FRANCHISING READING MATERIALS

KEY CONSIDERATIONS BEFORE FRANCHISING A BUSINESS BY ARMANDO O.

BARTOLOME

You may have read about this topic so many times before. But for the benefit of those who
are thinking of franchising a business most especially now that we have just started a new
year, this can be a guide towards their decision of finally starting up their own franchise
business.

THOUGHTS BEFORE FRANCHISING

You may feel the need of having a stable source of income. And starting it on your own
may fear you. A lot have considered starting up with a franchise business because they feel
that this would somehow give them an edge over starting their own business from scratch.
So how do you start? There are things that you need to consider prior to finalizing your
thoughts on having a franchise business.

• You very well know that any kind of business could be risky. Are you prepared to take
that step in risking your own money to start with a business? It will help you decide if you
are ready for that bold move if you try to look back and think of any situation from your
past that needed you to be put on a situation where you needed to make a decision with
regards to handling money. How were you able to deal with it? How long did it take you
before you were able to get pass through it?

• As franchisees, there are rules that you need to observe. They rules are clearly stated on
the agreement. You should be amenable to all that has been written. Otherwise, you will get
yourself in trouble. There is a need to maintain whatever the franchisor has started with
the business thus securing and ensuring that the standards will remain unchanged.

• You may need to do a little self-examination prior to franchising. Being a franchisee you
are expected to follow the rules. Are you capable of abiding by the rules? If not, then that
would be a sign that franchising may not be for you.

• Do a simple math : ASSETS - LIABILITIES= NETWORTH

Some franchisors may have a specific net worth requirement. Not unless you are
franchising a small business then that should not be a problem.

• To know which franchise to choose, instead of just choosing among what is available for
franchise is focusing on your skills and capabilities so that you are equipped with the
proper tools in building the business.

• Any earnings-related questions may not be easily disclosed by your franchisor

representative. The best way is to ask from current franchisees and somehow that can help
you decide if your chosen franchise is really what you want and what you can handle.

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• Having a franchise business may have been playing in your mind for months, but be sure
that you create a business plan to help you guide through the whole “journey”. This will be
needed especially when you need to apply for a loan where the bank may want to see your
projections and how else you plan for the business you have in mind.

BENEFITS OF HAVING A FRANCHISE BUSINESS

Having a franchise business may give you several good points which you may consider and
further encourage you to choose it over starting up your own.

• Sticking with a well-known brand gives you an edge.

• A franchisor will provide you with a business where you can just start without having to
worry on how to start with it. The franchisor should be able to provide you with the
necessary knowledge on how to start. It is the franchisee’s responsibility on how to
implement the rules based on what is written on the agreement.
• You will not worry about the equipment to be used in the franchise business because these
come with the agreed franchising fee. That lessens the franchisee’s worry on where to buy
the equipment needed.
• Buying supplies from the franchisor would definitely be less expensive as the franchisor
may have been provided with discounted rates which he can pass on to the franchisee.
• When it comes to financing a franchise business, you may have a bigger chance of having
this help especially when your franchisor have made good relationships with lenders as
these lenders will see it as a brand’s referral to be more favorable than an sole,
independent business owner who is just starting out.
• A very well-established brand would not pass on any chances of being known. The
franchisor will provide support with regards to marketing and advertising. This, however,
would cost a monthly contribution for each franchisee.
• If you have started your own business, your ROI may take about between 5-7 years. But
with an established brand, the company’s projection is anytime between 2-3 years.
• Franchisors provide seminars and trainings for franchisees so that they may be fully
aware on what to do and what to expect from the business. Franchisors would always want
to provide the necessary tools in order to help the business grow.
• Franchisees need not be burdened on coming up with new products/innovations on how to
expand the business. Franchisors may come up with these and try them on their own stores
and may ask franchisees if they are willing to test them.
• Franchisors have a team that can help provide the best locations possible in putting up
the franchise business instead of you worrying and wondering which could be the perfect
spot.Just in case a franchisee decides to discontinue the business after the contract, it will
be easier for the franchisee to sell it back to the franchisor (as the franchisor may assume
business until another individual may want to franchise the business on the said location).
• Choosing to have a business may just be the answer to our struggles nowadays. But be
sure which kind of business you want to get into. With having the necessary knowledge and
enough financial power, you may just be on your way first step in achieving your dreams.

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AN INTRODUCTION TO FRANCHISING

 What is a franchise? What are common franchise terms?

 What are the alternatives to franchising?
 What are the advantages and disadvantages of owning a franchise? What are the
legal issues in franchising?

WHAT IS A FRANCHISE?

A FRANCHISE is the agreement or license between two legally independent parties which
gives:
 a person or group of people (franchisee) the right to market a product or service
using the trademark or trade name of another business (franchisor)
 the franchisee the right to market a product or service using the operating methods
of the franchisor
 the franchisee the obligation to pay the franchisor fees for these rights
 the franchisor the obligation to provide rights and support to franchisees

FRANCHISE AGREEMENT

FRANCHISOR FRANCHISEE
Owns trademark or trade name Uses trademark or trade name
Providers support: Expands businesses with franchisor’s
 (Sometimes) financing support
 Advertising and marketing
 Training
Receives fees Pay fees

TYPES OF FRANCHISES
There are two main types of franchises:
1. Product Distribution Business Format
2. Business Format Franchises

PRODUCT DISTRIBUTION FRANCHISES simply sell the franchisor’s products and are
supplier-dealer relationships. In product distribution franchising, the franchisor licenses its
trademark and logo to the franchisees but typically does not provide them with an entire
system for running their business. The industries where you most often find this type of
franchising are soft drink distributors, automobile dealers and gas stations.

Some familiar product distribution franchises include:

✔ Pepsi
✔ Exxon
✔ Ford Motor Company

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Although product distribution franchising represents the largest percentage of total retail
sales, most franchises available today are business format opportunities.

BUSINESS FORMAT FRANCHISEs, on the other hand, not only use a franchisor’s
product, service and trade- mark, but also the complete method to conduct the business
itself, such as the marketing plan and operations manuals. Business format franchises are
the most common type of franchise.

USA Today reported that the 10 most popular franchising opportunities are in these
industries:
◆ fast food
◆ service
◆ restaurants
◆ building and construction
◆ business services
◆ retail
◆ automotive
◆ maintenance
◆ retail—food
◆ lodging

TYPES OF FRANCHISE ARRANGEMENTS

Because so many franchisors, industries and range of investments are possible, there are
different types of franchise arrangements available to a business owner.

TWO TYPES OF FRANCHISING ARRANGEMENTS:

1. Single-Unit (Direct-Unit) Franchise
2. Multi-Unit Franchise:
• area development
• master franchise (sub-franchising)

A SINGLE-UNIT (DIRECT-UNIT) FRANCHISE is an agreement where the franchisor

grants a franchisee the rights to open and operate ONE franchise unit. This is the simplest
and most common type of franchise. It is possible, however, for a franchisee to purchase
additional single-unit franchises once the original fran- chise unit begins to prosper. This is
then considered a multiple, single-unit relationship.

A MULTI-UNIT FRANCHISE is an agreement where the franchisor grants a franchisee

the rights to open and operate MORE THAN ONE unit.

There are two ways a multi-unit franchise can be achieved:

✔ an area development franchise or
✔ a master franchise.

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Under an area development franchise, a franchisee has the right to open more than one
unit during a specific time, within a specified area. For example, a franchisee may agree to
open 5 units over a five year period in a specified territory.

A master franchise agreement gives the franchisee more rights than an area development
agreement. In addition to having the right and obligation to open and operate a certain
number of units in a defined area, the master franchisee also has the right to sell franchises
to other people within the territory, known as sub-franchises. Therefore, the master
franchisee takes over many of the tasks, duties and benefits of the franchisor, such as
providing support and training, as well as receiving fees and royalties.

WHAT ARE COMMON FRANCHISE TERMS?

 BUSINESS FORMAT FRANCHISE – this type of franchise includes not only a
product, service and trademark, but also the complete method to conduct the
business itself, such as the marketing plan and operations manuals
 DISCLOSURE STATEMENT – also known as the UFOC, or Uniform Franchise
Offering Circular, the disclosure document provides information about the
franchisor and franchise system
 FRANCHISE – a license that describes the relationship between the franchisor and
franchisee including use of trademarks, fees, support and control
 FRANCHISE AGREEMENT – the legal, written contract between the franchisor
and franchisee which tells each party what each is supposed to do
 FRANCHISEE – the person or company that gets the right from the franchisor to
do business under the franchisor’s trademark or trade name
 FRANCHISING – a method of business expansion characterized by a trademark
license, payment of fees, and significant assistance and/or control
 FRANCHISOR – the person or company that grants the franchisee the right to do
business under their trademark or trade name
 PRODUCT DISTRIBUTION FRANCHISE – a franchise where the franchisee
simply sells the franchisor’s products without using the franchisor’s method of
conducting business
 ROYALTY – the regular payment made by the franchisee to the franchisor, usually
based on a percentage of the franchisee’s gross sales
 TRADEMARK – the franchisor’s identifying marks, brand name and logo that are
licensed to the franchisee UFOC – the Uniform Franchise Offering Circular, UFOC,
is one format for the disclosure document which provides information about the
franchisor and franchise system to the prospective franchisee.

WHAT IS A FRANCHISE BUSINESS?

The International Franchise Association defines franchising as “a method for expanding a
business and distributing goods and services through a licensing relationship.”

What happens is a person or company (the franchisor) grants the license to a third-party
person or company (the franchisee) to conduct business using the franchisor’s
products/services. The franchisor also provides the franchisee with an operating system,
brand and support.

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Simply put, in a business franchise an established brand/company will allow you to sell its
products/services by selling the license to you.

Franchising is a more risk-free business endeavor for newbie entrepreneurs because they
don’t need to build a brand and an audience. Because you get to sell products from a
known and established brand, the better the chances that your business will not fail.

Another benefit of getting a franchise is usually the company provides franchisees with the
equipment and the products needed to run the business as part of the package, so starting
your operations will be less of a hassle.

PROS AND CONS OF FRANCHISING

Is franchising the right type of business for you? Or are you better off starting a business
from scratch and running it on your own?

While it offers plenty of benefits, a franchise business also carries some risks. Weigh
carefully the pros and cons of franchising before you decide whether to go for it or not.

FRANCHISING ADVANTAGES

1. RECOGNIZED AND ESTABLISHED BRAND

When you buy a franchise, you have the right to use the franchisor’s trade name and
trademark or company logo. This gives you access to the well-known brand’s customer
base, so attracting and finding your first customers won’t be that difficult.

