it takes patience and tolerance to hear all sides
and to live with a consensus decision that, while maybe the best for
the franchise group as a whole, isnt the one you would make on
your own.

Graceful
It is in the Franchisors main interest to make sure everybody is
following the game plan and staying in line. If the Franchisor thinks
you need to implement the system more diligently or believes you
are ignoring certain practices or even taking your franchise in
another direction, youll hear about it. If you have a hard time
accepting suggestions or criticism, franchising may not be for you.

BY RUDOLF A. KOTI K
57
Trust
To succeed in franchising, you must believe in and support your
Franchisors system and policies. After all, Franchisors make money
from royalties, so its in their interest to help Franchisee build the
largest possible business. Your Franchisor will search constantly
for ways to help you achieve that potential, often developing new
approaches or policies for you to implement. As a good Franchisee,
you will accept policy changes in the spirit they are intended even
if react negative to the new policy.

Communication
Franchisees communicate often and openly with the Franchisor.
The more Franchisees share their experience, the better the
Franchisors operation can offer assistance and ideas. You will need
to work closely with supervisors who can share their broad
knowledge of how other outlets are operated and provide solid
information from trusted and valued associates.

Operational Systems
All Franchisees in a system follow their Franchise Agreement and
operations manual as they conduct their business. Living by the
same rules means you and your colleagues are building the system
using the same blueprint. But now and then, some franchisees feel
a little stifled by always going by the book, especially when it
appears to prevent a Franchisee from implementing a great new
idea.

BY RUDOLF A. KOTI K
58

X.
MI STAKES BY FRANCHI SE BUYERS

A great industry assures your success

Some Franchisors point out how large an industry segment they address.
While it's generally important that you are addressing a growing market,
this alone will not make succeed. The Franchisors training, marketing
plan, site selection, how you implement their plans and many others
factors will be more important to your success than just the size and
growth trend of the industry served.

I open my franchise for less

Dont mislead your Franchisor. If you are overly optimistic and
undercapitalized you may be doomed to failurethrough no fault of your
Franchisor.

Bigger is Better

The more franchises exist in a chain, the more successful they all must
be. Great marketing aggressive salesmen and an attractive industry can
cause a franchise system to grow even though there are better
BY RUDOLF A. KOTI K
59
Franchisors in the same industry. Call many Franchisees and ask them
how much TLC they receive.

Then check in other systems to evaluate the satisfaction level of their
Franchisees. Sometimes, in their eagerness to grow, a system will
overpopulate an area with many units causing each to steal business
from others.

Never be the First Franchise in a System

Who could get more care and attention than the first Franchisee to join? If
the Franchisor has good experience in its industry and you are confident
that they will be able to help you replicate their success, being the first
should be excellent.

Ill use about 80% of the Franchisors business plan, but Ill modify it
enough to fit my style of management and my town.

If you buy a franchise, use their system. If you insist on doing it your way,
you may violate your agreement and be terminated. Believe me, stick to
the whole planor don't buy a franchise.

All franchise systems are about the same. Therefore, the biggest
with the lowest price should be my choice.

Each system has a culture of its own. Meet with the Franchisor and meet
or talk to several Franchisees to see how youll fit in. Some Franchisors
now offer lower royalties, minimal renewal fees and other features to show
their commitment to your success.

When you buy a franchise, your success is assured.

Any new business venture involves risk. You must be ready to work long
hard hours to implement the Franchisors business plan in order to
succeed. The advantage isyou have a plan. The unknown ishow well
youll implement it.

BY RUDOLF A. KOTI K
60

XI .
AREA AND MULTI PLE UNI TS

So youre thinking about buying a franchise. Well, if operating one facility
looks like a good idea, might not running two or more facilities be better?
The answer isnt a simple yes or no.

Overview

Multiple units franchising offers a number of advantages, economies of
scale and diversification among the most important.

With more locations, you reduce the general and administrative per-unit
overhead.

You also minimize the adverse possibility of placing all your eggs in a
solitary location or unresponsive market. Three successful units can
greatly outweigh the impact of a single low-producing unit.

Another plus: the more units you operate, the more influence you are likely
to have in advertising decisions and expenditures.

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61
Multiple units franchising benefits the Franchisor as well. The company
that licenses you can use your financial resources to grow faster, spread
risks and deal with fewer Franchisees. Multiple units franchising is a two-
way street, with potential benefits accruing to both Franchisees and
Franchisors.

How It Works

You can get involved in multiple units franchising in several ways. You
may be asked to sign a single franchise agreement, which provides for the
opening of more than one site, usually with a specific territory. More likely,
you will be required to enter into an area development agreement and pay
a development fee to open a number of units within a designated
marketing region, usually according to a time schedule.

Another form of multiple units franchising is a hybrid between a Franchisor
and a developer. In an area franchise arrangement, the Franchisor grants
you the right to act as a Franchisor within specific area, typically for a
substantial fee. With rare exceptions, the master Franchisee is required to
pay the Franchisor a portion of the initial and ongoing franchise fees he or
she collects. Area Franchisees also incur sizable expenses for personnel,
advertising and office costs.

A very common way to become a multiple unit Franchisee is to purchase
operating multiple outlets from the Franchisor or from one or more existing
Franchisees. This method provides the normal advantages of buying an
ongoing enterprise rather than starting a new business from scratch, in
addition to gaining the usual support in training and continuing existence.

On the other hand

As with all business strategies, area or multiple units franchising has some
negatives. Consider these points.

Unless you are purchasing existing facilities, you will need to commit to
unit growth development by specific deadlines. Almost all Franchisors
retain the right to revoke your future development rights if you dont meet
the schedule.

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62
While you may enjoy reduced overhead on a per-unit basis, your overall
administrative burden will be greater. Youll probably have to hire
additional management and supervisory personnel.

The lack of an on-site owner/operator at each site can be a disadvantage,
especially in the cases of those franchised business that require personal
and close attention to customers needs. Such business may not lend
themselves well to multiple units franchising.

Decision-Making Guidelines

Consider area or multiple units franchising only if you have strong financial
resources. If you do have those resources, choose a business field in
which you are knowledgeable. This quality will make you more attractive
to a Franchisor and will help you attain a successful future.

Select a financially strong Franchisor with a proven commitment of
support to Franchisees.

Determine the experience of the Franchisor and/or other Franchisees in
operating units in the kinds of locations you want. Inquire, too, about the
advertising assistance you will receive.

Investigate all areas of the entire franchise system, with the same concern
you would exercise in selecting a single unit franchise. How long has the
franchise system been in business?

Has the management bounced around from franchise system to system,
or has it been dedicated consistently to the franchise operation that
interests you?

