Franchising

Franchise success stories are often written or talked about, but there’s another aspect of franchising that seldom gets enough media attention—the franchise scam.

People who get scammed in the franchising business naturally don’t want to talk about the experience. After all, it is proof positive that their “gullibility” has made them lose not just their money but also their self-respect. Indeed, it would be foolhardy for anyone to publicly admit that they have been scammed in a franchising deal.

Would-be franchisees should keep in mind that if they aren’t discerning and cautious enough, nothing can protect them from falling victim to a well-laid franchise scam. Thus, for those being propositioned to buy a franchise, Entrepreneur has gathered pointers from knowledgeable people to help them decide whether to sign that franchise contract or just politely walk away.

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Ma. Alegria Sibal-Limjoco, chairperson of the Philippine Franchise Association (PFA) , says that the two major reasons why people are victimized by franchise scams are the following: (1) lack of awareness and information about the franchising business, and (2) people’s attraction to putting up only a small capital for a business.

“Prospective franchisees should know that a business that hasn’t proven to be successful can’t really franchise itself legitimately,” she says. “In particular, the public should beware of businesses that require a franchise capital of only P10,000 to P20,000. Not all businesses that require such low capital could be genuine.”

This concern over very low-priced franchises is shared by Rudolf Kotik, a franchise consultant. “Franchise sellers who offer franchises for as low as P10,000 will often tell you later that this amount is just a down payment,” he says.

And Kotik says that not all scams are confined to franchises in the P10,000-range. He particularly cites the case of a halo-halo cart operator who succeeded in running off with P330,000 from a prospective franchisee. Once the latter had paid the franchise fee for a similar cart that he intended to put up in another mall, the supposed halo-halo franchisee and his cart simply disappeared.

In a recent seminar for overseas Filipino workers, Butz Bartolome, president of BMG Franchise Developers, Inc., identified three telltale signs that a seemingly great franchise opportunity is a scam. The franchise agent would make you believe (1) that the franchise comes very cheap; (2) that you can recover your investment in such a short time; and (3) that you would become a millionaire as a franchisee and could then afford to stop working.

Bartolome warns that all these simply can’t be true with legitimate franchises. “One more thing, people pushing a franchise scam won’t even let you know who owns the franchise,” he says. ”Often, the agent of a franchise scam will simply give you a three-page franchise agreement to sign. When this happens, simply ask yourself: How can you put down all of the franchiser’s and franchisee’s obligations in just three pages? A real franchise agreement will probably be as long as 35 to 45 pages. In fact, some very thorough agreements can have as many as 200 pages.”

In a legitimate franchising arrangement, Bartolome explains, the franchiser and franchisee have to work together in running a specific business. Their relationship will be defined by a contract called the franchise agreement. Without this agreement, there’s no franchise to begin with.

Bartolome suggests that to avoid being victimized in a franchise scam, the prospective franchisee should do the following: (1) evaluate the prospective business franchise; (2) check out the longevity of the product to be sure that isn’t just a fad; (3) appraise the product’s competitiveness with other products in the market; (4) find out how profitable the product is; (5) identify the business model (Is it a cart investment? Will it be located inside or outside a mall?); (6) determine the total investment a franchisee needs to put up; and (7) identify the various support programs that will be extended to the franchisee.

“When you buy a franchise, you’re actually buying the experience of the franchise owner in running the business, and you’ll be selling the name of the franchised product,” he says. “Obviously, you can’t get all of these for cheap. These days, you may be able to get a legitimate franchise for as low as P150,000, but you should be suspicious of those being offered for only P10,000 or P15,000. They are likely to be scams.”

 

She herself got scammed once. That was when a friend invited her to invest in the selling of some very popular brands of consumer goods. She readily shelled out P5,000 for the supposed franchise but nothing came out of her investment.

Despite that experience, Anglo kept an open mind about franchising. In 2003, she decided to buy a Zagu pearl-shake franchise. She did so because she had been impressed by the long line of customers at Zagu outlets in the malls. So one day, bringing with her some of her retirement money, she went directly to Zagu’s main office to apply for the franchise.

She took note that there were many employees in the office, and that the company’s officers were also on hand to entertain prospective franchisees. This convinced her that Zagu was legitimate.

Based on this experience, she has this advice to would-be franchisees: “Before deciding, observe several outlets of the franchise to see for yourself if the product really sells well. Then once you have decided, negotiate in the franchiser’s office and don’t pay for the franchise just anywhere. Do it in the franchiser’s office.”