2. TRIED-AND-TESTED BUSINESS MODEL

The business operating systems of franchising brands have been tested in various markets
in the Philippines and have already been proven to be effective. The policies, procedures,
and control systems for running the business are laid out in the operating manual—all you
have to do is to follow it. Thus, franchising suits you if you have no background or
experience in business management.

3. EASIER TO GET A GREAT LOCATION

Having the backing of a large corporation or popular brand makes it easy to get a lease for
your franchise business site. If your target site is a mall, you can easily get approved for a
lease because the established franchise brand can draw in more customers.

If you’re planning to start a food cart or kiosk business, location won’t be much of an issue
because franchisors typically require just a small space of at least 4 square meters.

4. TRAINING SUPPORT
Starting a franchise business is a great way to learn how a successful company operates.
Franchisors provide training to help franchisees understand their business model and learn
the day-to-day operations, customer service, and use of trade secrets such as proprietary

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recipes for food franchises. Franchise packages may also include employee screening and
training.

5. PRE-OPENING ASSISTANCE
Franchisors help in the pre-opening needs of their franchisees such as site design,
evaluation, and construction. Some franchise packages also include assistance for the grand
opening.

6. MARKETING SUPPORT
Franchise brands in the Philippines have solid marketing and advertising campaigns in
place, and their effects trickle down on their franchisees.

For example, if you get a shawarma food cart franchise, the package might include
marketing materials such as a standee of a famous celebrity endorser like Daniel Padilla or
Piolo Pascual. You won’t get such a crowd-drawer when you start a similar business on
your own.

7. CONTINUOUS RESEARCH AND DEVELOPMENT

No need to worry about spending time and money for product development and innovation
because the franchisor will take care of that. You can just focus on operations instead.

8. FASTER ROI
Compared to starting your own business, you can expect a quicker return on investment
with a franchise business. The access to an established brand name, customer base,
operating system, and all sorts of opening support cuts down the time it takes to recover
your investment.

9. HIGHER CHANCES OF SUCCESS

Running a franchise business has a success rate of 90%, based on a study by the United
States Agency for International Development (USAID). This fact is hardly surprising
because all the franchising pros listed above contribute to raising the chances of success.

FRANCHISING DISADVANTAGES

1. EXPENSIVE STARTUP COSTS

The capital needed to start a franchise business is its biggest drawback. Usually, the initial
investment is twice as (or even higher) that for opening a business from scratch.

The following are the typical startup expenses when starting a franchise business.
 FRANCHISE FEE – This one-time, upfront fee is what you pay to gain the license
to use the franchise brand’s proprietary information legally, such as its trademark,
logo, and trade secrets. The more popular the brand is, the higher this fee is
charged.
 ROYALTY FEES – The royalty payments for franchise businesses in the
Philippines typically range from 3% to 10% of the monthly gross sales. It’s paid

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 every month, so this can reduce your net income. Not all franchisors charge this fee,
though.
 ADVERTISEMENT AND MARKETING FEES – These are a small percentage of
the gross monthly sales, which are used to fund the franchisor’s marketing support.
 COST OF SUPPLIES – Although some franchisors provide the initial supplies as
part of the franchise package, franchisees have to keep buying the next batches
either directly from the franchisor or its accredited suppliers. This can cost you
higher compared to sourcing your own suppliers.

2. LIMITED FLEXIBILITY AND AUTONOMY

Franchising doesn’t offer much to franchisees in terms of creativity and innovation. You’re
bound to follow the rules in the operating manual and franchise agreement.

When you want to do something differently, like switching to a cheaper and more
accessible supplier, you’ll have to seek the franchisor’s approval first. If the company
doesn’t agree to it, you have no choice but to comply.

3. LOCK-IN PERIOD
Franchise contract terms range from two to five years or longer. Within that period, you’ll
be stuck with the company regardless if it’s performing well financially or not. Renewing
the contract depends on the franchisor’s evaluation of your business relationship and your
franchise business’ performance throughout the contract term.

4. BUSINESS RISK
Just like any kind of business, franchising is also a risky venture. Your success will depend
on the franchisor’s success. If the company fails, the reputation and performance of its
franchisees will suffer as well.

FRANCHISING IN THE PHILIPPINES

Here in the Philippines, the most common type of franchise is the business format
franchise. Notable examples are fast food chains such as McDonalds and Jollibee. It is
estimated that around 55% of franchises are food-related businesses while 45% are in
retail. While there are no laws that specifically cover franchising in the country,
franchising agreements are considered contracts and governed by the Civil Code.
Franchising arrangements could also be considered as technology transfer arrangements
and covered by the pertinent provisions in the Intellectual Property Code.

10 BEST FRANCHISE BUSINESS OPPORTUNITIES IN THE PHILIPPINES UNDER

P500,000
If you’re on board with starting a franchise business, here are the 10 best franchise
business opportunities you can get into.
1. Food Kiosk
2. Coffee & Cold Beverage Stand
3. Water Refilling Station
4. Fast Food Restaurant
5. Spa & Salon

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6. Vending & Service Machines
7. Personal Services: Shoe repair, Laundromat, & Payment Centers
8. Education
9. Car Wash
10. Retail & Pharmacy

15 PREMIUM & POPULAR FRANCHISE BUSINESS IN THE PHILIPPINES:

1. Jollibee
2. McDonald’s
3. Shell
4. 7-11
5. Max’s
6. San Miguel Food Ave
7. Petron
8. National Bookstore
9. Quicklean
10. Yellow Cab
11. Shakey’s
12. ML Kwarta Padala Express
13. Monterey Meatshop
14. Mineski Infinity
15. Tong Yang

HOW TO CHOOSE THE RIGHT FRANCHISE BUSINESS FOR YOU

The wide variety of options for franchise businesses in the Philippines is both a good and
bad thing for aspiring entrepreneurs. Finding the franchise that suits you best can be very
confusing and overwhelming.

9 THINGS TO CONSIDER WHEN CHOOSING A FRANCHISE

To narrow down your choices, focus on these important considerations:

1. PASSION
Success stories of entrepreneurs have a common denominator: they succeed at what they
love doing. It’s easy to fail in a business you aren’t interested in because you lack the drive
for it. Where does your passion lie? Do you love street food, fashion, baking, etc.? Is there a
particular brand you love? Your passion is a crucial factor to consider when choosing the
type of franchise you’ll be in.

2. PERSONAL GOALS
What motivates you to start a franchise business? Whether it’s gaining experience in being
an entrepreneur, generating income, or spending more time at home, figure out your goals
from the get-go so that you can find a franchise that will help you achieve them.

3. BUDGET
How much can you afford to invest in a franchise? Identify your budget for starting your
business. From there, trim down your options to franchise packages that fit your budget.

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When doing so, look at the total cost of package investment on top of the franchise fee. If
your available capital isn’t enough to start your target franchise business, consider getting
a bank loan to fill in the gap. Banks like BPI and Security Bank offer franchise business
loans to franchisees of their partner merchants.

4. LOCATION
Location is a critical factor in the success of any business. So put a lot of thought in
deciding the right franchise business based on your preferred location.

For example, if your prospective location is near a school, you can open a food cart that
sells cheap snacks that students can afford, like a burger stand or siomai stall.

Consider also the competition in the area. If you’re planning to get a laundromat franchise
but there are already too many laundry shops near your target location, look for another
type of franchise.

5. MARKET OPPORTUNITY
Is there a market for the franchise you’re considering to buy? To determine the answer,
perform market research before you check your franchise business options. You can
interview potential customers in your target location to know if the products you’re going
to sell will have buyers.

Put your findings together into a business plan that will help you determine if the franchise
business you’re considering will be profitable. Once you’ve identified the market
opportunity for a franchise, find a specific franchise system that’s aligned with your plan.

6. LEGITIMACY OF THE FRANCHISE

At this point, you should already have a shortlist of potential franchise businesses. Filter it
further by weeding out those that aren’t operating legally in the Philippines. Of course, you
don’t want to take chances with a scammer.

Legitimate franchising companies are registered with the appropriate government offices,
including the Department of Trade and Industry (for single proprietors), Securities and
Exchange Commission (for business partners and corporations), and Bureau of Internal
Revenue. They must also be licensed with specific government agencies depending on their
industry. For example, food franchises must be registered with the Food and Drug
Administration, and money transfer franchises must be registered with the Bangko Sentral
ng Pilipinas.

Another way to verify the legitimacy of a franchise brand is to check its membership with
reputable franchise groups in the Philippines. You may check the member directory of the
Philippine Franchise Association, Association of Filipino Franchisers, Inc., or Filipino
International Franchise Association.

7. FRANCHISOR’S BUSINESS OPERATIONS SYSTEM

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Find out which of the franchises in your shortlist have clear and well-established
operations systems. Their branches should be increasing in number and operating for a
long time. They must also have a lot of franchisees who are invested in the business.

8. YOUR PERCEPTION OF THE BRAND

How much you trust and believe in the brand matters a lot in choosing the right franchise.
It’s easier to persuade people to buy a product if you yourself have tried it and believe that
it’s effective, delicious, or satisfying.

9. FRANCHISE PACKAGE INCLUSIONS

Take a close look at what the franchise package includes. Does it offer all types of support
and guidance you need?

Some franchises include grand opening assistance or after-sales support; others don’t.

IMPORTANT QUESTIONS TO ASK THE FRANCHISOR BEFORE BUYING A

FRANCHISE
Once you have come up with your top three to five franchises, contact them and ask
questions. This is your chance to get to know your potential franchisors and determine if
you’re a good match professionally. Treat it like a job interview. Although the franchisor
provides franchising information on their website, you’ll want to dig deeper into the details
of partnering with the company.

Here are the questions you should ask the franchisor to ensure a win-win situation for both
parties:
1. What are your criteria for selecting franchisees?
2. How much is the total investment package?
3. Are there any royalty, branding, marketing, or advertisement fees? If so, how are
they computed?
4. Can you describe your training program in detail?
5. What ongoing support do you provide after the initial training?
6. Do you provide assistance for site inspection, evaluation, selection, and
construction? If so, do you charge an additional fee for this?
7. How do you evaluate locations?
8. What are your sales, marketing, and advertising approaches?
9. How long will it take until I earn a profit?
10. How much liquid operating capital is needed for sustaining the franchise until I get
an ROI?
11. How do you assist poorly performing franchise businesses? What will happen if
mine fails?
12. How many franchisees renew their contracts?
13. What sets your brand apart from the competition? What’s your unique selling
point?
14. Do you provide territorial exclusivity to your franchisees? If so, how will my
territory be protected from competing units?
15. How do you handle disputes or conflicts between the franchisor and franchisee?