Be sure you know exactly which rights are being granted to you and which
are retained by the Franchisor. Can the Franchisor open company-owned
units in your territory and thus be your competitor? Most Franchisors
meet expected standards of integrity, but failing to ask critical questions
could prove to be a costly error. Check the facts.

Examine whether an area development schedule is reasonable and can
be met, and understand what happens if you should fail to meet that
BY RUDOLF A. KOTI K
63
schedule. You should also understand your right to develop additional
franchise sites outside that territory.

Buying a franchise, and particularly an area or multiple unit franchise, is
potentially the largest personal investment decision youll ever make.
Dont be impulsive. Take you time, and enlist the assistance of franchise-
experienced professional like yours truly.

BY RUDOLF A. KOTI K
64

XI I .
BUYI NG A MASTER FRANCHI SE

Over the past several years there has been a marked increase in the
number of Franchisors from the USA, Canada, Europe, Australia and
other Countries expanding internationally.

As a consequence, there is an ever-increasing chance developer will
encounter Franchisors with great sales pitch, lots of enthusiasm and,
perhaps, the best of intentions, but not the necessary experience and
resources to effectively support the developer.

An area development franchise is an agreement that authorizes an area
developer to open multiple franchise units within a Country in accordance
with an agreed-upon development schedule.

A master franchise differs in that the agreement allows the so-called
master franchise to open franchise units itself and sub-franchise to
others within its territory.

A franchise system that has not taken local consumer preferences into
account be doomed from the start.
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65
One of the best tools for discerning a franchise systems potential for
success in any country is to evaluate the concept at a prototype unit or
through other market testing methodologies.

More often than not, international Franchisors want the full territory
development fee before a pilot can be established.

If the Franchisor has conducted market studies in the Philippines, the
developers certainly should request to see the results. If the Franchisor
has not, but has conducted studies in neighboring countries, the developer
should request to see those results.

This may offer some insight into what the developer may expect to
encounter in the Philippines though, depending on the degree of cultural
and economic similarity between the countries, the results may not be
conclusive.

Even if timing makes it impractical to conduct market testing before a
development agreement is signed, the Franchisor may assist in test
marketing after the deal is signed.

The Philippines laws may prevent a Franchisor itself from opening and
operating retail business, thus effectively precluding it from conducting
market testing prior to entering and into a development deal.

U.S. Offering Circular

In the USA, law requires every Franchisor to deliver a Uniform Franchise
Disclosure Documentation (FDD) to its prospective Franchisees in the
United States before they pay any money or sign any binding agreement.

The FDD is divided into 23 Items which contain detailed information
falling within three broad: Facts about the Franchisor and its history,
details about the terms of the deal and Information about the Franchisors
system.

In some cases, the Franchisor internationalizes its FDD so that it
specifically is relevant to the proposed international development
transaction. Other Franchisors simply provide the FDD they use for
domestic franchising in the USA without modification. Still others provide
BY RUDOLF A. KOTI K
66
no FDD to developers at all; some companies who franchise in
international markets do not franchise in the USA and may have prepared
a FDD, while others have a domestic FDD but choose not to provide it
unless asked.

If the Franchisor has not internationalized the FDD, typically it will reflect
contract provisions and operating practices relating to franchising activities
in the USA, which may be substantially different from the terms of the
proposed development agreement. For example, many U.S. Franchisors
engage in master franchising and area developments franchising only in
international transaction, so the FDD may not accurately describe the deal
terms that apply to the developer. So, the Franchisor may resist delivering
a copy of its standard U.S. FDD.

Nonetheless, even if the FDD has not been customized specifically for the
developer or generally modified to discuss international transactions, the
FDD is worth examination by the developer. It still contains detailed and
valuable information, about the Franchisor, its history and its system. Even
though the information describing the deal may not provide directly
relevant information, it may provide a benchmark against which the
developer can compare the deal terms being offered.

There are highly technical legal requirements for preparing a FDD and
unless the reviewer has had considerable experience in preparing or
reviewing them, it may be difficult or impossible to perform a
comprehensive and penetrating analysis of the document. It is as
important to understand what the FDD is supposed to disclose as it is to
examine what it actually discloses. Without an in-depth knowledge of USA
disclosure laws, the developer may overlook danger signals an expert
might spot. For this reason, among others, it is becoming increasingly
common for non-US developers to retain an International experienced
Consultant - like RK Franchise Consultancy - to assist in reviewing the
FDD and offer advice regarding key provisions in development
agreements.

Trademarks

What steps, if any, has the Franchisor taken to protect its trademarks and
service marks in the Philippines, and to investigate whether any third party
BY RUDOLF A. KOTI K
67
already has begun to use those marks locally. If there are such third party
uses, what will the Franchisor do to stop such use?

Product Sourcing

It is essential for the developer to determine as soon as possible whether
it is likely to encounter difficulties in sourcing any necessary products,
equipment or ingredients locally.

For example, in a food franchise, are all key ingredients available locally in
the same grade and quality as used in the Franchisors US operations? If
not, what is the cost of importing them from the US or other countries?

How many international deals has the Franchisor completed? What
countries were involved? What is the history and current status of those
other international deals in terms of the developers success in meeting
development goals and profitability? Have disputes risen between the
Franchisor and developers or international Franchisees, and how were
they resolved?

Potentially, the most informative source of information and insight into the
Franchisor, its experience, practices and capabilities may be found by
contacting a Franchisors existing international developers, and its US and
foreign Franchisees.

In the USA, it is extremely common for prospective Franchisees to contact
a Franchisors existing Franchisees. Surprisingly, in the international
context, few developers make the effort to contact them.

Whats the franchise name worth?

There are few franchise systems whose names are commonly known
worldwide. A prospective international entrepreneur who is well traveled
may be familiar with a specific brand. The main question, though, is
whether most consumers in a selected country recognize the brand name.

In many instances, the creation of brand recognition so vital to
franchising success will have to be established by Master Franchisee.
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68
Of course, the Franchisor will provide basic marketing materials, but the
core effort must be made inside the territory itself.

This will require a substantial commitment of time and financial resources
to build momentum, which is relevant not only to the sale of franchised
products and services, but also to the expansion of the franchise system
in the new country.
Does the Franchisor know anything about the world?

If the Company you are interested in has never franchised outside its
home country, then you both may well be in for an interesting joint learning
experience.

Its usually easier for a Developer to work with Franchisor already
experienced in the international arena. Such a company will have
encountered and dealt with the cultural, legal, financial and economic
differences involved in developing franchises in new countries and will
recognize the need for sensitivity and flexibility. The Staff will have been
trained to think global. You would be wise to ask, How many people in
your organization are dedicated to supporting international franchise
growth?

