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.

This article was first published in The Straits Times.