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HOW TO APPLY FOR A FRANCHISE BUSINESS IN THE PHILIPPINES
Found the perfect franchise business? Franchise application processes in the Philippines
are fairly simple. The hard part is waiting. To speed up your application, prepare all the
required documents beforehand.

FRANCHISE APPLICATION REQUIREMENTS

You can find the specific franchise application requirements on the franchisor’s official
website. But in general, here’s the list of documents you need when applying for a
franchise:
1. Letter of intent (Some franchisors have a downloadable template on their website.)
2. Filled out franchise application form
3. Valid government-issued IDs
4. Resume of the applicant
5. Details about the target location (address, site description, nearby commercial
establishments, etc.) plus vicinity map and photos

FRANCHISE APPLICATION PROCEDURE

To give you an idea of what happens during a franchise application, here’s a quick
walkthrough of the usual steps involved:
1. Submit your documents to the franchisor via email.
2. Wait for the franchisor to contact you for a meeting and/or site inspection schedule.
3. Meet with the franchisor on the scheduled date. A franchise manager or
representative will interview you and orient you on the franchising details. Make
sure to ask the crucial questions listed in the previous section.
4. After several meetings and evaluations, the franchisor will contact you again to
inform you if you’ve been chosen as a franchisee. You’ll be given a copy of the
franchise agreement or contract—review it thoroughly.
5. Sign the contract if you’re okay with all the terms and conditions.

10 TIPS FOR FRANCHISE SUCCESS

1. CHOOSE THE RIGHT BUSINESS FOR YOU. Business owners who provide
products/services that are focused on or related to their own interests or hobbies tend to do
better. When choosing the franchise for you, lean toward your interests – but do keep in
mind the demand for the products/services you will choose.

2. ENHANCE YOUR SKILLS. Although franchisors will teach you their system on how to
operate their business, you still need to have essential business skills of your own. You have
to know accounting basics, how to read and work with financial documents, or how to hire
and fire employees. If you’re new to all of these, you have to consider taking classes. Doing
research is a must.

3. HAVE A BUSINESS PLAN. Just because you have a franchise business selling
products/services that have already appealed to people in the past doesn’t always guarantee
that your business will go smoothly. You will still need a plan to grow your business. If

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you’re a novice who doesn’t know where to begin, you don’t have to be intimidated. You
can simply start by setting goals and doing a financial projection for the next year.

4. CONSULT A SPECIALIST. Getting advice from a specialist is recommended especially

for new entrepreneurs. A specialist – one who knows the ins and outs of the industry well –
can also help you polish your business plan. Another specialist you should consider is an
attorney. Tax rules can become confusing for franchises, which is why having an attorney,
preferably one who focuses on franchise laws, will be helpful in reviewing franchise
agreement documents and potential red flags.

5. THINK ABOUT YOUR LOCATION. The location of your business is crucial to its
success. Choosing a location is one of the most important decisions you’ll make as a
business owner. Consider factors like traffic patterns, parking, nearby stores, and check
with the franchisor if you’ll be guaranteed protected territory – this means that no other
franchise can open within a certain radius.

6. FOCUS ON THE QUALITY OF SERVICE. Even if you have a solid business plan and
have chosen a strategic location, the success of your business will still rely on customer
experience. Employee-customer interactions can make or break any business, so focus on
the quality of the service you provide. Hire staff that have a pleasing personality and are
eager to meet the needs of your customers.

7. NEVER STOP MARKETING. Even though you’re selling products/services by an

established brand, you still have to do marketing. Think about creative marketing schemes
for your business. If you need people singing outside the store to attract customers, do so.

8. CAN’T SELL? HIRE SOMEONE WHO CAN. Not a lot of people are good with sales
talks or even mingling with people. This may also relate to marketing and promotion. Or
maybe you yourself are unavailable to do the hands-on selling. If you simply can’t do the
selling, marketing, or promotion of your product, then just hire people who can.

9. DO NETWORKING. Networking helps both in promoting your business and also

learning from your peers. You can do this by attending seminars or expos for your
product.

10. KNOW YOUR INDUSTRY. Once you’ve launched your business, learn as much as you
can about the industry. Study the trends and what drives the demand. Consider your
competitors and maybe you can learn from them as well.

PHILIPPINE FRANCHISING LAW

ATTY. JERICHO B. DEL PUERTO SME Business Lawyer

FRANCHISING AGREEMENT

Legal Framework Key Points:

1) There is currently no specific law on franchising.

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 2) Contract Law thus applies since franchising is essentially an agreement.
3) Intellectual Property Law applies to provisions on technology transfer
arrangements.
4) The Department of Trade and Industry (DTI) has issued DTI Bureau Order No.
2010-24 advising the public about franchising agreements.

WHAT IS A FRANCHISE AGREEMENT?

A FRANCHISE AGREEMENT is:

- a written contract or agreement between two or more parties - by which a Franchisor
grants the Franchisee the right to engage in the business of offering, selling, or distributing
goods or services under a marketing plan/system/concept, for a certain consideration.
- Unless otherwise provided, said right includes the use of a trademark, service mark, trade
name / business name, know-how, logo-type advertising, or other commercial symbols
associated with a particular business.”

WHO IS A FRANCHISOR? A Franchisor is “a person, individual or a Corporation, duly

registered with the Department of Trade and Industry (DTI) or the Security Exchange
Commission (SEC).

” Note: The DTI has thus taken the position that the Franchisor should be registered with
the DTI or SEC. Accordingly, any franchisor should ensure that it is duly registered and
existing under Philippine Laws and within this jurisdiction.

WHAT IS A FRANCHISEE? A Franchisee is “a person, individual or a Corporation duly

registered with the Department of Trade and Industry (DTI) or the Security Exchange
Commission (SEC).” Note: Similar to a Franchisor, The DTI has also taken the position
that the Franchisee should be registered with the DTI or SEC. Accordingly, any Franchisor
should ensure that it is duly registered and existing under Philippine Laws and within this
jurisdiction. DTI Bureau Order No. 2010-24

As stated earlier, a Franchise Agreement is essentially a contract between the Franchisor

and the Franchisee.

Thus, Contract Law applies to a Franchise Agreement. The following are some of the key
principles in Contracts:
- Principle of Autonomy
- Principle of Relativity
- Principle of Adhesion
- Principle of Mutuality

CONTRACT LAW

PRINCIPLE OF AUTONOMY – allows the parties to freely stipulate to whatever terms

and conditions provided they are not contrary to law, morals, good customs, public policy
or public order.

FRANCHISING READING MATERIALS Page 14

PRINCIPLE OF RELATIVITY – binds only those who entered into the agreement and
cannot favor or prejudice a third person, even if he is aware of such contract and has acted
with knowledge thereof.

PRINCIPLE OF ADHESION – penalizes the one caused the ambiguity in the contract and
thus interpretation will be against such party.

PRINCIPLE OF MUTUALITY – binds both contracting parties with its validity or

compliance not left solely to the will of one of them.

INTELLECTUAL PROPERTY LAW

In addition, Intellectual Property Law applies to the provisions involving Technology
Transfer since it is provided in such law.

TECHNOLOGY TRANSFER ARRANGEMENTS refer to “contracts or agreements

involving the transfer of systematic knowledge for the manufacture of a product, the
application of a process, or rendering of a service including management contracts; and the
transfer, assignment or licensing of all forms of intellectual property rights, including
licensing of computer software except computer software developed for mass market.”

THE FOLLOWING ARE PROHIBITED IN TECHNOLOGY TRANSFER

ARRANGEMENTS:
1) Those which impose upon the licensee the obligation to acquire from a specific
source capital goods, intermediate products, raw materials, and other technologies,
or of permanently employing personnel indicated by the licensor;
2) Those pursuant to which the licensor reserves the right to fix the sale or resale
prices of the products manufactured on the basis of the license;
3) Those that contain restrictions regarding the volume and structure of production;
Section 87, Intellectual Property Code (R.A. 8293)
4) Those that prohibit the use of competitive technologies in a nonexclusive technology
transfer agreement;
5) Those that establish a full or partial purchase option in favor of the licensor;
6) Those that obligate the licensee to transfer for free to the licensor the inventions or
improvements that may be obtained through the use of the licensed technology;
7) Those that require payment of royalties to the owners of patents for patents which
are not used; Section 87, Intellectual Property Code (R.A. 8293)
8) Those that prohibit the licensee to export the licensed product unless justified for
the protection of the legitimate interest of the licensor such as exports to countries
where exclusive licenses to manufacture and/or distribute the licensed product(s)
have already been granted;
9) Those which restrict the use of the technology supplied after the expiration of the
technology transfer arrangement, except in cases of early termination of the
technology transfer arrangement due to reason(s) attributable to the licensee;
10) Those which require payments for patents and other industrial property rights after
their expiration, termination arrangement;

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 11) Those which require that the technology recipient shall not contest the validity of
any of the patents of the technology supplier;
12) Those which restrict the research and development activities of the licensee designed
to absorb and adapt the transferred technology to local conditions or to initiate
research and development programs in connection with new products, processes or
equipment;
13) Those which prevent the licensee from adapting the imported technology to local
conditions, or introducing innovation to it, as long as it does not impair the quality
standards prescribed by the licensor;
14) Those which exempt the licensor for liability for non-fulfilment of his
responsibilities under the technology transfer arrangement and/or liability arising
from third party suits brought about by the use of the licensed product or the
licensed technology; and 15) Other clauses with equivalent effects.

THE FOLLOWING ARE MANDATORY PROVISIONS:

1) That the laws of the Philippines shall govern the interpretation of the same and in
the event of litigation, the venue shall be the proper court in the place where the
licensee has its principal office;
2) Continued access to improvements in techniques and processes related to the
technology shall be made available during the period of the technology transfer
arrangement;
3) In the event the technology transfer arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration Law of the Philippines or the
Arbitration Rules of the United Nations Commission on International Trade Law
(UNCITRAL) or the Rules of Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the
Philippines or any neutral country; and
4) The Philippine taxes on all payments relating to the technology transfer
arrangement shall be borne by the licensor.