An international franchise agreement typically will remain in effect for
many years. Although there are no guarantees of success you must be
confident your Franchisor is going to be around for some time.

An important question to ask is, What portion of your franchise companys
income is derived from royalty fees and what proportion comes from
franchise licensing fees? The answer will give you a sense of how
dependent a Franchisor is on the scale of new franchises and how much
the Franchisees contribute through royalty payments.

Its is critical to your success in international franchising that the Franchisor
have a plan for transferring the accumulated system know-how clearly and
completely and provide you with the necessary support resources to
help put that proven expertise to work. The basic requirements are:

The training of your staff to become skilled in daily operations including
how to franchise if you intend to sub-franchise. This instruction usually
will be provided at the Franchisors corporate headquarters.

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A set of procedures manuals that describe in detail the operation of the
business.

Marketing programs that can be used in their present from adapted for use
in the Philippines.

Active marketing support for the opening of the first and possibly
subsequent units in the Philippines
Many large franchise systems can pass on their Franchisees substantial
savings, made possible by purchasing-power relationships established
with suppliers of equipment's and raw materials. Youll want to know what
purchasing opportunities and restrictions exist for expansion in the
Philippines.

The international Franchisee should expect fairness and consistency in
the level of fees (perhaps related to demographic and consumer income
statistics) and in the amount of the royalty percentage.

It is essential to make a realistic financial projection based on the
Franchisors experience for both the proposed individual units and for
the master franchise operation itself.

The Franchisor should provide you with information that will enable you to
prepare budgets for both of those levels.

Adjustments will have to be made to take account of local conditions. For
example, rent maybe higher and wages lower in the Philippines than in the
Franchisors home country.

However, youll need to make a best-guess of the overall cost of getting
started, the pace at which sales of product or service will build in each unit
and the rate at which youll be able to open additional units, whether sub-
franchised or corporately owned.

Beware of being too ambitious when you agree to the number of units you
can open within specified time frame.

Be sure to add in the overhead cost of being, in effect, a Franchisor, and
include the cost of training and supporting your Franchisees. Finally, dont
forget to include the cost of the master franchise fee, royalties and any
other payments to the Franchisors.
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In summary, international franchising is arguably the largest world of
business potential entrepreneurs around the globe have ever seen.

Venturing forth into this expanding universe is well worth the time and
effort it takes to explore its almost limitless possibilities.

Like undertaking any journey, knowing your destination is only the first
step. The main idea is to follow the map and read the road signs.
Get assistance from an International acclaimed Franchise Consultant like
RK Franchise Consultancy, who was involved in many Master Franchise
arrangements in the Philippines with foreign Franchise Companies.

BY RUDOLF A. KOTI K
71

XI I I .
FRANCHI SI NG YOUR BUSI NESS

Before implementing a franchise program, a company should evaluate
itself on several criteria. An important consideration is the success of the
initial or pilot operation. If the products or services offered have found
reasonable acceptability and if these products or services are readily
adapted to other areas, then the market potential for the franchise may be
good.

Does the company have a marketing niche that can be used to its
advantage? It the business similar to many others in a crowded business
segment and, if so, is there a targeted customer bases so that advertising
and selling can be focused effectively?

It is important to note that to be successful, a Franchisor must have some
degree of distinctiveness, or the potential to achieve distinctiveness, in its
business segment. If it does not, it will have difficulty attracting high
caliber Franchisees in an increasing competitive market for such persons.

A franchise may be distinctive in terms of its products, services, operating
and delivery systems or marketing. If a business is to be successfully
expanded by franchising its success must be attributable to its products or
services, business format, operating or management systems or
BY RUDOLF A. KOTI K
72
marketing. It cannot be attributable merely to the unique character of its
founder or its location.

The elements of the success of the business must be teachable to
persons with capabilities that exist among prospective franchise buyers
and must be replicable by such persons. To be successful, a franchised
business must appeal to high caliber franchise buyers and compare
favorably with other franchises.

The investment requirements of the business must be realistic and the
potential for a return on the investment should be appropriate to the risk
inherent in the type of business.

Any operating, marketing and financial problems should be addressed and
solved, for the Franchisee must receive a tested and refined business
format.

Is Your Business Franchisable?

The franchise method is now used successfully by all sorts of business in
all sorts of markets; but not all businesses are franchisable.

If your business has one or more of the following characteristics,
franchising may not be suitable:

A product or service, which is only likely to have a market for a
short time.

Gross margins which are too low to offer a return on investment to
both as the Franchisor and Franchisees

Skill levels for each operating unit that require very long training
periods (more than 6 months)

Predominantly repeat business customers whose loyalty relates to
the individual providing the service and which would be difficult to
transfer to a brand.

A geographically defined market that doesnt have the potential to
be repeated in many places.
BY RUDOLF A. KOTI K
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A business with audit and control requirements, which are too
critical to involve Franchisees operating as separate legal entities.

A business which is failing.

Dont franchise as a means of getting yourself out of trouble

Dont franchise unless you have a prototype, you cant franchise an
idea only.

Dont franchise if youre doing it on the cheap

Your business is franchiseable if:

"every City needs one" can be said for your business

you can handle sharing your ideas with many

you can handle your role becoming increasingly administrative

you are people oriented

you can afford to weather a likely difficult start

your success rests largely on your product or service

you can create an ongoing long-term relationship with a team of
people.

Before evaluating your business as a potential franchise, evaluate yourself
as a potential franchisor. Are you ready to share your success, your
system and your profit with other people? Consider your qualities and
remember that franchising is more than the business of selling services
and products to consumer. In addition, as a Franchisor you will be an
educator, Trainor and hand-holder to your Franchisee.

If you think your business might be franchisable then you will need to offer
Franchisees a business format which includes you brand business
system, training, opening assistance, marketing and support services
BY RUDOLF A. KOTI K
74
under the contractual terms of a franchise agreement which will, amongst
many other things, set out the financial arrangement.

Considerable development work is required before you will be in a position
to draw up offer documents and begin recruiting Franchisees.

As a Franchisor you will be building a brand with a reputation that other
people will want to buy and invest money into.

You will therefore need a brand, which is distinctive and appropriate for all
the places you would want to have Franchisees in operation.

It will also be your responsibility, and your obligation to Franchisees
paying for the benefit of using your brand, to protect it against abuse, both
by outsiders and by ex-Franchisees.

The System

The principal benefit, which Franchisors hold out to prospective
Franchisees, is the opportunity to run a business which has already
proved its capacity to deliver products or services profitably to an identified
market.

