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Doing due diligence before buying a franchise

Those aspiring to go into franchising have to take background checking to heart when looking for business partners.
By Ieth Inolino |

The local franchising industry is still riding high since experiencing a boom in the 1990s. A winning combination of low capital, low risk, and a high success rate (up to 90 percent) has enticed a lot of Filipinos to get into franchising. The increasing number of franchisors (from almost 600 in 2000 to over 1,000 in 2010) and a much bigger group of franchisees (from 30,000 in 2000, growing over four times to 124,000 in 2010) are concrete proof.


These numbers are conservative estimates though, limited to legitimate business entities that have remained profitable and supportive of their franchise network. Working under the radar, despite going head-to-head with legitimate franchise firms, are small-time, dishonest individuals who pass themselves off as franchisors. The Department of Trade and Industry (DTI) has received complaints every year about these franchise scammers. While franchising is a lucrative industry to be in, aspiring franchisees and franchisors must know how to properly conduct background checking to avoid losing money to swindlers. Here are some guidelines:



The qualification process

A franchise company’s qualification process is almost always unique to that company. Requirements and qualifying criteria vary for every franchisor, but the basics are:

1 Interested applicant sends a letter of intent;

2 Applicant answers a pre-qualification form;

3 He waits for the approval of the franchisor;

4 He prepares the documents that the franchisor needs; and

5 He studies the franchise investment package and understands the franchise agreement.


While the franchisor primarily has the upper hand in most of the stages, the applicant is expected to take a close look at every step of the process to avoid franchise pitfalls.


The anatomy of a reliable franchisee

As a franchisee, examine your readiness for your impending enterprise. You should have an insatiable desire for learning, and part of that is obeying and following the business directions of the franchisor. Quality control and site visits are mandatory duties of the franchisor too, so if you find it difficult to meet standards, you might have to think twice before getting a franchise.



The anatomy of a credible franchisor

To protect prospective franchisees, the DTI-Bureau of Trade Regulation and Consumer Protection (BTCRP) recently released a Bureau Order stating the characteristics of a reliable franchisor. The franchisor must have, among others:

1 A certified trademark from the Intellectual Property Office of the Philippines;

2 A certified, strong, and successful business franchise;

3 A clear system in running the business

4 A contract and franchise agreement; and

5 Documents and permits from government bodies relevant to the business.


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