THE FOLLOWING ARE ADDITIONAL PROVISIONS TO CONSIDER:

1) In the absence of any provision to the contrary in the technology transfer arrangement,
the grant of a license shall not prevent the licensor from granting further licenses to
third person nor from exploiting the subject matter of the technology transfer
arrangement himself.
2) The licensee shall be entitled to exploit the subject matter of the technology transfer
arrangement during the whole term of the technology transfer arrangement.
3) In exceptional or meritorious cases where substantial benefits will accrue to the
economy, such as high technology content, increase in foreign exchange earnings,
employment generation, regional dispersal of industries and/or substitution with or use
of local raw materials, or in the case of Board of Investments, registered companies
with pioneer status, exemption from any of the above requirements may be allowed by
the Documentation, Information and Technology Transfer Bureau after evaluation
thereof on a case by case basis.

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4) Technology transfer arrangements that conform with the provisions of Sections 86 and
87 [of the Intellectual Property Code] need not be registered with the Documentation,
Information and Technology Transfer Bureau.
5) Nonconformance with any of the provisions of Sections 87 and 88, however, shall
automatically render the technology transfer arrangement unenforceable, unless said
technology transfer arrangement is approved and registered with the Documentation,
Information and Technology Transfer Bureau under the provisions of Section 91 on
exceptional cases.

SUMMARY
1) So long as the requirements on Technology Transfer Arrangements under the
Intellectual Property Code are met, the Franchising Agreement will depend on the
contractual agreement between the Franchisor and the Franchisee.
2) There is no standard Franchising Agreement as contents therein will depend on the
commercial terms of the transaction and legal provisions that the parties will agree
on.
3) As a contract, the Franchising Agreement is subject to the laws and rules that
govern all contracts.

43 COMMON FRANCHISE TERMS YOU NEED TO KNOW!

If you're new to franchising and thinking about purchasing your first franchise, there are
several terms that you need to know to confidently navigate the research and purchase
process. Understanding basic franchise lingo will help you better grasp the ins and outs of
franchising, helping you to make an educated and confident decision!

COMMON FRANCHISE TERMS

1. ADVERTISING FUND: A collective pool of funds used by the franchisor to market
the brand. Often, a monthly contribution to the ad fund will be paid by the
franchisees alongside the other royalties.

2. AREA FRANCHISEE: A franchisee who has acquired exclusive rights to open

franchise units within a defined territory, usually on a schedule or timeline set at the
time of signing an agreement.

3. AREA REPRESENTATIVE: A franchisee who also acts as a salesperson for the

franchisor in a specific territory. The area representative identifies new franchisees,
but the actual franchise agreement and exchange of funds occurs between the new
franchisee and the corporate entity. The area representative may receive a
commission afterward from the franchisor.

4. BREAKEVEN: The point at which a franchise (or any business) takes in enough
revenue to balance the investment costs. In other words, the point where it reaches a
net profit and net loss of $0.

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 5. CANDIDATE: The term used by franchisors to refer to prospective franchisees who
have contacted them about their franchise opportunity.

6. CHURNING: The turnover of ownership of a franchisee from one franchisee to

another, from a franchisee to the corporate entity, or the termination and closing of
a franchise altogether.

7. COMPANY-OWNED LOCATIONS: Also referred to as corporate locations or

units, a company-owned location is owned and operated by the corporate entity of
the brand, as opposed to by a franchisee.

8. CONVERSION: The “rebranding” and modification of an existing business into a

franchise unit of a different company. Some franchisors prefer conversions to new
businesses as a way to reduce costs and ensure the franchise owner has the
appropriate skills to run the business.

9. CORPORATE LOCATION: Also referred to as a company-owned location or unit,

a corporate location is owned and operated by the corporate entity of the brand, as
opposed to by a franchisee.

10. DISCOVERY DAYS: A term commonly used to refer to the time when a franchisor
invites a prospective franchisee (sometimes several at once) to the corporate office to
meet the staff and learn more about the company. This is often one of the final steps
before the prospective franchisee makes a final decision on investing in the
franchise.

11. FIELD CONSULTANT: Employee or contract worker of the franchisor whose

responsibility it is to support and assist franchisees in the field, at their locations.
Usually, field consultants are assigned a geographic region, but this may vary based
on size of the franchise system, business model or other factors.

12. FRANCHISE BROKER: A person or company hired by a franchisor to help

cultivate potential new franchisees. Most brokers work with several franchise
brands concurrently, and will match a prospective franchisee with the brand that is
the best fit based on a set of criteria.

13. FRANCHISE DEVELOPMENT: The “sales” process of adding new franchisees to a

franchise company. Staff with “development” in their title are typically charged
with bringing new franchisees on board; however, the most successful franchise
brands generally treat this process less as a sale and more as a job interview. They
should be looking for the right fit for them, and you as a potential franchisee.

14. FRANCHISE EXPO: Event in which prospective franchisees can meet with a
number of franchise companies in person to discuss the opportunities they offer.
The largest expos in the U.S. take place in New York City, Anaheim, and Houston
each year, and are hosted by MFV Expositions.

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 15. FRANCHISE AGREEMENT: The contract a franchisor and franchisee sign to
confirm the agreement to open one or more franchise business(es). Among other
details, the franchise agreement will include a term, typically ranging from 5 to 20
years, that the franchisee is agreeing to continuously own the unit(s) being
purchased.

16. FRANCHISE DISCLOSURE DOCUMENT (FDD): A standardized document

required in the U.S. for all companies offering a franchise opportunity. The FDD is
a lengthy document that contains detailed information on the franchise, including a
description of the business model, estimated costs of starting a franchise, names of
officers and franchise owners, and other information.

17. FRANCHISE FEE: A component of the initial investment in a franchise business

that allows the franchisee to use the franchise brand’s name and likeness. This is a
one time fee.

18. FRANCHISEE: The name given to a person or corporate entity that owns a
franchise business.

19. FRANCHISEE SATISFACTION INDEX (FSI): A measurement of the satisfaction

of franchise owners within a brand. FSI was created by Franchise Business Review
in 2007 and is represented on a 100-point scale.

20. FRANCHISOR: The name given to a company that offers a franchise opportunity
as a means of growth. Sometimes referred to as “franchiser.”

21. INITIAL INVESTMENT: The estimated total investment a franchisee will need to
get the franchise business up and running. Usually represented as a range showing a
low-end and high-end, the initial investment can be found in Item 7 of a franchisor’s
Franchise Disclosure Document. Cost elements will include the franchisee fee,
equipment, property lease, and/or other ramp-up costs.

22. INTERNATIONAL FRANCHISE ASSOCIATION (IFA): The largest and best-

known organization representing the franchising industry. The IFA works to
provide resources to franchisors, franchisees, and suppliers to franchise companies
and is active in the political space for franchise and small business interest.

23. ITEM 19: The section of the Franchise Disclosure Document that a franchisor may
use to disclose earnings claims of existing franchise owners and corporate locations.
Note that this data is not a mandatory inclusion in the FDD, and the data provided
may represent only a specific group of franchisees and/or corporate-owned
franchises. Always read the fine print to understand where the numbers come from,
especially if comparing Item 19 claims from several brands.

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 24. LENDER: A bank or financial institution that provides a loan, in this case referring
to a business loan.

25. LIQUID CAPITAL: A sum of cash and other assets that can be easily converted to
cash. Franchisors will require a specific minimum amount of available liquid capital
from prospective franchisees.

26. LOW-COST FRANCHISE: A franchise with a low initial investment, typically

defined as being under $100,000.

27. MASTER FRANCHISE: A franchise agreement in which the franchisor agrees to

allow a franchisee to sell franchise units in a specific geographic region. A Master
Franchisee may, but doesn’t necessarily own one or more franchises in their allotted
territory.

28. MULTI-CONCEPT FRANCHISEE: A franchisee who owns units of multiple

different franchise brands. Some franchise brands prohibit multi-concept
franchising for their franchisees, while others may actively seek franchisees who
already own other brands.

29. MULTI-UNIT FRANCHISEE: A franchisee who owns multiple franchise business

units. Often, this refers to units of the same brand, but may also refer to “multi-
concept” ownership.

30. NET WORTH: Calculation of one’s total value (total assets minus total liabilities).
Many franchise brands require a minimum net worth in addition to a minimum
liquid capital for prospective franchisees.

31. OPERATIONS: The processes, procedures, and strategies employed by the business
to provide the product and/or services to its customers.

32. RENEWAL: Extension of the original franchise agreement whereby the franchisee
retains ownership of the franchise business for a new term.

33. RETURN ON INVESTMENT (ROI): A percentage of value of a business (or any

investment) relative to the cost of establishing it. A $100,000 business investment
that is now worth $200,000 would have a 100% ROI. The formula for ROI is
[current value - total cost] / [total cost] * 100.

34. ROYALTIES/ROYALTY FEES: The sum of money, usually a percentage of gross

sales, paid by the franchisee to the franchisor on a regular (usually monthly) basis
as part of the franchise agreement. Typical royalty fees are under 10% of gross
sales, but some companies may have higher fees or a different type of fee structure
depending on the services/support offered by the franchisor.

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 35. SENIOR CARE: Industry sector focused on in-home care for seniors, or services
associated with caring for seniors. Includes companies offering non-medical care,
with some offering medical services as well. Senior Care has been a very popular
and successful segment of the franchise industry in recent years.

36. SINGLE UNIT: A single franchise business, as opposed to multi-unit ownership, in

which one franchisee owns several franchise units.

37. START-UP COSTS: The total initial (and not perpetual) costs that go into starting
a franchise business. This can include the franchisee fee, construction fees,
equipment purchases, legal fees, and various other costs.

38. SUPPLIER/VENDOR: A business providing a service or product to another

business. Franchisors often establish “preferred” supplier/vendor relationships
wherein individual franchises receive negotiated discount pricing.

39. TERRITORY: A designated area that comprises a franchise “unit,” typically used
for service-based or mobile franchise business models. Many franchisors provide
exclusive territories to prevent conflict between franchisees.

40. TRANSFER: Ownership of a franchise business is moved from one party to

another.

41. TURNOVER: Refers to a franchise agreement that has been terminated, not
renewed, transferred, or the franchise business goes out of business.

42. UFOC: A Uniform Franchise Offering Circular (UFOC) is the original name of
what is now called the FDD (Franchise Disclosure Document).

43. VALIDATION: Part of “due diligence” when buying a franchise. Calling to speak
with existing franchise owners in an attempt to validate the virtues of the franchise
opportunity as explained by the franchisor. Typically, the prospective franchisee
will contact several franchisees from the list provided in the company’s FDD.

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DOMESTIC AND INTERNATIONAL FRANCHISING, MASTER FRANCHISING, AND
REGULATION OF FRANCHISE AGREEMENTS IN PHILIPPINES: OVERVIEW
by Ferdinand M Negre and Samantha Wesley K Rosales, Bengzon Negre Untalan
Intellectual Property Attorneys

A Q&A GUIDE TO FRANCHISING IN THE PHILIPPINES.

