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 relation- ships. 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:

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 ✔ an area development franchise or
✔ a master franchise.

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 fran- chisor’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 trade- mark 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.”

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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.

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

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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
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.

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  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
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

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4. Fast Food Restaurant
5. Spa & Salon
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

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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.
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.

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7. FRANCHISOR’S BUSINESS OPERATIONS SYSTEM
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?

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 15. How do you handle disputes or conflicts between the franchisor and franchisee?

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.

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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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