Programs & Policies on Enterprise Development Learning Module

Week 3 New and Existing Business

Learning Objectives:

To be able to discuss the steps in creating a business; To know the process, advantages,
disadvantages and critical questions of buying an existing business; To define what
franchising is; Types of franchising and its advantages and challenges.

Assignment:

Read the following sections (found in Reading Selections in the Lesson Summary
section). Try to answer the activity section based on your own understanding.

Look over the amount of reading before you begin, and make a plan to divide it up so
trying to absorb too much information at once. If you have any questions
about the reading, ask for help or do some extra research on your own.

Lesson Summary:

Creating A New Business

Running your own business is a stressful but good career and life choice. It demands
your time and focus. Start by expecting to live your work until it is established so it gets
off the ground

STEPS in Creating a Business

1. Start with an idea

2. Register your idea

3. Turn your idea into a Business

Research, research, research.

drawing board.

Write up a business plan.

Find partners and suppliers.

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BUYING AN EXISTING BUSINESS

a lot less work than starting from scratch. However, you will need to put time and effort

CRITICAL QUESTIONS

Why does the owner want to sell?

What is the physical condition?

What is the potential?

What legal aspects should be considered?

Is the business financially sound?

ADVANTAGES OF BUYING AN EXISTING BUSINESS

Business may continue to be successful.

Can use experience of previous owner.

Business may have best location.

Employees and suppliers are in place/established.

Inventory is in place and trade credit exists.

Easier time finding financing.

DISADVANTAGES OF BUYING AN EXISTING BUSINESS

Employees may not be suitable.

Location may be unsatisfactory.

Equipment may be obsolete.

Change and innovations can be difficult.

Inventory may be obsolete.

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Accounts receivable may be worthless than face value.

Business may be overpriced.

STEP BY STEP- HOW TO BUY AN EXISTING BUSINESS

1. Get a Professional advice

2. Research
3. Initial viewing and Valuation
4. Arrange finance
5. Make a formal offer
6. Negotiation
7. Completion

HOW TO INVEST IN THE RIGHT FRANCHISE

What is franchising?

concept. In a franchise relationship, the franchisee is granted the right to market a product
or a service under a marketing plan or a system that uses the trademark, name, logo
and advertising owned by the franchisor.

What are the different types of franchising?

Product franchising - also known as trade name franchising, is that type of franchising
wherein a manufacturer grants a franchisee the right to sell its products, but with no
method of doing business.

Examples of this type of franchising are car dealerships and service stations.

Business format franchising - also identified as a name and process franchise, features
a broader and ongoing relationship between the franchisor and the franchisee, wherein
aside from granting the right to use the name and market the products and services of
the franchisor, the franchisee is also provided a complete plan for managing and
operating the business a transfer of the proven way of doing business that has been
developed by the franchisor. This plan often includes a full range of services,
including site selection, training, product supply, marketing plans and even assistance in
operating systems, technical expertise,
marketing systems, training systems, management methods and essentially all relevant
information, are transferred to the franchisee.

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What are the advantages and challenges of franchising?

Advantages

High success rate

A franchise is a business model based on proven ideas and implementation. As opposed

to having to build a new business from scratch, a franchise business comes with a
reduced calculated risk.

Recognized brand and trademark

A franchise offers a product or a service that has become a household name. The
powerful brand names that your franchise carry will guarantee your success.

You are not alone

Franchisors discover and perfect operating and management efficiencies that they pass
on to their franchisees. These powerful and superior training and coaching system offered
by the franchisors are designed either to help a franchisee overcome his lack of
experience in running a business, or polish an acquired business sense.

Ease in financing / Re-salability of the franchise

Financial help for businesses with established good reputation come easy. Businesses
with high success rates get nods for loans from banks and financial institutions.
Moreover, a good franchise is an appreciating asset, thus maintaining its re-salability at
all times.

Huge profit

Through the franchisors, obtaining lower-cost materials and supplies is possible. This
benefit, coupled with the right marketing strategy, brand positioning, and growth of the
customer base, could only translate to increase in sales and immense profit.

Challenges

Control

As franchising involves the use of a proven business expertise, trademark, knowledge

and training, the franchisee is required to follow the system. Some franchisors impose on
a certain degree of control that makes following the system difficult.

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 Programs & Policies on Enterprise Development Learning Module

On-going costs

Aside from the franchise fee and royalty, franchisees pay a certain percentage of their

such as advertising costs, are also charged regularly to franchisees.

Failed expectations

Conflict may arise in a franchisor-franchisee relationship due to incompetence.

Franchisors can destroy its franchisees by failing to give ample support or by squeezing
them too aggressively for profits. On the other hand, franchisees who tend to be lax in
adhering to franchise agreements create dents on the established system, later on
creating damage to the business or the brand.

What is a good franchise business?

Unique. A fresh or unique concept that has the potential to expand nationally,
and even internationally.

Profitability. The business must be consistently profitable.

Systematized. The business operating systems should be polished and

efficient. These systems and procedures should be in manual form.

Training. The transfer of knowledge through training should be relatively easy

for others.