You cannot sell an idea as a franchise. You must have proven in practice
that the idea works and that you can successfully transfer the know how
to another person operating at arms length from you.

You will need to draw up and prove a comprehensive operations manual
that details what a franchise does, how to do it, and to what performance
and quality standards. The manual will need to cover the setting up phase
as well as continuing operation.

You will also need to develop and prove an initial and continuing training
program that ensures that the know how contained in the operations
manual can be transferred successfully to a third party within the time
available.

The work involved in proving and documenting your operating and training
systems is extensive and ordinarily calls for highly skilled and experienced
advice.
BY RUDOLF A. KOTI K
75
A critical phase of the development of a franchise program is the first
operation or the creation of prototype business to test and refine the
concept of the business to be franchised.

In its prototype businesses, a prospective Franchisor can test operational
systems, controls, dcor, designs, layouts, equipment, training methods,
advertising and marketing programs, products and services, job
requirements and descriptions, financial models, etc. The prototype is a
laboratory at which problem areas can be identified, enabling the company
to develop solutions and truly see if the business can be franchised.

Before franchising, a company should have been operating outlets
successfully at least at one, and preferably several, locations to verify the
viability of the business and its profitability.

A minimum period of time to test the pilot outlet would be one year to take
into consideration seasonal factors and to ensure that the business is
producing attractive results. Two or three years of actual experience
gained from the operation of exiting outlets are ideal.

The business to be franchised must be capable of producing a reasonable
return on the Franchisees investment, after deducting the value of the
Franchisees labor. If Franchisee is merely buying a job, his motivation
and loyalty to the network may be short lived. The business must also be
able to generate sufficient revenue to the Franchisor.

A Franchisor can capture only a portion of the gross revenue of a
franchise outlet through continuing fees or royalties and the gross profit
realized on sales of goods and services to the Franchisee.

If a business cannot generate a sufficient rate of return on the
Franchisees investment and sufficient revenue to support essential
Franchisor services and a sufficient profit to the Franchisor, the business
is a poor candidate for successful franchising.

The Trademark

If you have a product or service that is unique or in demand, you must
capture the trademark for your Company. It is not enough that you have a
DTI Business name registration or a SEC registration, in order to license
BY RUDOLF A. KOTI K
76
out your trademark to your Franchisee, you have to own it therefore every
Franchisor has to have a TRADEMARK! To get a Trademark, you have to
apply at the Intellectual Property Office in Taguig City or let FIFA Filipino
International Franchise Association do it for you.

Trademark is a component of Franchising
Right to use proprietary marks of others
Protection of the Franchisor
Protection of the Franchisee
Protection of the Public

The Initial Training

Each Franchisor has to make a training program for his Franchisee so
they will be able to learn the trade as they have to. Length of training
always depends on the complexity of the operational procedures of a
particular Company.

The Operations Manual

As part of the operational function in a well-developed franchise system,
you should prepare and provide an effective operations manual that
documents the functions of the franchise business in a written,
chronological, step-by-step format, so that the franchisee can easily follow
them after completing the initial franchise training program.

The Operations manual can easily reach up to 2,000 pages for Restaurant
Franchises and 300 pages for simple cart or retail franchises. Your
Franchise Consultant will provide you with your tailored manual as part of
the Franchise Development service. Each Franchisors operations manual
is unique, because in a given industry, each successful Franchisor has a
quality that distinguishes the business from its competitors.

A sample layout of an operations manual of a franchised business:
Essential Characteristics
Pre Opening Activities
Payment to Franchisor
Insurance
Advertising
BY RUDOLF A. KOTI K
77
Recruiting Personnel
Payroll
Personnel Policies
Non-Competition Agreement
J ob Descriptions
General Operation Procedures
Initial Preparation of product
Product Preparation
Service Procedures
Customer Handling
Cashier Flow
Daily Store Opening & Closing Procedures
Cleaning Procedures
Procurement
Supply Delivery Procedures
Recipes (for Restaurants)
Forms & Reports
Inventory

The Support Service

One of the biggest practical differences between a simple distribution
scheme and a fully-fledged business format franchise is the extent of the
initial and continuing support services offered by Franchisors to
Franchisees. Franchisors take on responsibility for product and service
development, for national promotion and PR, for purchasing financial and
administrative services, for quality control and national accounts for
network communications and discipline.

You will also need to make sure that your franchised business is
structured so that your Franchisees need your services on a continuing
basis and in consequence will want to go on paying you to belong to the
network.

Well-trained Personnel

Your success lies in your ability to recognize the business insight
necessary to operate a smooth-running franchise. To help you do this,
review carefully your current management and supervisors. You must
BY RUDOLF A. KOTI K
78
have a person or a team who is able to train the incoming Franchisees on
the same levels as your Company owned outlets.

One of the biggest practical differences between a simple distribution
scheme and a fully-fledged business format franchise is the extent of the
initial and continuing support services offered by Franchisors to
Franchisees. Franchisors take on responsibility for product and service
development, for national promotion and PR, for purchasing financial and
administrative services, for quality control and national accounts for
network communications and discipline.

You will also need to make sure that your franchised business is
structured so that your Franchisees need your services on a continuing
basis and in consequence will want to go on paying you to belong to the
network.

Well-trained Personnel

Your success lies in your ability to recognize the business insight
necessary to operate a smooth-running franchise. To help you do this,
review carefully your current management and supervisors. You must
have a person or a team who is able to train the incoming Franchisees on
the same levels as your Company owned outlets.

The Financial Arrangements

Youre in business to make money and theres no point choosing a growth
strategy, which doesnt maximize your profit potential. Some Franchisors
would be more profitable if they owned their own outlets themselves. On
the other hand they would never have grown to a fifty or two hundred unit
chain without franchising.

As with any business planning process the financials have two different
approaches:

What will it cost me, so how much must I charge to make a sensible
return?

BY RUDOLF A. KOTI K
79
What price will the market bear, so what can I afford to spend to make the
business profitable?

In franchising you have to address these questions both from your point of
view as the Franchisor, and from the point of view of your Franchisees.

In constructing a viable financial plan for franchising a business, dont:

Underestimate your initial costs and the associated financial prospects;

Overestimated the early growth rates when youre just learning how to
attract the right prospects

Assume you can make any real profit element on the initial fees. Profit
comes later from the on-going charges to Franchisees based on their
trading success.

A good approach is to keep initial fees to Franchisees as low as possible
to maximize their chances of a successful business entry, and then to
make sure that Franchisees can see a value for money return on the
royalty fees they pay.

Royalty fees calculated as a percentage on turnover are preferable, but
some product distribution franchises inevitably rely on a mark up on goods
supplied.

