Sunday, May 31, 2009

STI: Starting a business? Try a franchise

May 31, 2009

Starting a business? Try a franchise

It helps to reduce risk and setting-up cost, though success is not guaranteed

By Debbie Yong 


Retrenched with a decent sum of money and not sure what to do next?


Or have you always yearned to be your own boss but do not know where or how to learn the ropes?


For some individuals, the answer could lie in franchising. In this arrangement, one party (franchisor) develops a business model and licenses the rights to operate it, under its trademark or name, to another (franchisee).


Both enter into a legal contract, ensuring that the franchisee gets support to run the business for a fixed time. An initial fee is paid and annual or monthly royalty charges are imposed. These range from 3 per cent to 20 per cent of the franchisee's revenue.


Retail franchisees typically pay lower royalty fees while those providing services pay more. According to the Franchising and Licensing Association of Singapore (FLA), there are about 250 companies here with more than 3,000 franchisees under them. Half are homegrown concepts. These figures are based on a 2006 study by the FLA.


The annual turnover of Singapore-based franchises, both local and foreign, is estimated at $5.48 billion.


But though the franchise path may seem well-trodden, franchising consultants advise that you have to do background checks before signing on the dotted line.


Factors to assess include the franchisor's financial position, the demand for the product and whether existing franchisees are pleased with their business.


It helps to engage a lawyer to look through the terms of the franchise agreement, such as the rights and obligations of each party, said Ms Jasmine Tham who runs business consultancy Bean Counters.


Exit clauses, such as early-termination penalty fees and restriction of businesses entered into after termination of a franchise, should also be scrutinised.


While the franchisee can tap on benefits such as economies of scale in purchasing, joint advertising and promotions and an established customer base, it has its downsides too. 'If you have a franchisor indiscriminate in choosing franchisees, then the black sheep within the chain can be a big minus for all,' said Mr Albert Kong, chief executive officer of Asiawide Franchise Consultants.


Franchisors may also grant rights to separate operators located in close proximity, which results in rivalry for the same customers.


Hence, it is important for potential franchisees to discuss their plan in detail with their franchisor and set realistic expectations.


'Franchising does help reduce the risk and cost of setting up the business but like any business, there's no guarantee of success,' said Ms Terry Wong, general manager of FLA.


And not everyone is suited to be a franchisee. Entrepreneurial people, for example, may feel reined in.


'He may want to invent new things and run ahead of others but he may not get to do so because the franchisor has other considerations,' said Mr Kong.


They bring yogurt treat to Singapore


The brand is known for causing snaking queues and retail wars in the United States and South Korea.


Now, Korean frozen yogurt Red Mango can be found on Singapore shores in the form of a 100 sq ft stall outside Carrefour supermarket in Suntec City. It opened last May.


Behind the venture is MrChua Wei Yang, 40, and his team, comprising his wife and another couple. They decided to take on the franchise in September 2007. Mr Chua had been introduced to the brand by an ex-colleague who was working with Red Mango. 'We were won over when we tried it, and we wanted more people in Singapore to know about it,' said Mr Chua, who also runs an IT consultancy.


'But if we started a business from scratch, there is a higher risk and it takes time to build up a brand name and a customer base.' When the stall opened, Yami Yogurt was the incumbent frozen yogurt brand while other new operators were springing up, he said.


'Beyond the brand name, frozen yogurt is a product that requires research and development and by going with Red Mango's tried-and-tested formula, the difference shows in the taste,' said Mr Bernard Ho, 44, one of Mr Chua's partners.


Before inking the franchise agreement, Mr Chua's team visited South Korea as well as Bangkok, the brand's only other Asian outpost.


They checked out outlets and spoke with franchisees as well as Mr Daniel Kim, Red Mango's founder-CEO.


Mr Chua said: 'We felt the company genuinely encouraged all its franchisees to succeed, rather than just try to sell you something.'


Citing confidentiality clauses, he declined to reveal his franchise fee and would say only that 'a few hundred thousand' was invested. A large part of the start-up cost came from buying high-end equipment, as stipulated by Red Mango's requirements, and renovation and rental fees. Mr Ho said monthly royalty fees are less than 8 per cent of revenue.


They hold the master franchise for Singapore - others who want to open outlets here will have to sign on as their franchisee - and their contract is for 10 years. There is no penalty fee for early termination.