The Q&A provides an overview of the main practical issues concerning local and
international franchising, including: current market activity; franchising regulatory
framework; contractual issues relating to franchising agreements (analysing pre-contract
disclosure requirements, formalities, parties' rights and obligations, fees and payments,
term of agreement and renewal, termination and choice of law and jurisdiction);
Operations Manual; liability issues; intellectual property; real estate; competition law;
employment issues; dispute resolution; exchange control and withholding; and proposals
for reform.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional
Q&As visit www.practicallaw.com/franchising-guide.

MARKET
1. WHAT HAVE BEEN THE MAIN DEVELOPMENTS IN THE FRANCHISING
MARKET OVER THE PAST 12 MONTHS?
The franchising market has been growing in relation to the following sectors:
 Education, including pre-schools, review schools, specialty schools and math or
reading programmes.
 Health and fitness (for example, Anytime Fitness clubs).
 Healthy food (for example, Salad Stop or Juju Eats).
 Convenience stores (for example, AlfaMart, FamilyMart and 7-Eleven).
 Pharmacies and drug stores (for example, Generika Drug Store and The Generics
Pharmacy).
 Food outlets and restaurants (for example, Potato Corner).

2. WHAT ARE THE MOST COMMONLY USED METHODS OF LOCAL AND

INTERNATIONAL FRANCHISING?

LOCAL FRANCHISING
DIRECT, SINGLE-UNIT FRANCHISING has always been one of the most common
forms of franchising in the Philippines. Lately, however, franchisors have begun to
explore other options. An increasing number of franchisors are becoming interested in
large scale, multi-unit franchising formats such as development agreements and master
franchising agreements. Others are exploring joint ventures and innovative new
methods, including:
 Conversion franchising, where an independent store owner in a similar business
converts his store into a franchise.
 Passive franchising, where the franchisee is interested in providing capital but
not in managing the franchise.

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 INTERNATIONAL FRANCHISING
International or overseas franchisors investing in the Philippines often choose to enter
the Philippine market through joint venture or master franchising agreements. This is
mostly because while there is no special law regulating franchising, Philippine law
prohibits foreign nationals and foreign corporations from owning land in the
Philippines and from entering into certain sectors of the market. For example, under
the Constitution, no foreign national or foreign corporation can:
 Own or manage a media company.
 Engage in retail trade below a certain amount of paid-up capital.
 The exploitation of natural resources, advertising and public utilities are also
limited to Filipino citizens and corporations that are owned by a Filipino
majority.

3. ARE THERE ANY SPECIFIC REASONS FOR AN OVERSEAS FRANCHISOR TO

USE A SEPARATE ENTITY FOR ENTERING INTO A FRANCHISE AGREEMENT
WITH A FRANCHISEE IN YOUR JURISDICTION?
There are no reasons specific under the laws or practices in the Philippines for a
franchisor to use a separate entity for entering into a franchise agreement with a
Philippine franchisee.

REGULATION OF FRANCHISING
4. WHAT IS THE LEGAL DEFINITION OF FRANCHISING AND/OR A FRANCHISE?
There is no statutory definition of franchising in the Philippines. Instead, franchise
agreements are categorised as technology transfer arrangements (TTAs). TTAs are
defined in the Intellectual Property Code of the Philippines as contracts or agreements
that involve either:
 Transfer of systematic knowledge for the manufacture of a product, the application
of a process or rendering of a service, including management contracts.
 Transfer, assignment or licensing of all forms of IP rights, including the licensing of
computer software (except computer software developed for a mass market).

On 17 November 2010, the Department of Trade and Industry (DTI) released a non-
binding advisory under Bureau Order No. 10-24 Series of 2010 (Advisory on Due Diligence
to be Undertaken by a Prospective Franchisee). This Advisory defines a franchise
agreement as a written contract or agreement between two or more parties by which a
franchisor grants the franchisee the right to engage in the business of offering, selling, or
distributing goods or services under a marketing plan, system or concept, for a certain
consideration. Unless otherwise provided, this right includes the use of a trade mark,
service mark, trade name/business name, know-how, logo-type advertising, or other
commercial symbols associated with a particular business.

5. WHAT ARE THE LAWS REGULATING FRANCHISING?

There are no specific laws governing franchising in the Philippines. Franchise
agreements are regulated by the applicable provisions of the:
 Intellectual Property Code (IPC).
 Civil Code.

FRANCHISING READING MATERIALS Page 23

  Corporation Code.
 Relevant special laws.

IPC
Sections 87 and 88 of the IPC list prohibited and mandatory provisions of technology
transfer agreements, including franchise agreements (see Question 4). Failure to conform
to these provisions (that is, the inclusion of prohibited provisions or the exclusion of
mandatory provisions in a franchise agreement) will render the agreement unenforceable.
Sections 87 and 88 of the IPC are intended to prevent unfair competition and trade. The
prohibited provisions are deemed prima facie to have an adverse effect on competition and
trade.

CIVIL CODE
The Civil Code contains the general law on contracts and human relations. Franchise
agreements are considered to be ordinary contracts. Therefore, franchise agreements are
subject to the general provisions of the Civil Code governing obligations and contracts. For
example, when offering a franchise, a franchisor must observe honesty and good faith.
Additionally, offers are only deemed accepted if they are accepted unconditionally.
Contracts between a franchisor and franchisee are also subject to the rules on
interpretation of contracts.
Actions for remedies for breach, damages or recovery relating to franchise agreements are
treated as regular civil actions.

CORPORATION CODE
The Corporation Code sets out the requirements for registering a business in the
Philippines. Before it can conduct trade or business in the Philippines, a foreign
corporation must apply to the Securities and Exchange Commission (SEC) for a licence to
transact business in the Philippines.

A foreign corporation that intends to conduct franchising operations in the Philippines has
the followings options:
1. Enter into a franchising agreement with an existing local entity.
2. Establish an entirely new corporation under Philippine laws.
3. Register a branch office with the SEC.
The third option is only available to corporations from countries that provide
reciprocal treatment to Filipinos for doing business in their country.

SPECIAL LAWS
There are some special laws that affect franchising, such as:
 While foreign corporations are generally governed in the same manner as domestic
corporations, the Retail Trade and Liberalisation Act prevents them from owning
or wholly owning a business below a certain amount of paid-up capital.
 The Foreign Investment Negative List and the Foreign Investments Act set out
restrictions and prohibitions on foreign investors in relation to the sectors they can
invest in and how much they can invest.
 The Philippine Competition Act prohibits:

FRANCHISING READING MATERIALS Page 24

 1. anti-competitive agreements; and
2. one or more entities from abusing their dominant position by engaging in
conduct that would substantially prevent, restrict or lessen competition.
 The Data Privacy Act of 2012 protects individuals from unauthorised processing of
personal information by regulating the collection, recording, organisation, storage,
updating or modification, retrieval, consultation, use, consolidation, blocking,
erasure or destruction of personal data.

6. WHAT IS THE REGULATORY AUTHORITY RESPONSIBLE FOR ENFORCING

FRANCHISING LAWS AND REQUIREMENTS IN YOUR JURISDICTION?
Technology transfer arrangements (TTAs) are primarily regulated by the
Documentation, Information, and Technology Transfer Bureau (DITTB), an agency
under the Intellectual Property Office of the Philippines (IPOPHL). The DITTB is
responsible for reviewing all TTAs, including franchise agreements, to determine their
compliance with the requirements of the Intellectual Property Code (IPC) before the
TTA's recordal with the IPOPHL. The DITTB also determines whether a particular
TTA can be granted an exemption from any of the requirements under the IPC.

On 21 July 2015, the Philippine Competition Act (PCA) was signed into law. The PCA
created the Philippine Competition Commission (PCC), which is tasked to promote and
maintain market competition by regulating anti-competitive conduct (that is, anti-
competitive agreements, abuses of dominant position and anti-competitive mergers and
acquisitions). The PCA regulates all entities, including franchisors and/or franchisees
engaged in either:
 Trade, industry or commerce in the Philippines.
 International trade, industry or commerce having direct, substantial and reasonably
foreseeable effects in the Philippines, including those that result from acts done
outside the territory of the Philippines.

The Data Privacy Act of 2012 was signed into law on 15 August 2012, and its
Implementing Rules and Regulations (IRR) came into force on 9 September 2016. The
Data Privacy Act and the IRR created the National Privacy Commission (NPC) to
administer and implement the provisions of the Data Privacy Act. The NPC regulates
acts or practices by entities, including franchisors and/or franchisees, outside the
Philippines if:
 The act, practice or processing relates to personal information about a Philippine
citizen or a resident.
 The entity has a link with the Philippines, and the entity is processing personal
information in the Philippines or even if the processing is outside the Philippines
as long as it is about Philippine citizens or residents such as, but not limited to,
the following:
 a contract is entered in the Philippines;
 a juridical entity unincorporated in the Philippines but has central
management and control in the country;
 an entity that has a branch, agency, office or subsidiary in the Philippines and
the parent or affiliate of the Philippine entity has access to personal

FRANCHISING READING MATERIALS Page 25

 information and the entity has other links in the Philippines such as carrying
on business in the Philippines and the personal information was collected or
held by an entity in the Philippines.

7. MUST THE FRANCHISOR BE REGISTERED WITH A PROFESSIONAL OR

REGULATORY BODY BEFORE SETTING UP A FRANCHISE SYSTEM?
The law does not require the registration of franchisors with a professional or regulatory
body before setting up a franchise system. However, Bureau Order No. 10-24 Series of
2010 (Advisory on Due Diligence to be Undertaken by a Prospective Franchisee) advises
potential franchisees to require the franchisor to obtain a certificate of good standing
from the Securities and Exchange Commission, and a certificate stating that the
franchisor is a member of any franchisor association and has no pending cases against it.
See also Question 11.

8. IS THERE A CODE OF ETHICS OR OTHER MEANS OF PROMOTING ETHICAL

FRANCHISING IN YOUR JURISDICTION?
There is no statutory code of ethics for franchising, although any franchise agreement
that is contrary to law, morals, good customs, public policy or public order is
automatically void.
However, private franchising associations can establish their own code of ethics, which
are binding among their members. For example, the Philippine Franchising Association
has a Code of Ethics and Fair Franchising Standards that binds over 100 member
franchisors.