Franchise Marketing

If you are selling Franchises to use your brand and your business system,
with the benefit of the support systems you offer, within the framework of a
franchise agreement and initial and continuing feed, you will need a
brochure. Potential Franchisees will want to know what business they can
expect to do and how profitable it can be.

Since your business is already up and running, and since you will have
already run a pilot scheme discrete from your own operation, you will have
some facts on which to base your projections.

Good Franchisors have to draw a fine balance between generating
expectations which can be met, and giving Franchisees targets which are
BY RUDOLF A. KOTI K
80
so low that they do not need to fully exploit their business opportunities.
You shouldnt oversell or undersell, but thats also a matter of matching
the presentation of your offer to the norms of the franchises recruitment
market, so experienced advice can be helpful.

Many Franchisors provide a Franchise Marketing Kit with an attached
application form to serious Franchisees. These confidential questionnaires
help Franchisors in selecting their Franchisees.

Recruiting Franchisees

Recruiting Franchisees is probably the hardest and most expensive job for
Franchisors. Franchisors have conversion ratios of serious inquiries to
appointment of round 30:1 sometimes higher than 100:1.

The recruitment mechanisms available are Franchise Shows and Expos,
newspaper advertising, referrals, websites such as
http://www.franchise.ph and the seminar series of RK Franchise
Consultancy.

International Franchising

Franchising of Philippine Companies in the International market is
expanding rapidly. Increased population and available disposable income
has created a worldwide expanded market, plus the fact that Filipinos can
be found in any corner of this world, a certain home advantage helps
also bringing Philippine Franchisors to other Countries.

Most Franchisors head overseas after an unsolicited query gets their
adrenalin pumping. Others pursue international markets out of ego. Still
others simply like the appeal of international travel.

Before entertaining international proposals, Franchisors should have a
strong and profitable base at home. To do otherwise is like serving dessert
before the main course. We cant pinpoint an exact number of Facilities
you should need in the Philippines, but your domestic operation should
have a significant number of franchises in various regions. A saturated
domestic market is a clear green light.

BY RUDOLF A. KOTI K
81
Considered in bringing your Franchise to other shores has to be:

Political climate between Manila and the Country you like to award a
Franchise. Are there agreements on trademarks or bilateral
agreements existing?

Regulations on imports or operational procedures in the Country of the
Franchisee.

Language barriers, cultural differences and traditions in taste of food or
products.

Religion can be a factor particular in the food business or the internet
business.

Points to consider in International Franchising your business:

Include local business people in decision making, planning, and the
operation of the franchise.

Base the concept on the local population preferences, habits and
cultural features.

Be sensitive to the needs of the local population and be respectful of
their beliefs and practices, both political and religious.

Be patient and tolerant and follow the legal steps with as little
challenge to rules and regulations as possible.

Conduct a good environmental scan, taking into consideration social,
political, and economic circumstances of the country.

Examine the per capita gross product and the population of the country

Carefully examine the demographic data of a country, with emphasis
on the emerging population that can be classified in the middle income
group and relatively young.
BY RUDOLF A. KOTI K
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If it is a food franchise, select menu choices carefully and be flexible
and prepared for menu adaptations and modifications.

METHODS AND MODE OF ENTRY

Direct Franchising, also referred to as licensing, allows a Franchise to
set up a Franchise using the system, products and to function as does
a Franchisee in the Philippines.

Developer Agreement, wherein the developer agrees to develop the
area and own all outlets.

Master Franchisees act like mini-franchisors in other Countries. Master
Franchisees may open their own outlets or grant Franchises to others.

J oint Venture, wherein the Franchisor has more control than in the
case of a master franchise.

In addition, no training is universal. You need to weave adaptations for
international operations into your standard training. If you offer sub-
franchising to master franchisees which will select franchisees in their
markets and also provide franchisees with support, you need to prepare
them and train them on how to be a Franchisor. After all, they will e
performing the same tasks as you do as a Franchisor.

Hiring a Franchise Consultant

To do all the works for you in developing a Franchise, you might consider
professional help. There are only three Franchise Consultants in the
Philippines with a long list of experience and successful clients. It is not
that the most expensive Consultant is also the best, consider the long
term offers those Consultants offer you. As this writer is in this business
for a very long time, we dont stop serving our clients once we finished our
development work, but assist our friends and clients even long after and
actively market the franchise opportunities in behalf of our Franchisors.
While we charge for that service, it is in most cases lesser than the initial
Franchise fee you collect from your first Franchisee and therefore you pay
the services off with your first franchise sale, which can be fast.
BY RUDOLF A. KOTI K
83

XI V.
FEES

FRANCHISE FEE

Many Franchisors fail because they expect to immediately profit by
charging high initial franchise fees, high royalty fees or high advertisement
fees. However if you look at the Philippine Franchise market, you will find
quite plenty affordable Franchise systems. Your Franchise Consultant will
assist you in formulating the right Franchise Fee and Royalty structure.
You have to be also sensitive with your fees to be competitive with other
Franchisors in the same industry so you wont overprice yourself or short-
change your Company.

The Franchise Fee is primarily to compensate the Franchisor for the use
of its trademark as well as to defray cost incurred in setting up a system to
sell and market franchises. It includes also usually the initial training and
the pre-, grand- and post-opening assistance provided by Franchisor.

Franchise Fees are always collected upon signing of the Franchise
Agreement. Usually the first Franchise is sold at a certain discounted rate.
To pay the Initial Franchise Fee in installment is not common; however if a
Franchisor accommodates a request, dont expect a long term payment
program, maximum until the outlet is ready to open.
BY RUDOLF A. KOTI K
84
ROYALTY FEE

The royalty Fee, as the name indicates, is the royalty payable to the
Franchisor on a regular basis for securing rights of franchising.

Royalties are usually a percentage of the gross sales (=collected money
less VAT) and to be paid monthly within 5 days for the previous month.

It is common in retail business if the product line is to be purchased from
Franchisor that no royalty is charged.

The highest royalty fees are collected by education Franchisors, since
they have to work steadily on new curriculums which are to be provided to
Franchisees.

Common charged Royalties

Retail Franchises: NONE if all merchandise comes from the Franchisor

Drug Store and Bakeshop have the lowest royalties from 0 4% of gross
sales

Food Franchises and Restaurants from 3 10% with most common rates
of 4 5 %.

Education Franchises have 6 to 40 % of gross tuition and they have to
provide in exchange a new curriculum every year.

Many service franchises work with a Continuation Fee instead of a Royalty
and charge a fixed monthly amount instead of a percentage of royalty.

RENEWAL FEE

A renewal fee is usually charged for the renewal of the contract and is
usually 25 to 50 percent based on the current franchise fee.

