With Hong Kong's economy in the doldrums and unemployment at a record high, now may not seem to be the best time to start a new business. But with the economic slowdown have come lower interest rates, cheaper rents, and greater flexibility in negotiating business contracts, all of which have resulted in a noticeable surge among entrepreneurs looking to start a franchise business.

The franchise business has been growing steadily in Hong Kong since Kentucky Fried Chicken and McDonalds first set up in the territory in the 1970s. Until then, few people had heard about franchising. The Hong Kong General Chamber of Commerce recognized the benefits that franchising brings to the economy and started to promote and monitor the development of franchising activities in Hong Kong in 1992. The Chamber also organized study missions, seminars and training courses, and published books and CD-ROMs on the various aspects of franchising.

Hong Kong's legal climate is conducive to franchising. There is no specific legislation governing franchising operations. There are no exchange controls, anti-trust laws, or foreign equity participation or local management participation regulations. Disputes arising from a franchise agreement are subject to the common law (and specifically the principles of contract law) and to the legislation relating to the registration, licensing and protection of intellectual property rights.

As franchise operations are not required to register with the HKSAR Government nor any trade associations, there is no official record of the total number of operators in Hong Kong. The Chamber's records indicate that there were only about 55 franchise operators in Hong Kong in 1992. The number grew to 75 in 1994, and rose steadily to peak at 124 in 1999, before slipping to about 106 in July 2002. Combined, these franchises operate over 2,700 outlets, both franchised and company-owned across Hong Kong. A list of franchise operators in Hong Kong can be found on the Chamber's franchise Web site at www.franchise.org.hk.

Interestingly, 53 per cent of all franchise operators in Hong Kong are local companies. Some of the more visible names include: Bag & Sac, BYOC Coffee Chateau, Daily Jewellery, Double Star, Easystamp, FX Creations, Japan Home Centre, Hong Kong Real Estate Agency, Hui Lau Shan, Hung Fook Tong, Kung Wo Beancurd Products, Life Zone, Pie & Tart, Saint's Alp, Sunshine Laundry, Teddy Kids, Toto, UR Photo, Vogue Laundry, Xian Zong Lin, among others.

Foreign franchises with sub-franchising, such as Agfa, Bee Cheng Hiang, Century 21, Dymocks, Fuji, Kodak, Konica, 7-Eleven, etc, account for 18 per cent of total franchises here. Foreign franchises without sub-franchising who are either operated by the franchisors themselves or by a territory developer -- Body Shop, Circle K, Pizza Hut, KFC, McDonald's, Tie Rack, etc -- account for 29 per cent.

During the past two years, there has been a noticeable downward adjustment of the level of initial investment for a franchise, while at the same time contracts have become more flexible too. The duration of a franchise agreement is usually linked to the lease of the premises, which is usually around three years. The return on investment varies from business to business and depends on a number of factors, but as a rough guide, franchise investors usually can recoup their investment in about 18 months.

Lower rents is attracting people to set up small shops and catering outlets in the main shopping areas, which also helps to promote the image and visibility of the franchise.

It is these small businesses that are expected to continue to do well, as their relatively small outlay requirement will help entrepreneurs recoup their investment in a relatively short time. These could include education and personal enhancement franchises, children-related businesses, and specialty snacks and eateries are expected to offer a better chance of succeeding.

Though based on proven businesses, entering into a franchise agreement needs to be carefully studied and professional advice should be sought. Potential investors should also bear in mind that it is a long-term commitment, and that they cannot simply sell their business to a third party.