9. DO FRANCHISEES BENEFIT FROM ANY LAWS DESIGNED TO PROTECT

CONSUMERS OR SMALL BUSINESSES?
Republic Act No. 10644, known as the Go Negosyo Act, contains provisions that assist
micro, small and medium enterprises that seek to enter into technology transfer
arrangements (TTAs).

The Go Negosyo Act provides for the establishment of Negosyo centres in all provinces,
cities and municipalities in the Philippines. These Negosyo centres assist micro, small
and medium enterprises by facilitating business registration and renewal. They also help
these enterprises with entering into TTAs through their partnerships with the Philippine
Franchise Association and the Association of Filipino Franchisers.

10. ARE THERE ANY OTHER REQUIREMENTS WHICH MUST BE MET BEFORE A
BUSINESS CAN SELL A FRANCHISE?
There are no other requirements that must be met before a business can sell a franchise.

FRANCHISE AGREEMENT
Pre-contract disclosure requirements
11.IS THE FRANCHISOR SUBJECT TO ANY GENERAL OR FORMAL PRE-
CONTRACT DISCLOSURE REQUIREMENTS?
There is no law requiring any formal pre-contract disclosure in the Philippines.
However, potential franchisees are advised to exercise due diligence before engaging in

FRANCHISING READING MATERIALS Page 26

 franchising business with a franchisor. In particular, franchisees are advised to obtain
the following information on the franchise/franchisor before entering into a contract:
 Franchisor's business address, e-mail address, internet home page or website, fax
numbers and other contact details.
 Copy of the franchisor's registration with the Department of Trade and Industry
(DTI) or Securities and Exchange Commission (SEC).
 Parent companies and affiliates, if any, and their respective roles in the franchise,
and franchisor's declaration on whether any affiliate is a supplier and what they
will supply.
 Names of the members of the board of directors and officers, with a brief
description of their qualifications and background, ownership interests and
references.
 Contact numbers and business locations of existing franchisees.
 Executed promotional/marketing materials.
 Description of the business concept, which includes brand image, brand
personality, unique selling proposition, target market, mission and vision.
 Basic information on training, commercial and/or technical assistance.
 Certificate attesting that the franchisor:
 is a member in good standing of any franchisor association; and
 has no pending administrative, civil or criminal cases against it.
 Initial fee amount that will be collected, and services covered by these fees.
 Training that will be provided, including number of persons trained, duration
and training modules.
 Number of years the franchisor company has been in operation and number of
years it has franchised the business, with corresponding numbers of company-
owned branches and franchised outlets.
 Draft franchise agreement.
 Full disclosure of the financial requirements of the franchise business.
 Whether there is a requirement on the franchise applicant to seek adequate legal
and financial counsel before signing the franchise agreement.
 Mechanism for dispute resolution.

Franchisees are also advised to consult any of the following:

 A franchisor association.
 The SEC.
 The DTI or the nearest DTI regional/provincial office.
 A certified franchise executive.
 A franchise consultant.

These recommendations, while not mandatory, are set out in the DTI's Advisory Bureau
Order No. 10-24 Series of 2010.

12. MUST THE FRANCHISOR DISCLOSE FAIRLY AND IN GOOD FAITH ALL
FACTS MATERIAL TO THE PROSPECTIVE FRANCHISEE'S DECISION TO
ENTER INTO THE ARRANGEMENT, OR MUST THE PROSPECTIVE
FRANCHISEE RELY ON ITS OWN DUE DILIGENCE?

FRANCHISING READING MATERIALS Page 27

 See Question 11. Prospective franchisees must rely on their own due diligence. The
franchisee is expected to exercise the usual care and attention as is exercised by an
ordinary person similarly situated. If there are open and patent defects that could have
easily been discovered by the prospective franchisee, it is assumed that there was no
misrepresentation on the part of the franchisor and the principle of caveat emptor
(buyer beware) applies.

However, under the Civil Code all persons must observe honesty and good faith and the
failure to disclose facts, when there is a duty to reveal them constitutes fraud. Therefore,
a franchisor can be held liable for purposefully concealing or failing to disclose a
material fact.

FORMALITIES
13. WHAT ARE THE FORMAL CONTRACTUAL REQUIREMENTS TO CREATE A
VALID AND BINDING FRANCHISE AGREEMENT?
There are no special laws governing franchise agreements, which are governed by the
general law on contracts. For a contract to be valid, there must be consent,
consideration and a valid object. However, to be enforceable, a franchise agreement
must:
 Be written.
 Contain all the mandatory provisions required by the Intellectual Property Code
(IPC).
 Not contain any of the prohibited provisions under the IPC.

PARTIES' RIGHTS AND OBLIGATIONS

14. IS THERE A GENERAL OBLIGATION TO BEHAVE FAIRLY, REASONABLY OR
IN GOOD FAITH TO THE OTHER PARTY DURING THE TERM OF THE
FRANCHISE AGREEMENT?
Every person must, in the exercise of their rights and in the performance of their duties,
act with justice, give everyone what they are due, and observe honesty and good faith
(Civil Code).

OBLIGATIONS OF THE FRANCHISEE

There are no obligations specifically imposed on the franchisee by local law. The
agreement is the law between the parties. The parties to a franchise agreement are free
to include the terms that they deem proper, provided that these terms are not contrary
to law, morals, good customs, public order or public policy.

OBLIGATIONS OF THE FRANCHISOR

As with franchisees, there are no obligations specifically imposed on the franchisor by
local law. The terms of the contract will determine the obligations of both parties,
provided that these terms are not contrary to law, public policy, public order or morals.

15. DOES LOCAL LAW REQUIRE THAT PARTICULAR PROVISIONS MUST BE

EXPRESSLY INCLUDED IN A FRANCHISE AGREEMENT?

FRANCHISING READING MATERIALS Page 28

 All technology transfer arrangements (TTAs) (such as franchise agreements) must
include a provision stating all of the following (Intellectual Property Code):
 The laws of the Philippines govern the interpretation of the TTA, and in the
event of litigation the venue must be the proper court of the place where the
licensee has its principal office.
 Continued access to improvements in techniques and processes related to the
technology must be made available during the period of the agreement.
 In the event of arbitration:
 the arbitration proceedings must be governed by the Procedure for
Arbitration of the Arbitration Law of the Philippines, the Arbitration Rules
of the United Nations Commission on International Law (UNCITRAL
Arbitration Rules 1976) or the Rules of Conciliation and Arbitration of the
International Chamber of Commerce; and
 the venue of the arbitration must be the Philippines or any neutral country.
 Philippine taxes on all payments relating to the TTA must be borne by the
licensor (franchisor).

16. ARE EXCLUSION AND ENTIRE AGREEMENT CLAUSES ENFORCEABLE IN

YOUR JURISDICTION? IF SO, ARE THEY EFFECTIVE TO PROTECT THE
FRANCHISOR?
The terms of a contract have force of law between the parties. Entire agreement and
exclusion clauses are generally valid provided that they are not contrary to law, public
order, public policy, morals or good customs. For example, a provision that excludes a
party's liability in the case of fraud is void for being against law.

However, it is strictly prohibited to include in a franchise agreement provisions that

exempt the franchisor from either or both (section 87.14, Intellectual Property Code):
 Liability for non-fulfilment of his responsibilities under the technology transfer
arrangement.
 Liability arising from third-party claims brought about by the use of the
licensed product or the licensed technology.

Barring any fraud on the part of an overseas franchisor, an overseas franchisor that is
not party to the local franchise agreement may be sufficiently protected by exclusion
and entire agreement clauses if the sub-franchisor commits any fraud or defaults on its
obligations.

17. CAN THE FRANCHISOR IMPOSE PRODUCT TYING OR OTHER PURCHASING

RESTRICTIONS AND NON-COMPETE OBLIGATIONS ON THE FRANCHISEE
DURING THE TERM OF THE AGREEMENT?

Restrictions on purchasing and product tying

Product tying is not permitted. There is a prohibition on agreements that impose on the
franchisee the obligation to (Intellectual Property Code (IPC)):
Acquire from specific sources capital goods, intermediate products, raw materials and
other technologies.

FRANCHISING READING MATERIALS Page 29

Permanently employ personnel indicated by the franchisor.
It is possible to request an exemption from the Documentation, Information, and
Technology Transfer Bureau, provided that such product tying or purchasing restrictions
are for meritorious reasons, such as to maintain the quality of the goods or services.
However, such exemptions are granted on a case-to-case basis.
Non-compete obligations and transfer restrictions
Restrictions on the use of the technology supplied after the expiration of the technology
transfer arrangement are prohibited, except in cases of early termination due to reasons
attributable to the franchisee (section 87.9, IPC). The Director General of the Intellectual
Property Office of the Philippines held that non-compete clauses violate section 87.9 of the
IPC. However, in the same case, the Director General stated that a non-compete clause can
be valid provided that the period is limited to one year from the termination of the
agreement (re: Pre-Clearance of a Shop Franchise Agreement, 20 October 2003).
Fees and payments
18. What fees are usually payable by the franchisee? Are there any restrictions on the
parties' freedom to set the fees and payments, or any other payment requirements?
The fees that are payable, including initial fees, royalties, marketing fees, or any other
charges, are wholly determined by the terms of the franchising agreement between the
parties.
The law, however, provides that interest rates must not be unconscionable. The standards
for unconscionable interest rates are determined on a case-by-case basis and by the
jurisprudence.
Term of agreement and renewal
19. Are parties free to agree on the term of the franchise agreement? What is the typical
term of a franchise agreement in your jurisdiction?
Parties are free to agree on the term of the franchise agreement, provided that it is not
contrary to the law, public order, public policy, morals or good customs. In practice, the
usual term of a franchise agreement is five to ten years.
20. What rights of renewal are usually included in the franchise agreement? Are fees paid
on renewal?
Commercial practice
Franchising agreements usually contain a right to renew the contract without having to
execute a new franchise agreement. Most franchisors require that certain minimum
requirements be met, such as minimum paid-up capital or full compliance with certain
requirements. Renewal fees can also be required.
Local law
The right of renewal is a contractual right. The right to refuse to renew, the fees to be paid,
and the conditions to be met can all be stipulated in the contract. If the parties agree to a
right of renewal and the franchisor reneges on this obligation, the franchisee can sue for
breach of contract.
Termination
21. Are there any limitations on the right of a franchisor to terminate the agreement?
Neither party can unilaterally terminate the agreement unless either:
There is a valid reason for termination.
Both parties consented to a term allowing one party to unilaterally withdraw from the
contract.

