FRANCHISING READING MATERIALS

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

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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
every month, so this can reduce your net income. Not all franchisors charge this fee,
though.

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  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
6. Vending & Service Machines
7. Personal Services: Shoe repair, Laundromat, & Payment Centers

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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.
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

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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

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.

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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?

HOW TO APPLY FOR A FRANCHISE BUSINESS IN THE PHILIPPINES

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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
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.

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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.
2) Contract Law thus applies since franchising is essentially an agreement.
3) Intellectual Property Law applies to provisions on technology transfer
arrangements.

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 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.

FRANCHISING READING MATERIALS Page 14

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 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.

FRANCHISING READING MATERIALS Page 17

 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.

FRANCHISING READING MATERIALS Page 18

 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.

FRANCHISING READING MATERIALS Page 19

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 21

  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 22

 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 23

 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 24

 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 25

 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 26

 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.

FRANCHISING READING MATERIALS Page 27