BY RUDOLF A. KOTI K
85
TRANSFER FEE

This fee is charged by the Franchisor when a transfer of ownership is
desired by the Franchisee. This transfer requires prior approval by the
Franchisor. The transfer fee is paid by the new Franchisee or voluntarily
by the outgoing Franchisee. It can be as high as 50% of the original
Franchise Fee paid or is a fix amount prescribed by Franchisor in the
Franchise Agreement. This Fee is for the administrative change, the legal
requirements and training needs of the incoming Franchisee.

ADVERTISEMENT FEES:

GRAND OPENING MARKETING
Upon Opening Franchisee shall spend P5K-350K for initial awareness of
outlet, which is spent by Franchisee directly

LOCAL STORE MARKETING
1%-2% of gross sales, spent by Franchisee directly to promote the
business in the territory of Franchisee

COOP ADVERTISEMENT
J oint advertisement in yellow pages or billboards among a group of
Franchisees

NATIONAL ADVERTISEMENT FUND
TV, Radio and Broadsheet ads. Administered by Franchisor and all
outlets, Company owned or Franchised, have to pay into the pot.

BY RUDOLF A. KOTI K
86

XV.
FRANCHI SE LEGAL REQUI REMENTS

Franchise agreements must be comprehensive. They are not sales
brochures and there is not one standard work that fits any business. A
good agreement is stretching from 25 to 60 pages and is just as much
concerned to set out the obligations of you the Franchisor as well as your
rights and the rights of the Franchisee as well as their obligations.

That does not mean that franchise agreements are an equal balance of
rights and obligation between equal business partners. Franchisors are
responsible for the network as a whole and that sometimes means acting
against the interests of an individual Franchisee for the greater good of the
network.

Franchise agreements have gone through more than twenty years of
development to ensure that Franchisors have the appropriate rights to do
their job within a framework of fair and reasonable treatment for
Franchisees. However, any Franchise agreement is biased in favor of the
Franchisor is a fact of life.

There are only a limited number of Philippines lawyers familiar with the
complexity of franchise agreements, and only some of those have the
BY RUDOLF A. KOTI K
87
necessary skills to advise a business on the best way to structure a
franchise agreement. In this area you must get fully experienced
professional advice, like RK Franchise Consultancy.

The following items constitute the Franchise agreement of a typical
franchise, although this list is not comprehensive and agreements vary to
a considerable extent:

1. Appointment
2. Duration of the Agreement
3. Fees and other payments
4. Responsibilities of the Franchisors
5. Responsibilities of the Franchisee
6. Proprietary marks
7. Operating Procedures and Confidentiality
8. Advertising and Promotions
9. Royalty
10. Financial Records
11. Training
12. Insurance
13. Products and services
14. Transferability of the Franchising Agreement
15. Termination
16. Right and duties upon termination
17. Covenants not to compete
18. Renewals
19. Arbitration
20. Right of first refusal
21. Applicable law
22. Severability and construction
23. Notices
24. Waivers and non-waivers

Other Legal Agreements which a Franchisor may need:

MEMORANDUM OF AGREEMENT

Pre-Contract to Franchise Agreement, if Franchise Agreement can not
be signed due to a.) location still under construction, b.) Shopping mall
BY RUDOLF A. KOTI K
88
has no space available, c.) Franchisor still has to put his finances
together

AGREEMENT WITH LANDLORD

Agreement between Landlord, Franchisor and Franchisee to secure
the location for Franchisor if Franchisee defaults on Landlord or
Franchisor

SITE SELECTION AGREEMENT

Territory protection while Franchisee signed already Franchise
Agreement and is still looking for the appropriate location

GUARANTEE AND ASUMPTION OF OBLIGATIONS

For Guarantee of low capitalized Franchisee (fresh graduates, etc.)

TRANSFER & RELEASE AGREEMENT

If Franchisee sells his rights to be executed between Franchisor,
Franchisee and Purchasee of the Franchise privileges

BY RUDOLF A. KOTI K
89

XVI .
FRANCHI SE RELATI ONS

Now that you have invested your time, energy and money in buying or
establishing a franchise, how do work within the system? How do you
take advantage of all your Franchisor has to offer? How do you deal with
other Franchisees?

In any franchise organization, its important to maintain open
communications lines. A franchise is like a marriage and communication is
the key.

Communication in a franchise relationship occurs in numerous ways. You
should remember to keep communication friendly, helpful, upbeat and
honest.

Too many times a Franchisors/Franchisee relationship will become
adversarial, hostile and aggressive. If this happens, communications lines
tend to go down and everyone suffers. The Franchisee has the power to
keep communications on a positive note. There are many things that can
be done to help your Franchisor communicate with you.

BY RUDOLF A. KOTI K
90
Try not to be a chronic complainer. If you have a legitimate complaint,
perhaps you could offer some praise first. Something that being done right
and how happy you are. Then mention the little something thats caused a
stress for you at your business. If you think you might have a solution-offer
it or brainstorm. Offer to meet them at your store, your point of power so
you can negotiate from a stronger position. Be friendly. Try to meet when
youre having peak hours.

Show the Franchisor or their representative how efficient you are, how
clean your place is and how you are following standards. Treat it like a
military inspection. Then explain the problem. Tell them your suggestions
and ask what should you do?

All Franchisors are not the same. Some have a very corporate attitude
and some are very down to earth and almost folksy. No matter what type
you belong to, communication is still the key.

With a small Franchisor, you may be able to call the president or founder
directly. A Franchisor with fewer than thirty units needs your input at the
top level. He or she will still be working out administrative and organization
bugs in the system.

Your success is a very serious issue with them. They cant afford very
many Franchisee failures this early in the game.

Your problems and suggestions take precedence over all other aspects of
their business. If you fail, it will affect future sales. It is important for the
Founder to know how the franchised model performs in different locations,
demographics and local economic environments. If they can solve these
problems at a unit level now, it will insure the success of the future units
one hundred fold.

In medium sized franchises, you may not have the opportunity to be on a
first name basis with the Founder or President. However, you will certainly
get the chance to meet them. You must likely mirror the attitude of the
Founder or President.

A large Franchisor will have layers of corporate management and
Managers assigned to different areas. Some large Franchisors may not
have a Founder any more. The original Founder may have sold most of
their stake in the company and no longer oversees any part of the actual
BY RUDOLF A. KOTI K
91
Franchisor operation. Some large Franchisors may be publicly traded
companies that may also own other franchise systems and may during
your franchise term either buy more Franchisors out.

