Starting a business is a dream for many Filipinos, and franchising offers a promising shortcut to success. With an established business model, brand, and operational system, the franchise model indeed promises a safe investment for your capital.
Before you start your franchise, one important document needs your full attention—the franchise agreement.
This is a vital document, not just a formality (so don’t just sign it!). It outlines both the franchisor’s and the franchisee’s rights and responsibilities. Overall, it’s the foundation of the franchisor-franchisee relationship. This document is vital to protecting your investment and ensuring a smooth business journey.
What is a Franchise Agreement?
What is franchising? It’s a legal agreement between two entrepreneurs allowing one to operate under the original owner’s brand and use its business model and systems. For this to succeed, it needs a contract – a franchise agreement.
A franchise agreement is a legally binding contract that grants the franchisee the right to use the franchisor’s name, trademarks, systems, and know-how in exchange for fees and adherence to specific terms.
In the Philippines, while there is no specific franchising law, franchise agreements must follow the general laws on contracts under the Civil Code of the Philippines, the Revised Corporation Code, Intellectual Property Code, the Securities Regulation Code, the Consumer Act of the Philippines, DTI regulations, and local governments.
Franchise Agreement vs. Franchise Disclosure
As a franchisee, you’ll encounter two main documents – the franchise disclosure document (FDD) and the franchise agreement. What is the difference between these two?
A Franchise Disclosure Document (FDD) (sometimes referred to as Uniform Franchise Offering Circular or UFOC by international franchisors) is an informational document that gives you a detailed look at the franchisor’s business to help you decide whether it would be profitable. It may include financial performance, company background, a list of existing franchisees, litigation history, and a summary of fees.
Although not yet required by law in the Philippines (unlike in countries like the U.S.), many credible franchisors voluntarily provide an FDD to help you understand the franchise’s advantages and disadvantages.
In contrast, a franchise agreement is a binding contract between the franchisor and the franchisee. It’s legally enforceable and contains specific obligations and rights between you and the franchisor.
In simple terms: The FDD helps you decide whether to invest in the franchise opportunity; the franchise agreement governs your responsibilities once you do. Always make sure the contents of the FDD align with what’s in the franchise agreement. If there are inconsistencies, bring them up before signing.
Provisions in a Franchise Agreement
Let’s break down the key provisions you’ll typically find in a franchise agreement:
1. The Grant of Franchise Rights and Term
This section specifies what exactly you’re getting. Are you allowed to use the brand in just one location, or is it a multi-unit franchise? It will also detail how long the agreement is valid—usually between 5 to 10 years—and the terms for renewal.
2. Franchisee’s Development Obligations
The franchisor may expect you to open your branch within a certain time frame. Delays might lead to penalties or even cancellation of the agreement. Some franchisors also require minimum performance standards (like monthly sales targets).
3. Initial and Ongoing Training
The best franchise businesses in the Philippines often provide comprehensive training to make sure you understand the business operations. This section outlines what training is included—whether it’s at headquarters, on-site, or virtual—and whether refresher training will be provided throughout the contract.
4. Territorial Rights
This part defines your territory, meaning the geographic area where you can operate without competition from other franchisees of the same brand. For example, you may be granted exclusive rights within a barangay, city, or province.
5. Operating Procedures
One of the most important factors in starting a franchise is having clear operating procedures that guarantee cost efficiency. For franchisees, these procedures help increase their chances of success.
However, for franchisors, this ensures consistency across all branches. Thus, franchise agreements specify that you must follow their prescribed customer service, inventory management, staffing, and store design methods.
6. Initial Fees
This is the upfront franchising cost you pay to become a franchisee. It typically covers the right to use the brand, initial training, and the setup of your store. In the Philippines, this can range from ₱100,000 to several million pesos, depending on the brand.
7. Ongoing Fees
Recurring franchise fees should be detailed in the franchise agreement. These may include royalty fees (a percentage of your gross sales, which can range from 3% to 10%) and possibly fixed monthly payments. This section outlines how much, when, and how these fees should be paid.
8. Marketing Fees and Marketing Obligations
Most franchisors run national or regional marketing campaigns. To support these efforts, you may be required to contribute a marketing fee, usually around 1% to 5% of gross sales. Some agreements also require local store marketing at your expense.
9. Restrictive Covenants and Non-Competes
You may be prohibited from owning or operating a competing business during the franchise term—and sometimes for a set period after the agreement ends. This protects the franchisor’s interests but also limits your freedom, so read this part carefully.
10. Termination and Post-Termination
This clause details the grounds for terminating the agreement, such as failure to meet obligations, breach of contract, or insolvency. It also explains what happens afterward: returning confidential materials, removing branding, and the treatment of any pending obligations.
11. Insurance and Indemnification
You might be required to maintain insurance policies (fire, liability, etc.) to protect the business and the franchisor. Indemnification means you agree to cover the franchisor in case your actions lead to legal issues or damages. The agreement should indicate the circumstances in which the franchisee must compensate or reimburse the franchisor.
12. Legal Rights and Jurisdiction
This final section outlines where and how disputes will be settled. In the Philippines, it’s common to see a provision stating that any disputes will be handled through arbitration in Metro Manila or via court proceedings under Philippine law.
The Fine Print is Key to Successful Franchising
The Philippine franchising industry forecast promises rewarding opportunities for both new and experienced entrepreneurs. However, success doesn’t come from the brand name alone – it starts with how well you understand and fulfill your role as a franchisee.
So, before you sign the franchise agreement, make sure to read the fine print (including the franchise disclosure document and UFOC) and fully understand what you’re getting into.
By learning what a franchise agreement entails and doing your due diligence, you’re setting yourself up not just to open a business but to grow a thriving, long-lasting one.
