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Wednesday, July 20, 2011

Franchising : Beware of Food Cart Franchising Scams!

Street foods are no longer on the streets, they're in the malls! With the success in the country of the big food industry players in the franchising business such as Mc Donald's, Jollibee, KFC and 7-Eleven come the proliferation of franchisor wannabees, thus the mushrooming of food carts or mobile kitchens all over the different establishments! The food products sold by street vendors and hawkers although locally known to be delicious and cheap are sometimes not patronized due to concerns on freshness and cleanliness, as these products are normally displayed without refrigeration for several hours mostly on portable stalls on the streets. The street vendors, more often than not also do not have business permits therefore did not pass food quality and sanitation tests required for legit food vendors.

Some street foods however are now packaged and presented to consumers in a seemingly much cleaner and healthier fashion through food carts or mobile kitchens in malls and other similar establishments where the vendors wear uniforms; some even have hair nets, plastic gloves and aprons! We see mothers easing up a bit, allowing their children to buy iskrambol (Shaved ice with sugar, pink food coloring and artificial flavoring topped with powdered milk and chocolate syrup), kwek-kwek (dip fried quail eggs coated in an orange batter served with vinegar), deep fried squid balls, sago't gulaman (a sweet cold beverage of tapioca balls and diced gelatin with artificial flavoring) and the likes.

A lot of people are dreaming of becoming successful entrepreneurs but lack the expertise or the capital needed to put up one. While some, may just be lacking in initiative or imagination. Thus, the idea of franchising for as low as P20,000 - P30,000 is sometimes considered as a good opportunity to start up a business quick and easy. However, many are disappointed with the result. One, is a friend of mine who just recently closed her food cart of dimsums. She said the overhead cost was way above the expected income and actual sales! She opted to buy out and pre-terminate her franchising contract rather than lose more in rentals and wages! Ugh!

Franchising is actually riding on the proven successful sales track record of a business by carrying the company's trademark and business model. It is a business venture that most of the time equally benefit the franchisor as well as the franchisee. On the part of the franchisor, it enables him to expand by building a chain of stores to distribute his products and/or services while avoiding direct investment and liability over the stores. On the the other hand, the franchisee will have the advantage of starting up a business quickly by adapting the successful business operation strategies and carrying the brand name or trademark of the franchisor instead of developing his own which is more costly and risky. The downside however for the franchisee is that it never really is his own business. He merely leases an opportunity in a territory that usually lasts for a fixed time period as stipulated on the Franchising Agreement with an option for renewal.

In practice, there are normally 2 types of  payments made to the franchisor namely the "royalty" for the use of its trademark and the up-front, one time, franchise fee for the training and advisory services provided.

In consideration of the above, these are the points one must consider before acquiring a franchise:

1. Corporate Image
The company and its products must be an established name in the industry. It must enjoy a widespread positive brand name awareness as evident by consumer patronage and loyalty. If the the product is popular but not the brand itself, then think again. For example, we all know that Siopao (steamed buns with pork filling) is a popular snack but consumers would definitely go for Hen Lin's, Chowking's or Kowloon's than an unknown brand say, Pao-Pao's Siopao.
2. Disclosure Document
The franchisor makes claims in the disclosure document regarding his earnings, actual and/or forecasted. Said claims must be backed by supporting papers that are verifiable. The disclosure document must also include not only the franchisor/s financial background but also his criminal records, if any, especially those dealing with financial crimes such as swindling, estafa, fraud, cheque fraud, credit card fraud, mortgage fraud, scams or confidence tricks.
A full disclosure of the investment requirements, potential profits, performance records of existing franchises as well as those of terminated ones and the likes must be presented by the franchisor. Failure of a full disclosure is a misrepresentation. 
 It will not hurt if you do you own background checking, one can never be too careful!

3. Longevity
How long has the business been operating successfully? Best rule of thumb must be at least more than 10 years! If it is any less than this, then you might want to consider putting up your own business instead.
4. Number of franchisees
Make sure you're not the first one to franchise from a company or only a handful did prior to you! Check also if there are frequent terminations, cancellations and  non-renewals of franchise. This should be a problem indicator.
5. Support
You must ascertain that you will be given enough support with regards to training of employees as well as advertising. Franchisees are often required to contribute a percentage of their income to a common advertising fund. Find out also how the fund is disbursed. Check also if you get discounts or reimbursements if you finance your own advertising campaigns.
6. Costs (Initial and On-going)
Of course you must be prepared to pay the cost of franchising a business. Needless to point out that it must be less than the projected income to gain a good margin of profit based on the time frame of leasing the business. Compute your overhead expenses or on-going expenses such as rentals, wages, utilities, transportation and taxes against the projected gross income before plunging in!

7. Location, location, location
Aside from your good business management and the support that you will get from the franchisor, the business' location will play a major role in the success of your franchise. Therefore, great attention should be taken by studying the product, the target market, the population's demographic profile, even the traffic of transient visitors in the area you wish to operate your franchise.
8.  Get a good lawyer
There is no specific franchise legislation yet in the Philippines so obviously there are also no franchise lawyers, but it is covered under commercial law. So, go find yourself a good advise from a commercial law expert before signing a franchise agreement.

Good luck and beware of franchise scams!


  1. A franchise solicitor will be able to help you in no of ways and gives your business the best way to get success. thanks for sharing

    1. A particular one franchisee is really beneficial for you to gaining its business through many ways like new ideas , new strategies and new tactics. It is the best way to minimize your risk through various status.

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  2. Hi ENGANIL,

    Thanks for dropping by and offering your services.

  3. A business owner always try to get success. So try to collect all previous financial data and should conservative about revenues and expenses. Will also help and I agree that maker sure you know that you're not the first one to franchise from a company. Keep sharing valuable information.

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    1. Hi Sugar,

      Thanks for reading and your comment :)

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