Excellent margins. The profit margins built into the concept should be viable
enough that every franchisee who adheres to the franchise system can realize
an attractive Return on Investment.

What should I consider before buying a franchise?

1. Ask yourself why you want to own a franchise.

2. Begin the search. Look for opportunities that are in harmony with you and that
greatly interests you.

3. Do your own research:

Have a complete understanding of the business.

Check on the business experience and track record of the franchisor.
Check your personal resources experience in running the business; the hours
and personal commitment to run the franchise; and, how much money is to be
invested.
Determine the terms and conditions of the franchise agreement.

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Get information on the franchise by visiting stores and interviewing existing

franchisees.
Check on necessary government and other related permits.

4. Concept Look into the product or service and discern what makes it stand out
among other businesses.

5. Location, location, location Ask about the territory rights. Make sure that you get a
good site selection.

The Franchise Agreement

The Franchise Agreement (FA) - is the legal document which details the rights and
obligations of the franchisor and the franchisee, including the length of term, the start and
end periods of the agreement, the renewal provisions and the end of the contract.

What is included in the Franchise Agreement?

Terms of Agreement - The FA carries a contract explanation detailing the type of

relationship a franchisee is entering into with the franchisor. Since a franchise
relationship is temporary in nature, the FA should specify how long the agreement
will last. At the end of that appointed period, the franchise is considered null and
void.

Renewal - Renewal period grants the franchisor the chance to review the FA thus

good performance is the most common of all criteria. However, a renewal does not
guarantee the retention of the original terms and conditions of the agreement. If
applicable, a renewal fee is also charged by the franchisor.

Investment Amount and Fees - This part of the FA explains the total investment
cost and its inclusions, as well as the date a franchisor is to be paid. Included in
these are:

Franchise fees - The initial franchise fee, which may be non-refundable, is paid at
the start of a franchise relationship thus giving the franchisee the right to engage
stem.

Royalties -
typically paid weekly, biweekly or monthly.

Marketing contribution - System-wide marketing contributions are also based on

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Training and Support The FA should state the kind of training and support the
franchisor will provide.

Purchase of Products - Products and supplies used in the franchise system should
maintain consistency. Hence the FA specifies that the franchisee may only buy
from suppliers accredited by the franchisor. A detailed list of approved suppliers is
also provided in the Operations Manual.

Territory- The Territory determines the geographical boundaries a franchisee may

operate, or within which no other unit

Termination - The FA carries in it the grounds for termination of the contract. In

some cases, violations of such conditions may still be remedied, however if
repeated over time or failure to act on them will still lead to termination of the
contract.

Agencies to go to for help in Franchise Business:

1. Philippine Franchise Association (PFA)

Unit 701 OMM-Citra Building
San Miguel Avenue, Ortigas Center, Pasig City
Tel. Nos.: 687-0365 to 67; 798-2543; 579-4841
Mobile: 0917-8320732 ; 0999-8833732 ; 0932-8792732
Fax No.: 687-0635
E-mail: pfa@[Link]
URL: [Link]

2. Bureau of Trade Regulation and Consumer Protection (BTRCP)

2/F Trade and Industry Building
361 Sen. Gil Puyat Avenue, Makati City
Tel. Nos.: 751-0384 loc. 2221-2229
Fax No.: 890-4949
E-mail: btrcp@[Link]

3. Securities and Exchange Commission (SEC)

SEC Building, EDSA, Greenhills, Mandaluyong City
Tel. Nos.: 726-0931 to 39
Fax No.: 725-5293

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 Programs & Policies on Enterprise Development Learning Module

Why People Become Entrepreneurs?

Being your Own Boss

Self-management is the motivation that drives many entrepreneurs.

Financial Success

Entrepreneurs are wealth creators.

Job Security

Over the past ten years, large companies have eliminated more jobs than
they have created.

Quality of Life

Starting a business gives the founder some choice over when, where, and
how to work.

Entrepreneurial Characteristics

Vision - entrepreneurs begin with an overall idea for how to make their business
idea a success.

High Energy Level - a willingness to work hard.

Need to Achieve - entrepreneurs work hard because they want to excel.

Self-Confidence - fearlessness in the face of difficult odds.

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 Programs & Policies on Enterprise Development Learning Module

Tolerance for Failure - entrepreneurs are not easily discouraged.

Creativity - entrepreneurs devise innovative ways to overcome difficult problems

and situations.

Tolerance for Ambiguity - entrepreneurs take in stride uncertainties.

Internal Locus of Control - entrepreneurs believe they can control their own fate.

Materials:

N/A

Activity:

Answer the following questions, thoroughly.

1. Which is more effective Franchising or Independent Business? Why?

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2. Discuss who are the Franchisor and Franchisee

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 Programs & Policies on Enterprise Development Learning Module

3. The greatest mistake many franchisees do is not reading the whole

franchise contract

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4. Given the chance, what franchising business scheme should you consider? Why?

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Learning Assessment:

Not yet
Areas of Assessment Developing Achieved Notes
evident
To be able to discuss the
steps in creating a
business.
To know the process,
advantages,
disadvantages and critical
questions of buying an
existing business.
To define what franchising
is.
Types of franchising and
its advantages and
challenges.

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