If you have to expand your area and add another store, do some
preliminary demographic work and a franchising study. Ask your
Franchisor to review it and call you to talk. Youll definitely improve your
chances of being approved. Also include a schedule of estimated
increased income from royalties and purchases in your package to the
Franchisor. Show them how you can help them.

If you are in default of your Franchise Agreement, talk with your
Franchisor. Develop a time line that you can live with to come back into
compliance. Franchisors dont want to terminate good Franchisees.

Think of the Franchisor as your coach and the other Franchisees as your
teammates.

Remember: Team is an acronym

T E A M =Together Everyone Accomplishes More

Whenever you hear anything said about a fellow Franchisee, say positive
things.

As a matter of fact, no matter which Franchisee in mentioned, say
something positive. On rare occasions you may hear something negative.
Be sure to down play anything you hear that is negative about a fellow
Franchisee.

It is important for you to join at least one service club. It helps your
business become part of the town. If your neighboring Franchisees belong
to certain groups, you should belong to a group, which they do not. For
instance, if one belongs to the Rotary you should join the Lions.

It is important to attend Chamber of Commerce meetings. Since most of
the people at these meetings will already know you as a local
businessperson, they will typically engage you in conversation and this will
prevent you from meeting new people.

BY RUDOLF A. KOTI K
92
In the Philippines, Franchisors should join any of the Franchise
Association: the PFA, Philippine Franchise Association, the AFFI, the
Association of Filipino Franchisers, Inc.; or the most flexible one, FIFA,
Filipino international Franchise Association (http://www.fifa.ph), which
allows local and international Franchisors and even Franchisees to join.
This writer is a founding member of FIFA and a member of the PFA.

It is important to call up and just say hi to your fellow Franchisees. It will
remind them that you are always near by. You can also talk about the
worst customer of the week or the most ridiculous complaint of the year.

If a customer wants service outside your exclusive territory or its too far
away to shop in your store, try to refer them to another Franchisee in your
system. This will strengthen your companys good will and name
recognition. It will also make someone just like you very happy. Im sure
youll get referral customers in exchange.

When owning a franchise, you are in business for yourself, but not by
yourself. Use this fact to your advantage. Use the resources of your
Franchisor, your vendors, and your fellow Franchisees. Make your
business great. And no matter what you do dont ever give up.
Communication is the first step. Youre going to do fine.

BY RUDOLF A. KOTI K
93

XVII.
DTI FRANCHISING RULING

To avoid more people being scammed by fake Franchisors selling their
franchises (particular cart Franchises), the DTI came out with a Bureau
Order (10-24 Series of 2010) to assist Franchise Buyers not being
victimized by unscrupulous franchise sellers. We actually actively support
the Bureau Order and prepare the FDI for all our clients.

Bureau Order No. 10-24
Series of 2010

Subject: Advisory on Due Diligence to be Undertaken
by a Prospective Franchisee

In order to protect the interest and welfare of a prospective franchisee, the
DTI-Bureau of Trade Regulation and Consumer Protection (BTRCP) has
issued the following Advisory:

1. Scope and Coverage

This advisory is addressed to persons engaged or interested in the
franchise business.

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2. Definition of Terms

2.1 Franchise Agreement is a written contract or agreement
between two or more parties by which a Franchisor grants the
Franchisee the right to engage in the business of offering,
selling, or distributing goods or services under a marketing
plan/system/concept, for a certain consideration. Unless
otherwise provided, said right includes the use of a trademark,
service mark, trade name / business name, know-how, logo-
type advertising, or other commercial symbols associated with a
particular business.

2.2 Franchisor is a person, individual or a Corporation, duly
registered with the Department of Trade and Industry (DTI) or
the Security Exchange Commission (SEC).

2.3 Franchisee is a person, individual or a Corporation duly
registered with the Department of Trade and Industry (DTI) or
the Security Exchange Commission (SEC)

2.4 Franchise Disclosure Information refers to a set of information
and documents that needs to be disclosed by the Franchisor to
the Franchisee and / or prospective Franchisee.

3. Due Diligence to be undertaken by a prospective Franchisee

Before a person decides to engage in or acquires a franchise
business, due diligence should be done by the prospective
franchisee.

3.1 Secure or ask Disclosure Information for the Franchisor as
follows:

3.1.1 Business address, email address, internet home page /
website, fax numbers and other contact details

3.1.2 Copy of DTI or SEC Registration

3.1.3 Parent companies and affiliates, if any, and their
respective roles in the Franchise, and Franchisors
BY RUDOLF A. KOTI K
95
declaration if any affiliate is a supplier and what they will
supply

3.1.4 Names of the Board of Directors and officers with a brief
description of their qualifications and background,
ownership of interests and references

3.1.5 The contact number and business location of existing
Franchisees

3.1.6 Executed promotional / marketing materials

3.1.7 Description of the business concept, which includes
brand image, brand personality, unique selling
proposition, target market, mission and vision, among
others

3.1.8 Basic information on training, commercial and / or
technical assistance

3.1.9 Certificate that the Franchisor is a member in good
standing of any Franchisor Association and that the
Franchisor has not pending administrative, civil or
criminal case

3.1.10 Declaration of the Initial Fee, amount that will be
collected and services covering these fees

3.1.11 Training that will be provided, number of persons, how
long and training modules

3.1.12 Number of years Company has operated and number of
years it has franchised with corresponding numbers of
company owned branches and franchised outlets

3.1.13 Draft of Franchise Agreement

3.1.14 Full disclosure of the Financial requirements of the
franchise business

BY RUDOLF A. KOTI K
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3.1.15 A provision that requires the franchise applicant to seek
adequate legal and financial counsel before signing the
Franchise agreement

3.1.16 Mechanism for dispute resolution

3.2 Call or visit or consult any of the following:

3.2.1 Franchisor Association (FIFA 995.0734)

3.2.2 Nearest DTI Regional or Provincial Offices

3.2.3 Securities and Exchange Commission

3.2.4 DTI Direct (Telephone Number 751-3330)

3.2.5 Certified Franchise Executive

3.2.6 Franchise Consultant (RK Franchise 912.2946,
912.2973)

4. Franchisor Association or Organization

To establish a databank of Franchisor association or organization
nationwide, Franchisor association or organization should submit to
DTI-Bureau of Trade Regulation and Consumer Protection
(BTRCP) the following documents:

4.1 A certified true copy of its Article of Incorporation and By-Laws

4.2 A current certified true copy of Certificate of Good Standing from
the SEC

4.3 Updated list of trustees, officers and members of the
organization including their addresses and

4.4 Other pertinent documents such as Code of Ethics and
Standards.

BY RUDOLF A. KOTI K
97
5. Self-Policing of Members

This Advisory aims to promote and encourage the Franchise
industry to self-police its own ranks by setting a Code of Ethics and
Standards for grievance or dispute resolution mechanism to
redress complaints against its members, including issues arising
from transactions with their franchisees, prospective or otherwise.

