Franchise Scams

Dreams of owning your own franchise can turn into a nightmare once you fall prey to franchise scams. Here’s what every potential franchisee should know.

Franchise Philippines success stories are often more written or talked about, like Mang Inasal Franchise Success Story, but there’s another aspect of franchising that seldom gets enough media attention – the franchise scam.

Franchise Scammer

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.

But people will continue to be victimized by franchise scams unless they are forewarned that other than legitimate franchisors, there are unscrupulous operators who are only after their hard earned money rather than their participation in a supposedly successful business formula.

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, we have gathered pointers from knowledgeable people to help them decide whether to sign that franchise contract or just politely walk away.

Falling Victim

Ma. Alegria Sibal Limjoco, chairperson of the Philippine Franchise Association says that the two major reasons why people are victimized by franchise scams are the following:

  • Lack of awareness and information about the franchising business
  • 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 later had paid the franchise fee for a similar cart that he intended to put up in another mall, the supposed halo-halo franchise and his cart simply disappeared.

To guard against being taken by such scams, Kotik advises prospective franchisees to check first if the franchisor is legitimate and for real. A good indicator, he says, is a franchisor’s affiliation with any of the three franchise associations in the country, namely, the Philippine Franchise Association, the Association of Filipino Franchisers Inc., and the Filipino International Franchise Association.

Warning Signs

In a recent seminar for overseas FIlipino workers, Armando 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:

  • that the franchise comes very cheap
  • that you can recover your investment in such a short time
  • 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 franchisor’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 franchisor 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.

Staying Protected

Bartomolome suggests that to avoid being victimzed in a franchise scam, the prospective franchisee should do the following:

  • Evaluate the prospective business franchise
  • Check out the longevity of the product to be sure that it isn’t just a fad
  • Appraise the product’s competitiveness with other products in the market
  • Find out how profitable the product is
  • Identify the business model (Is it a cart investment? Will it be located inside or outside a mall?)
  • Determine the total investment a franchisee needs to put up
  • 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 these being offered for only P10,000 or P15,000. They are likely to be scams.”

This view about the pricing of franchises is shared by Richard Sanz, president and CEO of Tea Square Food & Beverage Inc. He suggests that for prospective franchisees to appreciate why a franchise can cost so much, they should ask themselves this hypothetical question: If you’re a franchisor who has spent so much time and money to put up a system for an efficient and profitable business, and if it took you several years to make your brand name well known, would you sell that business for only P10,000?

Sanz then explain the logic behind franchising: “A franchisor sells a franchise because the business has proven to be successful, and one way to expand the business is to replicate it through a franchise. To be able to franchise the business, however, the franchiser has to develop the whole operations system and document it. This way, the franchisor can teach the franchisee every aspect of the business.- the product, the marketing strategy, the accounting system, the customer service.”

What surely marks a franchise scam, Sanz points out, is the absence of support to the franchisees. “Once you have paid the franchise fee of, say, P10,000, you can be sure that the scam franchisor will be gone in a matter of days.” he says. According to Sanz, victims of a franchise scam usually will find themselves in the following situations:

  • They couldn’t find the supplier for the franchised product when they start operating and the franchisor is nowhere to be found as well.
  • They will be enticed to sign the franchise agreement with the assurance that there would be no franchise fee, but before they can begin to operate, they will be asked to pay hidden charges as much as P200,000.

Paying Attention

Mercedes “Chedeng” Anglo, a retiree from a paper manufacturing company, says that people get victimized by franchise scams because they don’t study their prospective business well enough. “Most of them only think of how much they can earn big money fast and don’t really pay much attention to the business details,” she says.

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 Pearlshake 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 reirement 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 franchisor’s office and don’t pay for the franchise just anywhere. Do it in the franchisor’s office.”

Still another strong indication of a risky franchise is when its owners are not selective in choosing franchisees. This is a bad sign considering that the brand name of the franchise is greatly dependent on the performance of the other franchisees in the system. As Sanz says, “It takes just one bad egg and you’re done for.”

by Geraldine Bulaon-Ducusin
Entrepreneur

  • star uy

    hi, we are looking at franchising a new store. we already have 2 franchises of yellow cab. any more good franchise stores you can suggest?

  • Rod

    Can foreigners own a franchise in the Philippines?

  • jojogreg

    what can i do now that i’m already franchising a small capital which promise me that my ROI will recover in 2-3mos.time..Is this really a scam?pls. advise…