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How to start a franchise business: 10 factors to consider before taking the plunge

10 minute read

Deciding what kind of business to go into is a big issue that many entrepreneurs encounter. One way to own a company and increase your chance of success is by starting a franchise business. There are many industries that offer franchise opportunities in Singapore, with the country being a hotspot for businesses to operate in. It’s not just local brands though, international businesses have set up franchises here too, taking advantage of Singapore’s low tax rates and economic stability.

Being a franchisee opens doors to numerous options that you might not have when you start your own business. It’s a path worth considering especially if you’d like to start a business and grow an existing brand that you might already be familiar with. This article will take you through what you should consider before starting a franchise business in Singapore.

Overview:

What are the pros and cons of having a franchise business?

A franchise business involves operating a company under the brand of another business. The franchisee agrees with the franchiser to sell their products or services for a specific period, in return for payment to the franchiser.

Most franchises in Singapore are in the food and beverage, retail, business services and health-care industries. Some examples of businesses in Singapore that offer franchise opportunities are 7-Eleven, Old Chang Kee, Toast Box and Charles & Keith.

Here are some pros and cons of franchise businesses.

Pros to running a franchise business

Cons to running a franchise business

  • You’ll have access to marketing and branding that will help to grow your business.
  • You don’t have complete control over your business – you won’t be able to make your own business decisions as you have to follow the guidelines set out by the parent company.
  • Comes with a franchise model and business framework that has a proven track record.
  • There is no flexibility when it comes to marketing and branding.
  • It’s easier to secure financing, compared to starting your own business.
  • High initial start-up costs that can be hundreds of thousands of dollars – often far higher than starting a new business from scratch.
  • You’ll be provided with training, as well as data analysis on what works and what doesn’t – advice on troubleshooting common issues is highly valuable.
  • Monthly franchise fees can really add up.
  • As long as you have the required capital to invest in a franchise, you can start one without any prior business knowledge.
  • A higher level of accountability compared to running your own business.

What are the rights and obligations of franchisers and franchisees?

In Singapore, there are no separate rules or laws that relate specifically to franchise businesses. Companies involved in franchise agreements – whether as a franchise owner or a franchisee – are bound by the regular laws of the country that relate to companies and contracts.

Here are some key organisational points to keep in mind:

  • The Franchising and Licensing Association of Singapore (FLA) is the national franchise body. It works to promote and facilitate the growth of franchising both locally and abroad. It is, however, not mandatory for companies to become members of the FLA. But if they choose to do so, they are bound by the body’s Code of Ethics.
  • Franchise businesses can operate as a sole proprietorship, partnership, limited liability partnership (LLP), or a company. The income tax responsibilities depend on the type of business structure. If the franchise owner is not a Singapore resident, the local franchisee has to pay withholding taxes to the Inland Revenue Authority of Singapore (IRAS) on royalties payable to a franchiser. The prevailing withholding tax rate is 10% but companies also have to take into consideration whether there is a mutual double taxation agreement (DTA) between Singapore and the franchiser’s home country. Countries that Singapore has comprehensive agreements with for the avoidance of double taxation include the United Kingdom, South Korea, India, Japan, Germany and China.

Franchise business regulations

There are also certain rights and obligations that both franchisers and franchisees have.

The franchiser has:

The franchisee has:

  • The obligation to provide the franchisee with all the information needed to run the business
  • The obligation to respect the franchise agreement
  • The obligation to ensure that the franchisee and their staff have access to training
  • The obligation to use the technology given to them as required by the franchiser
  • The right to be compensated for granting the franchisee the rights to operate the business
  • The obligation to pick the location for the franchise business
 
  • The obligation to pay royalties or any other form of compensation to the franchiser, as set out in the franchise agreement
 
  • The right to use the trademark of the franchise and the profits that arise from its use

10 factors to consider before starting a franchise business

Just because the franchiser provides you with training and lots of business materials, it doesn’t mean that you don’t have to do any homework when setting up a franchise business. Here are 10 important points to take note of before making this big decision.

