Beware of franchising scams!

by the SERDEF Media Bureau

How prevalent are franchising scams?

The problem must be so serious that the Department of Trade and Industry (DTI) was prompted to  issue an advisory sometime ago warning the public against phony franchising entities.  The DTI directive, in particular, warned overseas Filipino workers (OFWs) and their families against scammers posing to be legitimate businesses but only out to part them from their hard-earned money.

The DTI named several companies to beware of — including Fran.con Franchise Marketing and Consultancy, Inc., Hamoraon Business Specialist Inc., and Michelle Ann Pacubas-Chan – but fell short of divulging the modus operandi (MO) used.

Victims, not surprisingly, are reluctant to share their experiences for fear of ridicule.

However, here is one MO that made the rounds in the internet:

Modus operandi

The intro could be a well-written letter on an authentic looking business stationery.  The business would be one that is already popular or is gaining in popularity.  The letter would present credentials, such as a Security and Exchange Commission (SEC) registration number, an Intellectual Property Office license number, office address and the full range of contact numbers.  It would also describe the product or business being franchised, with variants that investors could choose from.

When someone shows interest to invest, the scam artist would be likely visiting the prospective investor at the latter’s house showing documents, photos, even accompanying him to commissary or even to a farm or factory.

The final bait would be set when a price too cheap to refuse is offered and for a “limited time only.”  The not too subtle message is — HURRY (hand over your money)!


How to recognize a scam

Speaking in a seminar for OFWs, Armando Bartolome, president of BMG Franchise developers, said that the first warning sign that a franchise could be spurious is when the offer comes with a get-rich -quick promise.  Alarm bells should start ringing when a franchise agent entices you with a very cheap package and an assurance that you can recover your investment quickly and that you would become a millionaire in no time.

Legitimate successful franchise businesses won’t be giving would-be investors such unrealistic promises.  Moreover, they are not likely to sell the company name and goodwill that took them years to build at give-away prices.

Here are other signs to watch out for:

  • When the franchise agent won’t let you know who owns the franchise and would instead give you a three-page contract to sign. A real franchise agreement would be as long as 30 or more pages, since franchisee and franchisor obligations are not few and simple.
  • When you don’t see a franchise agreement.  Without this agreement, there’s no franchise to begin with.
  • When the supposed owners of the franchise are not selective in choosing franchisees.  Legitimate franchisees are careful of the name and reputation they have worked so hard to build, so they make sure that the business partners they choose would be capable of preserving this good image. “One bad franchisee, and a brand can be done for.”

How to check a franchisor

A majority of legitimate franchisors are affiliated with franchising associations.  Thus, the DTI directive advises would-be investors to call for details on a franchisor’s membership with the following groups:

  • Philippine Franchising Association (PFA) – (+632) 687.0365 to 67
  • Filipino International Franchising Association (FIFA) (+632) 912.2946
  • Association of Filipino Franchisers Incorporated (AFFI) – (+632) 642.1829 / 9000.0002
  • Food Cart Association of the Philippines (FOCAPHIL) – (+632) 738.7740 / (+63923) 844.9378

There is also a DTI help line at (+632) 751 330.

Philippine Franchise Association (PFA) President Yvette Pardon Orbeta suggests to would be-franchisees:  “Be more diligent when looking into a franchise concept. Check the facts first before parting with your hard-earned money. It would be wise if you can consult with your lawyers and show the documents presented to you.”  She echoes the need to check with franchising organizations on the standing of a particular member-franchisor.

An investor’s research should be thorough and should ideally include site visits and interviews with existing franchisees to check the business experience and track record of the franchising company.

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