Is it Worth It Paying So Much for a Franchise?

Should I GAMBLE MY LIFESAVINGS on a franchise?

  I have on quite a few occasions encountered  people wanting to start a business and asking if it is worth paying so much for a franchise, to wit:

1.  A Siomai House franchise is about P250,000.  A Top brand Scramble about P150,000 to P200,000.  Other franchise package still entail additional investments on the part of the franchisee like kitchen equipment (mixer, scales etc) that are not part of the franchise, crew uniform.

2. If you want to be in a mall, expect to pay P20,000 to P35,000/month in rent. That's not all, you still have to pay CUSA (or Common Utility, Security, Janitorial) of P2,000/mo or more, Aircon charge of P2,000 or more, Pest Control etc.  You will be expected to join Mall-sponsored Promotional Events by way of sponsorship. (Add 12% VAT to all figures.Hay!)

3.  If you set-up a Siomai or Sisig or some foodcart, you may be required to rent a separate Storage Room in the basement of the mall to store your chest freezers, dry materials like styro packs, etc and rent is as much as the kiosk itself especially if the area is big.

4.  If you need electrical and telephone/DSL landline and your kiosk location is far from the PLDT/Meralco Main Distribution Panelboard, the mall will charge you Feeder Line fee which can reach up to P39,000 or more (it's a per meter charge).  This does not include yet the Installation charge of the Telecom carrier.

5.  Add mall rental of P35,000 per month (before VAT) and rental deposit of between 3 months (for medium-size or single-location malls)  to 12 months (for the top chain malls).

6.  If you want to put tarpaulin standees around the mall to let everybody know you are in the mall, it will cost you P500 or more per standee a month.  NOTHING IS FREE.

BTW, do not expect the franchisor to conduct any meaningful promotions on your behalf (other than a half-hearted opening day support which you will pay for too)  and so, you better be active MARKETING YOUR FRANCHISE!

7. If you cannot afford the name brands of say Scramble at P150,000/franchise, should you get the lesser known brand at P60,000/franchise?  Hard to say what is the best to do as you will pay the same mall overhead whether known brand or not.

8.  You will sign a 6-month or 12-month rent contract but if after 3 months of losses, you decide to call it quits--- You might be required by the mall to pay also the remaining months of the contract and forfeit your security deposit.

9.  If the franchisor has a poor Supply Chain or Logistics department, you may have to pick-up the supplies yourself thereby increasing your overhead still. 

10.. Again, if the franchisor has poor logistics, your kiosk may ran out of stocks and you lose customers and still HAVE TO PAY THE RENT. (Note:  I had a Blog comment from a reader complaining that after he has paid for a Scramble franchise, he is having difficulty with supplies delivery and coordination with the franchisor.)

11.  You will treat your Security Deposit as an Expense because the only time you will see your Security Deposit again is when you decide to close shop.

12. The Franchise fee is also to be treated as an Expense too as that goes to the franchisor as income.  Likewise, many franchisors charge a Renewal Franchise fee of maybe same amount or half of the original franchise fee (adjusted for price increase!!!)  after say 3 years. 

13.  So you better make sure you can earn back the Franchise fee plus Security Deposit plus your  Capital outlays during the first 3 years and still earn a reasonable profit.

14.  On the other hand, if you start your own brand:

a.  The Mall may not give you space as they always allocate the space to the known franchisor and let the franchisor to whom they will give the franchise to.

b.  What you save in franchise fees can be used to lower your selling prices or advertise more.

c.  You will have to setup your own Purchasing, Commissary/kitchen, warehouse and Logistics capabilities like storage and delivery truck.

d.  By not getting a franchise, you will have to prepare yourself to be a really HANDS-ON owner.

e.  You will have to personally hire, train, deploy and fire your crew as well as be the payroll master and personnel department all-in-one.

f. Should you pay yourself a salary (and increase the store's expenses?)  Hmmmmmmmmmmmmmmm

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