Before the opening of the Suntec outlet, a team of four from Red Mango's South Korean headquarters, including the CEO, flew here to dispense advice, from marketing tactics to how to serve the yogurt and display the toppings.


As raw materials such as milk and fruits are sourced locally, Red Mango staff also helped tweak the frozen-yogurt formula till it was 'only a slight variation' from the original, Mr Chua said.


Taste tests were also conducted to ensure that the formula suited local palates.


She helps to set up 'third generation'


From running a franchise six years ago, Ms Susan Loke now manages franchisees and shares her experiences with potential ones.


In her late 30s, she was the first franchisee of childcare centre chain Cherie Hearts when she opened a branch in Kembangan in September 2003. The chain has 50 outlets today.


It was the first foray into running her own business for Ms Loke, then a senior business development manager in the construction industry. Cherie Hearts founder Sam Yap, a former colleague, had shared his expansion plans with her over lunch.


'I knew him well and was used to his working style. I knew that he was a man with foresight and I was confident that he would do well,' said Ms Loke, who roped in childhood friend Jesselin Foo to handle the day-to-day operations of the centre.


'My biggest concern was the learning curve. We were both unfamiliar with the field and there were many rules and regulations,' she said. 'What if the licences weren't approved but we still had to continue paying our staff and rent?'


Various licences had to be obtained from the Ministry of Community Development, Youth and Sports (MCYS) before a childcare centre could be set up.


But a visit to Mr Yap's first centre in Limau Garden eased her concerns.


She said of Cherie Hearts co-founder Gurchan Singh: 'Dr Singh was very approachable and we saw how good a rapport they had with the children's parents.'


Both Mr Yap and Dr Singh helped Ms Loke and her partner with setting up the centre and making sure their centre met MCYS' hygiene and safety licensing criteria.


She paid $65,000 in franchise fees and 8 per cent of monthly revenue as royalties. Curriculum, IT support and marketing and branding efforts are centrally coordinated.


In 2007, while she was expecting her first child, she left her job and joined the Cherie Hearts headquarters as a senior vice-president of business development. She is now the president of local operations for the chain.


Her 6,000 sq ft centre, which started with 20 children and four staff, now has 122 kids under the care of 12 staff.


She plans to open a second centre by the end of the year.


These days, she shares her experiences of running a childcare centre with potential and current franchisees, whom she meets at monthly meetings and job fairs.


Her proudest achievement: To see what she calls 'third generation' franchisees.


She said, with a laugh: 'We had a parent of one of the children start a franchise, and then a parent from that centre opened one too.'


He has to learn faster to help others grow


If you run a small or medium-sized enterprise, Mr Damian Boon wants to help your business grow.


The 46-year-old is a franchisee of Sales Partners, a business coaching and consultancy service founded by American Blair Singer.


The latter is an associate of Mr Robert Kiyosaki who wrote Rich Dad Poor Dad, a book dispensing investment and wealth management advice.


Said Mr Boon, who met Mr Singer at a seminar the latter conducted here in September 2007: 'His teaching methodologies resonated with me. I felt that I could combine my talent, skills and experience with Blair's proven systems to help other people.'


Mr Boon was then a service quality manager at an insurance firm. He had spent 20 years as a corporate employee in marketing, sales and customer service.


These days, he helps owners assess the financial health of their companies and conducts sales training and other courses for their staff. He has worked with more than 30 clients so far, from five-man teams to a firm with 150 staff.


Watching the businesses increase their sales revenue by up to 20 per cent and seeing people become more confident are some of the rewards, he said.


The best part of his business, however, is that he gets to upgrade himself as well.


The $44,000 franchise fee he paid includes a nine-month induction programme with a United States-based trainer conducted via teleconference calls.


He also received textbooks and CD kits, which he listens to 'everywhere, from the car to the dinner table'.


'For me to help others grow, I have to learn and grow at a faster rate.'


The monthly royalty fee is 21 per cent of sales. It helps motivate him to work harder to source for business.


His business requires a lower start-up cost compared to food or retail franchises which have high equipment, rental and staffing costs, he said.


'On top of that, these business owners have to manage other issues like shop theft and stand in at odd hours for absent staff, whereas the only cost to me is my time in travelling to meet clients.'


His wife left her job as a customer service manager to join his business last November and he hopes to eventually enlist trainers to help grow his business.


Mr Boon said: 'I give myself three to five years to get all the engines going.'

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