1. Financial stability

Does your company have the necessary finances to become a franchisee? Research extensively to find out how much money you need to start this franchise business. List down the various costs involved and find out in which areas your franchiser will be providing you with support. For example, even though most franchisers offer general marketing support, some might require franchisees to pay extra for marketing materials. Find out beforehand what the total costs are and if you’re in a financial position to start this franchise business.

2. Money

Investment costs vary depending on the type of franchise business. For example, more often than not, food chains require franchisees to put down more capital. As a general rule, you need to have enough to cover the initial start-up costs (i.e. capital and franchise fees) as well as to run your business (i.e. rent, renovations, employees’ wages). Don’t forget to take royalties into account as this will affect your monthly income once you start operations! Some franchisers offer in-house financing, where they give you access to investor funds to grow your business. Find out exactly what your franchiser offers so that you know the exact financial commitment you’re making.

3. Potential revenue

Is this brand successful overall or just in name? Don’t get carried away by the brand’s reputation or number of franchisees. Exercise due diligence and find out more about their actual financial state. Get a lawyer to help you with this task if you find it too overwhelming. You could even visit other franchises to get a feel of how successful they are before you take the plunge. As a general rule, the franchiser should be financially stable enough to last at least the length of your contract with them.

4. Franchiser support

Some franchisers are more supportive than others so you should get the exact picture of what they’ll do for their franchisees before diving in. This is a good way of finding out if you will incur any hidden costs you weren’t aware of before as assuming that the franchiser will support you in every area of the business is not a given. You should also ask them what support they will give you if your business doesn’t do well so you can be prepared for worst-case scenarios.

5. Location

Where will your franchise be located? Location is extremely important in determining the success of a business, especially for food and beverages and retail franchises. Therefore, you need to know where your business is and suss out if this is a good location for it. Are there any competitors in the same area? What is the footfall like in that area? What are your neighbors selling?

And, depending on the type of business you’re running, you might also need to take into account factors like car park and public transport accessibility. Also ask the franchiser if there are any restrictions on where your franchise business can be located.

6. Franchise contract

It’s extremely important to know beforehand how long the commitment to the franchise is so that you can plan your finances accordingly. You need to be comfortable with the length of the contract, as well as its terms. How easy or difficult is it to terminate in case you have to cease operations before your contract ends? And are there any special clauses that you need to pay attention to?

Also note if the franchiser has included a non-competition clause as you need to know if there are any limitations on the type – or even location – of business you can run if and when this franchise contract ends.

7. Franchiser’s reputation

You might personally be a fan of the brand and you think that it’s a sound business investment. However, what does the man on the street think of the brand? And what is its reputation in the industry? Look at customer reviews online – on more than just one website – to gauge what people think of the brand itself, their products and the service they provide.

If you’re able to get access to them, speak to other franchisees to find out what it’s like working with this particular franchiser and what their reputation is like among their franchisees and employees. You might not want to partner with a brand that has many outlets but has a reputation of being very difficult to work with.

8. Market potential

Do you know what are the chances that your franchise will be a success? Is there demand for one more outlet or is the market already saturated with this particular brand? Will you be able to get customers? Also, once you’ve successfully launched your business, what is the potential for it to grow? Some factors to take into account are the demand for more from this brand, the amount of competition in the market, and the population of the target market, if applicable (this could be relevant in the case of childcare center franchises, for example).

9. Advertising/marketing requirements

To get your business off to a good start – and to make it grow thereafter – there needs to be good marketing of the brand and this new outlet. Be clear with the franchiser who does what when it comes to marketing and advertising, such as bearing the costs and deciding on the type of promotions. Also ask if you’re able to come up with your own advertising campaigns or if it has to be the brand’s standard ones across all franchisee outlets. This way, you’ll be aware of your limitations, marketing-wise.

10. Business responsibilities

Taking on a business is a big task and you might have to wear many hats. Are you able to handle running the franchise, managing your employees and also your commitment to the franchiser? Do you have the bandwidth to deal with everything by yourself or should you bring in others to help with some tasks? This will determine your overall financial commitment too so you have to know what exactly your new business will entail.

There are so many things to take into account when starting a business. Add the numerous procedures to follow and laws to abide by to ensure that your company is properly registered and it can be an extremely stressful time. Let Sleek take on this big task for you, contact us for more information on how to start a business.

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