6. Publication

This advisory shall be published in newspapers of general
circulation and shall be part of the DTI Information, Educational and
Communication Program.

Issued this 17
th
day of November 2010 in Makati City

VICTORIO MARIO A. DIMAGIBA
Director

NOTE: All clients of RK Franchise Consultancy become member of FIFA
Filipino International Franchise Association. RK and FIFA were the 1
st
Barangay

Consultant and Association respectively to register with the DTI under the
Bureau Order.

New BUSINESS NAME registration fees in effect JANUARY 3, 2011

The Department of Trade and Industry (DTI) is now implementing the
following registration fees for business name registration (original and
renewal) depending on the territorial jurisdiction covered in the application:

PHP 200.00
City / Municipality PHP 500.00
Regional PHP 1,000.00
National PHP 2,000.00

BY RUDOLF A. KOTI K
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XVI I I .
THE FUTURE OF FRANCHI SI NG

Franchising is an answer in a growing number of sectors adapted to
current ways of living, namely: retail and services, fast food, sports goods,
specialized health and beauty retail, leisure, motorist services and others.
It is a system that actively participates in the modernization of trade and
craft practices.

It is obvious that franchising has reaffirmed itself as the most profitable
means to take advantage of traditional economic multipliers.

Franchising provides a solution when faced with changes under way and
is an offensive means that will help handle the economic and social
paradoxes of this third millennium. We are searching for stability while
calling for change.

We are looking for solidarity but we can grant more and more
consideration to our individuality and wont infringe on our personal rights.

We have an international outlook, and simultaneously we do love our
native soil even better. The Philippines is becoming familiar and we
change into Globalization but still, we feel we belong where we were born
or where we live, be it Manila, Cebu, Mindanao or anywhere else in the
Archipelago.
BY RUDOLF A. KOTI K
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We want to take part in scale economies while having the capacity to
develop and adapt our own local energy and strategy.

We call for rules, guarantees and ethics but we wish very much to
preserve the necessary flexibility that makes innovation possible. We want
to preserve the whole but respect the particular.

Because the franchising network is a place of mutual enrichment and
profitability, because the Franchisor and the Franchisee, two partners that
are co-responsible for their common business have institutionalized their
dialogue.

It is the only trading model that eases the partnership between two strong
economic actors, both deeply engaged in a daily battle, having
complementary capacities and clear separate responsibilities; the keeping
a straight long term objective in mind.

For would be Franchisors, don't be scared, go for it if you have the
qualifications to Franchise. Grow big with OPM, "others people money",
instead of investing your own in the growth of your Company. Think big
and grow big through Franchising.

Franchising is here to stay and to grow stronger and bigger in the third
millennium not only in the Philippines but worldwide. One step towards
globalization for established Philippine Franchisors may be franchising out
internationally as 25 of the more than 400 Franchisor clients of RK
Franchise Consultancy do already.

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For advertisement in FranchisingPH please contact J en at (02) 995.0734.
40,000 copies are printed every two month and distributed at major events
and in Coffee shops, Restaurants, Salons, DTI Offices, IPO Office and all
SM Global Pinoy Centers nationwide. Emailed to more than 40,000
addressee and available online on www.franchising.ph

BY RUDOLF A. KOTI K
111
FIFA FILIPINO INTERNATIONAL FRANCHISE ASSOCIATION AND RK
FRANCHISE CONSULTANCY ANNOUNCES THEIR SCHEDULES FOR
" ALL ABOUT FRANCHISING" SEMINARS WITH " TRADEMARK YOUR
BUSINESS" FOR 2011 AND 2012

MANILA FRANCHISE SEMINARS:
FIFA-RK FRANCHISE CENTER
G/F Minnesota Mansion
267 Ermin Garcia Street
Cubao, Quezon City

Saturday, October 01, 2011
Saturday, November 05, 2011
Saturday, December 10, 2011
Saturday, J anuary 28, 2012
Saturday, March 10, 2012
Saturday, April 21, 2012
Saturday, May 26, 2012

SPECIAL EARLY BIRD RATE: prepaid Pesos 750.00 only (regular
Participation Fee: P 1,200.00 if paid upon seminar day), for details call
Dhel or Bernadette at (02) 912.2946 or 912.2973

Seminar starts at 1.30 pm until 5 pm,
including seminar materials, CD "All about Franchising", snacks
FREE BASEMENT PARKING

CEBU FRANCHISE SEMINARS:

RK Franchise Consultancy Cebu Office
Unit 11 St. Patrick Square
Don Ramon Aboitiz Street
(Back of Redemptorist Church across St. Therese)
Saturday, October 8, 2011, 1.30 pm
Participation Fee: P 750.00 (Due to limited space only pre-paid
participants possible)
For prepayment and details call (032) 254.0473 or 253.5010

SM CITY CEBU CONFERENCE HALL D
Saturday, March 3, 2012

BY RUDOLF A. KOTI K
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CAYAGAN DE ORO CITY SEMINAR:
Dynasty Court Hotel
Thursday, October 25, 2011, Participation Fee: P 750.00

Seminar topics:
What is Franchising, History of Franchising, Defining Franchising,
Franchising 101, What does a Franchise provide, Benefits of buying a
Franchise, How to select a Franchise, Advantages and Demands of
Franchising, Mistakes by Franchise Buyers, Buying a Franchise,
Franchising your business, Legal Franchise Requirements, Franchise
Operations Manual, DTI Bureau Order on Franchising, The Future of
Franchising and Introduction to Franchise Opportunities

SEMINAR SPEAKERS
RUDOLF A. KOTIK
Franchise expert for 33 years in 3 Continents, developed more than 400
Filipino Companies into Franchise Systems
ATTY. KARLO NICOLAS
Expert in Intellectual Property Laws (in Manila seminars only)
For updates on seminar and expo schedules please visit
www.franchise.ph and click at Seminars & Expos. For special group
seminars or for associations please contact us.

For Reservation and details please contact:
RK Franchise Consultancy
Manila (02) 912.2946, 912.2973, 995.0734, 911.1966
Cebu (032) 254.0473 or 253.5010
Email: rk@rkfranchise.com, rkfranchiseconsultancy@yahoo.com
www.rkfranchise.com, www.franchise.ph , www.franchising.ph

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March 2-4, 2012
SM CITY CEBU TRADEHALL

For details call
(02) 995.0734

www.cebufranchise.com

BY RUDOLF A. KOTI K
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THIS CD IS BROUGHT TO YOU BY

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