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The grounds for termination are usually set out in the agreement itself. Some common
grounds for termination found in franchise agreements are:
Expiration of the term.
Default.
Breach of contract.
Insolvency.
Failure to meet performance milestones.
Change in ownership.
Contractual penalties and liquidated damages are enforceable. However, the courts can
reduce the amount of penalty or liquidated damages if they find that the total amount is
excessive.
22. Are post-term restrictive covenants enforceable?
Non-compete clauses have been found to violate section 87.9 of the Intellectual Property
Code. However, the Director General of the Intellectual Property Office of the Philippines
allowed non-compete clauses provided that the duration is limited to one year from the
termination of the agreement (see Question 17, Non-compete obligations and transfer
restrictions). Payment to the franchisee is not required as a condition for the validity or
enforceability of non-compete post-term covenants.
Non-disclosure/confidentiality provisions are valid in the Philippines. Payment to the
franchisee is not required as a condition for the validity or enforceability of a non-
disclosure/confidentiality provision.
23. Can the franchisor or a replacement franchisee continue to sell to the former
franchisee's customers?
The franchisor or a replacement franchisee can continue to sell to the former franchisee's
customers. There is no law prohibiting or regulating this practice.
Choice of law and jurisdiction
24. Will local courts recognise a choice of foreign law in a franchise agreement for a
business operating in your jurisdiction?
Local courts will not recognise a choice of foreign law in a franchise agreement for a
business operating in the Philippines, unless they are granted an exemption by the
Documentation, Information, and Technology Transfer Bureau. Technology transfer
arrangements (which include franchise agreements) must contain a provision stating both
that (Intellectual Property Code):
The laws of the Philippines govern the interpretation of the contract.
In the event of litigation, the venue must be the proper court of the place where the
franchisee has its principal office.
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for
a business operating in your jurisdiction?
See Question 24. The law also provides that jurisdiction is determined by law, not by the
parties.
Operations Manual
26. How does the franchisor ensure that the franchisee complies with the business
standards, systems and requirements?
The obligation to comply with the standards or the Operations Manual is set out in the
terms of the agreement. A franchisee's failure to comply with these requirements may be a
cause for termination of the franchise.

FRANCHISING READING MATERIALS Page 31

27. Can the franchisor change the Operations Manual unilaterally, as is usually required?
Franchising agreements usually provide that the Operations Manual is subject to
modification based on changes or improvements in technology, systems, operating
standards or marketing variables. However, if the modification of standards or
requirements is so great that the franchisee cannot reasonably be expected to comply with
the change, this may be considered invalid for being a potestative condition (that is, a
condition or term of a legal agreement that is completely within the power and control of
one of the parties and that makes the agreement unenforceable for lack of mutuality of
obligation). The law provides that the validity of, or compliance with, a contract cannot be
left to the will of one of the parties.
Liability issues
28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent
selling practices?
Depending on the nature of the fraud or deception, a franchisee can either file:
A civil action for breach of contract and an action for rescission or specific performance.
An action to set aside the contract for being voidable.
The franchisee can also file a criminal action for swindling. Regardless of the action taken,
the franchisee (if successful) will usually recover damages from the franchisor.
29. How can third-party claims against the franchisee be brought successfully against the
franchisor?
Indemnity
The right to indemnification of either the franchisor or the franchisee will depend on the
terms of the contract. However, section 87.14 of the Intellectual Property Code prohibits
provisions that exempt the franchisor from liability:
For non-fulfilment of its responsibility under the franchise agreement.
Arising from third-party suits brought about by the use of the licensed product or
technology.
Precautions
To emphasise the franchisee's independence from the franchisor, a franchise agreement
will typically include a provision stating that the franchisee is not an employee, business
partner, agent or representative of the franchisor. Most franchise agreements also contain
a provision explicitly prohibiting the franchisee from holding himself out as having
authority to bind the franchisor.
Intellectual property
30. What provisions are usually made in relation to intellectual property rights (IPRs),
including know-how?
Generally, franchisees are granted the right to use the franchisor's trade mark. The
franchisee can only use the trade mark for a limited time or for the duration of the
franchise agreement, and only for the use it was intended. Additionally, the trade mark
must always:
Conform to the branding standards of the franchisor.
Maintain a uniform look throughout the franchise.
As franchise agreements typically grant the right to use the franchisor's trade mark, they
must comply with section 150 of the Intellectual Property Code (IPC), which requires a
franchise agreement to provide for effective control by the franchisor of the quality of the
franchised goods or service.

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A franchisor's know-how usually comes in the form of an Operations Manual and training.
The use of the Manual and information acquired in training are determined by the
contract, not the law. Most franchise agreements contain a confidentiality clause
prohibiting the disclosure of such information. For example, the franchise agreement may
provide that, during the period of the agreement, the franchisee cannot divulge confidential
information or reproduce the Manual in any way.
There are some limitations on the ability of a franchisor to limit the use of IPRs and
confidential information or to carve out express reservations from the rights granted.
These limitations are listed as prohibited clauses, which are clauses that (section 87, IPC):
Reserve the right of the licensor to fix the sale or resale prices of the products
manufactured on the basis of the licence.
Contain restrictions regarding the volume and structure of production.
Prohibit the use of competitive technologies in a non-exclusive technology transfer
agreement.
Establish a full or partial purchase option in favour of the licensor.
Obligate the licensee to transfer for free to the licensor the inventions or improvements that
may be obtained through the use of the licensed technology.
Prohibit the licensee to export the licensed product, unless justified for the protection of the
legitimate interests of the licensor (such as exports to countries where exclusive licences to
manufacture and/or distribute the licensed product(s) have already been granted).
Restrict the use of the technology supplied after the expiration of the technology transfer
arrangement (TTA), except in cases of early termination of the TTA due to reason(s)
attributable to the licensee.
Require that the technology recipient cannot contest the validity of any of the patents of the
technology supplier.
Restrict the research and development activities of the licensee designed to absorb and
adapt the transferred technology to local conditions or to initiate research and development
programmes in connection with new products, processes or equipment.
Prevent the licensee from adapting the imported technology to local conditions, or from
introducing innovation to it, as long as this does not impair the quality standards
prescribed by the licensor.
31. What are the registration requirements for licensing IPRs?
Licences over IPRs are separate and distinct from the IPRs themselves. Licence
agreements are considered as technology transfer arrangements (TTAs) which, like
franchise agreements, must comply with the provisions of the Intellectual Property Code
(IPC) on mandatory and prohibited clauses (see Question 30).
Licences over IPRs are submitted to the Documentation, Information, and Technology
Transfer Bureau for review and pre-clearance before submission to the Bureau of Trade
mark or Bureau of Patent for recordal. Licence agreements concerning IPRs are registered
separately from the IPRs themselves.
A trade mark licence agreement has no effect against third parties unless the licence is
recorded with the Bureau of Trade mark (IPC).
A franchise agreement need not be registered if it contains all the necessary mandatory
provisions and does not have any of the prohibited provisions under the IPC. However, if a
franchise agreement contains provisions relating to the franchisee's use of the franchisor's
registered trade mark, the franchise agreement will need to be recorded with the Bureau of

FRANCHISING READING MATERIALS Page 33

Trade mark. Otherwise the provisions pertaining to the use of the trade mark will have no
effect against third parties.
Real estate
32. Are consents from landlords difficult to obtain when transferring leases or granting
subleases from a franchisor to a franchisee?
There are no real estate laws particularly relevant to franchising. The difficulty of
transferring leases or granting subleases will depend on the terms of the lease agreement.
33. How can a franchisor prevent the franchisee from occupying the premises after the
franchise agreement has ended?
While there has not yet been a ruling on this matter, the authors believe that any provision
in the franchise agreement requiring the franchisee to vacate the premises after the
franchise agreement has ended may be considered adverse to competition and trade and
prohibited under section 87.15 of the Intellectual Property Code.
However, if the real property is owned or leased by the franchisor, and the franchisee
refuses to leave, the franchisor can file an ejectment suit with the courts.
34. How can the franchisor effectively acquire the franchisee's premises at the end of the
franchise relationship?
The imposition of a full or partial purchase option in favour of the franchisor is prohibited
(section 87.5, Intellectual Property Code). Consequently, the franchisor cannot require the
franchisee to sell or otherwise transfer ownership of the premises at the end of the
franchise relationship.
35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all
related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent
expressed as a percentage of the franchisee's sales?
There is no law prohibiting either of these stipulations. Both options are valid provided
that they are included in the franchise agreement.
Competition law
36. What is the effect of competition law rules on franchising agreements? Are there any
available exemptions?
Competition law
The Philippine Competition Act (PCA) prohibits two general acts:
Anti-competitive agreements (section 14).
Abuse of dominant position (section 15).
The agreements between or among competitors that are considered anti-competitive
agreements are further divided into the following two categories:
Agreements that are per se prohibited, which are those that:
restrict competition as to price, or components of the price, or other terms of trade; and
fix price at an auction or in any form of bidding (bid manipulation).
Agreements that are prohibited only if they have the object or effect of substantially
preventing, restricting or lessening competition. These include agreements that:
set, restrict or control production, markets, technical development or investment; and
divide or share the market, whether by volume of sales or purchases, territory, type of
goods or services, buyers or sellers or any other means.
Agreements other than those specified above which have the object or effect of
substantially preventing, restricting or lessening competition are also prohibited. However,
agreements that contribute to improving the production or distribution of goods and

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services or to promoting technical or economic progress, while allowing consumers a fair
share of the resulting benefits, may not necessarily be deemed contrary to the PCA.
The following acts are considered an abuse of dominant position and are prohibited:
Selling goods or services below cost with the object of driving competition out of the
relevant market.
Imposing barriers to entry or committing acts that prevent competitors from growing
within the market in an anti-competitive manner.
Making a transaction subject to acceptance by the other parties of other obligations which,
by their nature or according to commercial usage, have no connection with the transaction.
Setting prices or other terms or conditions that discriminate unreasonably between
customers or sellers of the same goods or services, where:
these customers or sellers are contemporaneously trading on similar terms and conditions;
and
the effect may be to lessen competition substantially.
Imposing restrictions on the lease or contract for the sale or trade of goods or services in
relation to where, to whom or in what forms goods or services can be sold or traded (such
as fixing prices, giving preferential discounts or rebate on the price or imposing conditions
not to deal with competing entities), where the object or effect of the restrictions is to
prevent, restrict or lessen competition substantially.
Making supply of particular goods or services dependent on the purchase of other goods or
services from the supplier, which have no direct connection with the main goods or services
to be supplied.
Directly or indirectly imposing unfairly low purchase prices for the goods or services of,
among others, marginalised agricultural producers, fisherfolk, micro-, small- and medium-
scale enterprises, and other marginalised service providers and producers.
Directly or indirectly imposing unfair purchase or selling price on competitors, customers,
suppliers or consumers.
Limiting production, markets or technical development to the prejudice of consumers.
Exemptions
The PCA does not prohibit or render unlawful (section 15(e), PCA):
Permissible franchising, licensing, exclusive merchandising or exclusive distributorship
agreements, such as those that give each party the right to unilaterally terminate the
agreement.
Agreements protecting IP rights, confidential information or trade secrets.
Generally, any barrier to entry, price differential, limit on production or technical
development which develop in the market as a result of or due to a superior product or
process, business acumen or legal rights or laws are not considered an abuse of dominant
position.
Online/e-commerce restrictions
There are no online/e-commerce restrictions under the PCA and the Intellectual Property
Code. The terms of the contract, however, can provide for such restrictions provided that
they are not contrary to law, public order, public policy or morals.
Employment issues
37. Can a franchisee be regarded as an employee of the franchisor?
Under Philippine Labour Law, the following factors are taken into account to determine
the existence of an employer-employee relationship:

FRANCHISING READING MATERIALS Page 35

The employer has the right to hire or select the employee.
The employer pays the wages of the employee.
The employer has the power to dismiss or discipline the employee.
The employer has the power to control the means and methods by which the employee's
work is to be accomplished.
The most important element is the last element (that is, control). Franchise agreements, in
theory and in practice, do not usually establish employer-employee relationships. However,
if the circumstances of the franchising relationship show that the franchisor in fact
exercises a sufficient measure of control over the franchisee, the franchise may be said to
establish an employer-employee relationship. There has not yet been a ruling on this
matter.
Dispute resolution
38. How are franchising disputes typically dealt with? What provisions for handling
disputes are usually included in domestic franchise agreements?
The parties can stipulate in the franchise agreement that any dispute will be subject to
arbitration. However, if the franchise agreement provides for arbitration, the law requires
that both:
The arbitration procedure must be governed by the:
Procedure of Arbitration of the Arbitration Law of the Philippines;
UNCITRAL Arbitration Rules 1976; or
Rules of Conciliation and Arbitration of the International Chamber of Commerce.
The venue of the arbitration must be the Philippines or any neutral country.
The ability to choose a neutral country other than the Philippines as the venue for
arbitration proceedings is one of the advantages of arbitration over court proceedings.
If the dispute goes to court, there are mandatory mediation and judicial dispute resolution
proceedings that must be complied with before the case undergoes a full-blown trial.
Arbitration and mediation are preferable to regular court proceedings as court
proceedings can be expensive and protracted.
Under Philippine law, a franchise agreement must include a provision stating that:
The laws of the Philippines govern the interpretation of the franchise agreement.
In the event of litigation, the venue must be the proper court of the place where the
franchisee has its principal office.
Therefore, requirements for an overseas governing law and an overseas forum for
litigation are not enforceable.
39. How are foreign judgments or foreign arbitral awards enforced locally?
The enforcement of a foreign judgment involves the two following steps:
The judgment must be filed with a regional trial court for recognition.
The judgment can then be used as evidence in an action to enforce the foreign judgment for
use in separate litigation proceedings.
The facts of the case will not be re-litigated once the judgment is recognised. However,
recognition can be denied on grounds of lack of jurisdiction, lack of notice to the opposing
party, collusion, fraud, or clear mistake of fact or law.
Foreign arbitral awards are enforced similarly, but subject to different grounds for
recognition and denial. These grounds are set out in the Alternative Dispute Resolution
Law and the UN Convention on the Recognition and Enforcement of Foreign Arbitral
Awards 1958.

FRANCHISING READING MATERIALS Page 36

Exchange control and withholding
40. Are any exchange control or currency regulations applicable to payments to an
overseas franchisor?
There are no exchange control or currency regulations applicable to payments to an
overseas franchisor.
41. Is there a withholding obligation on payments made to an overseas franchisor?
Under Philippine tax law, income sourced from the Philippines by a foreign corporation is
taxed at source. Regular corporate income tax is set at 30%, while royalties are charged at
20%. The franchisee must withhold the appropriate amount and pay it to the Bureau of
Internal Revenue.
Foreign franchisors can benefit from preferential tax treatment or lower tax rates if the
franchisor is a resident of a country that either entered into a bilateral or multi-lateral tax
treaty with the Philippines or allows a reciprocal credit for taxes paid in the Philippines.
Reform
42. Are there any proposals to reform the laws affecting franchising?
In 2007, a bill seeking to establish uniform standards of conduct for franchising
relationships was filed. However, this bill was not passed. There are currently no pending
bills to regulate franchise agreements in the Philippines. However, there are voluntary self-
regulating governing bodies for franchising in the country, such as the Philippine
Franchising Association.

WHAT IS FRANCHISING
Franchising refers to the method of practicing and using another’s perfected business
concept. In a franchise relationship, the franchisee is granted the right to market a product
or a service under a marketing plan or a system that uses the trademark, name, logo and
advertising owned by the franchisor.

WHAT ARE THE DIFFERENT TYPES OF FRANCHISING?

Product franchising, also known as trade name franchising, is that type of franchising
wherein a manufacturer grants a franchisee the right to sell its products, but with no
method of doing business. Examples of this type of franchising are car dealerships and
service stations.The business format franchising, also identified as a name and process
franchise, features a broader and ongoing relationship between the franchisor and the
franchisee, wherein aside from granting the right to use the name and market the products
and services of the franchisor, the franchisee is also provided a complete plan for managing
and operating the business – a transfer of the proven way of doing business that has been
developed by the franchisor. This plan often includes a full range of services, including site
selection, training, product supply, marketing plans and even assistance in obtaining
financing. All of the franchisor’s operating systems, technical expertise, marketing systems,
training systems, management methods and essentially all relevant information, are
transferred to the franchisee.

With the means of distributing goods and services perfected, rapid expansion of a
successful business concept occur more quickly. Modern day franchising is primarily in the
business format mode, accounting for around 90% of franchise businesses worldwide. PFA
is an association of franchisors who are into business format franchising.

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WHAT IS A GOOD FRANCHISE BUSINESS?
• Unique. A fresh or unique concept that has the potential to expand nationally, and even
internationally.
• Profitability. The business must be consistently profitable.
• Systematized. The business operating systems should be polished and efficient. These
systems and procedures should be in manual form.
• Training. The transfer of knowledge through training should be relatively easy for others.
• Excellent margins. The profit margins built into the concept should be viable enough that
every franchisee who adheres to the franchise system can realize an attractive Return on
Investment.

ARE YOU FRANCHISEE MATERIAL?

A good franchisee is an important part of a successful franchise chain. Evaluate your
ability to be a good franchisee with these qualities:

• Avid learner. Someone eager to learn will be receptive to the training and knowledge a
franchisor will impart.
• Effective communicator. A franchisee with good communication skills will be effective in
conveying their thoughts and ideas to different individuals in their course of work.
• Ample experience. General business skills, such as marketing, sales or administrative
expertise, will come in handy for a franchisee.
• Financially capable. Financial capability is essential in making a franchise fruitful. The
required money should be complemented with proper financial planning to run the
business till it breaks even.
• Awareness of the brand. A prospective franchisee’s ample knowledge about the product
or a service indicates whether he is really serious in getting a franchise or not.
• Open to new ideas. A good franchisee must be open to new ideas in order to make it easy
for the franchisor to introduce changes in the system that can be beneficial for both of
them.
• Ready to follow. A franchisee must be ready to follow the prescribed set of rules and
regulations contained in the franchise agreement. This is important in maintaining the
proven business system developed by the franchisor.
• Original thinkers. Though it’s necessary that a franchisee be a good follower, he should
also be able to think for himself. However, it must be made clear that franchisors are to
be consulted first at every stage of introducing a new change in the system.

WHAT SHOULD I CONSIDER BEFORE BUYING A FRANCHISE?

1. Ask yourself why you want to own a franchise.
2. Begin the search. Look for opportunities that are in harmony with you and that greatly
interests you.
3. Do your own research:
• Have a complete understanding of the business.
• Check on the business experience and track record of the franchisor.

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• Check your personal resources – experience in running the business; the hours and
personal commitment to run the franchise; and, how much money is to be invested.
• Determine the terms and conditions of the franchise agreement.
• Get information on the franchise by visiting stores and interviewing existing franchisees.
• Check on necessary government and other related permits.
3. Concept – Look into the product or service and discern what makes it stand out among
other businesses.
4. Location, location, location – Ask about the territory rights. Make sure that you get a
good site selection.

The Franchise Agreement

The Franchise Agreement (FA) is the legal document which details the rights and
obligations of the franchisor and the franchisee, including the length of term, the start
and end periods of the agreement, the renewal provisions and the end of the contract.

What is included in the Franchise Agreement?

Terms of Agreement – The FA carries a contract explanation detailing the type of
relationship a franchisee is entering into with the franchisor. Since a franchise
relationship is temporary in nature, the FA should specify how long the agreement will
last. At the end of that appointed period, the franchise is considered null and void.

Renewal – Renewal period grants the franchisor the chance to review the FA thus enabling
him to decide whether to renew the agreement or not. The franchisee’s good performance
is the most common of all criteria. However, a renewal does not guarantee the retention
of the original terms and conditions of the agreement. If applicable, a renewal fee is also
charged by the franchisor.

Investment Amount and Fees – This part of the FA explains the total investment cost and
its inclusions, as well as the date a franchisor is to be paid. Included in these are:
Franchise fees – The initial franchise fee, which may be non-refundable, is paid at the start
of a franchise relationship thus giving the franchisee the right to engage in the business
using the franchisor’s name and business system.
Royalties – Royalties are usually a percentage of the franchisee’s sales and are typically
paid weekly, biweekly or monthly.
Marketing contribution – System-wide marketing contributions are also based on the
percentage of franchisee’s sales.

Training and Support – The FA should state the kind of training and support the
franchisor will provide.

Purchase of Products – Products and supplies used in the franchise system should maintain
consistency. Hence the FA specifies that the franchisee may only buy from suppliers
accredited by the franchisor. A detailed list of approved suppliers is also provided in the
Operations Manual.

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Territory– The Territory determines the geographical boundaries a franchisee may
operate, or within which no other unit of the franchisor’s businesses may compete.

Termination – The FA carries in it the grounds for termination of the contract. In some
cases, violations of such conditions may still be remedied, however if repeated over time
or failure to act on them will still lead to termination of the contract.

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