Comprehensive Guide to Franchising in the Philippines (2020)

Are you an entrepreneur who is looking for franchise opportunities in the current market? Do you have what it takes to become the next tycoon in your chosen industry? If yes, you are surely a determined franchisee who is willing to step up the game and aim for more profitable ways of managing a business.

Franchising is an enticing industry. It is booming, and people are constantly looking for ways to engage in this field. They are eager to learn and understand the principles and basics of franchising since it is the first step to becoming successful in this field.

Moreover, as a form of investment, franchising is an avenue for aspiring business owners to have consistent income while making sure that it is a valuable undertaking despite its short and long term goals.

Hence, we have created this franchising comprehensive guide to give aspiring franchisees the chance to fulfill their dreams and eventually become franchisors of an established business.

Table of Contents

• What is franchising?
• Types of Franchising
• Pros and Cons of franchising
• How to select a franchise?
• Questions to Ask the Franchisor
• Things to Consider Before Buying a Franchise
• Advantages and Demands
• Business Legal Requirements and Fees
• Frequently Asked Questions (FAQ) and Terminologies
• Benefits of Attending Franchise Expos and Seminars
• Tips for Franchising Success
• Conclusion

What is franchising?

Franchising Defined

In simple terms, franchising means getting the right to operate a business from the franchisor for a fixed price, which includes the usage of the trademark and the business model. The interested party is the franchisee and the owner of the business is the franchisor.

Franchising is bound by various legal documents and considerations to secure smooth business operations. The Franchise Agreement (FA) document is the paper that specifies all the duties of the franchisor and the franchisee, duration, and the provisions. Take note that it is essential before starting out any business-related operations between you and the franchisor.

FA is set on a renewal basis and that makes the franchising deal temporary. However, despite that, it is essential that you know the terms and provisions that govern your agreement with the franchisor.

Franchising in the Philippines is both technical and easy to understand if you manage to familiarize franchising basics and its interesting facts. Hence, aside from the fees and others, pay attention to their business models and observe how it works.

The Importance of Business Model

Do not decide impulsively and weigh things first before making any decisions. Mostly, the pitfall of franchised businesses is attributed to inadequate research and the franchisees being unfamiliar with the business model.

So, what is the use of a business model in franchising? In franchising, a business model is the established system of the franchisor that has been tested in the market for years and is proven to yield results within a certain timeframe.

Franchisees prefer a corporate business model since it is ideal having a separate identity from its shareholders. Businesses with corporate models often have varied nature of business ranging from the food industry such as Jollibee and McDonald’s to the oil conglomerates like Shell and Petron.
 

Type of Franchising

There are three common types of franchising business: product franchising, manufacturing franchising, business format franchising.

Product Franchising

Also known as the trade name franchise, this type of franchise grants to the franchisor the power to give rights to every franchisee in terms of selling its products and the use of trademarks for a fee. 

Mostly, it does not include any method of doing the business but the franchisor is always the focal person who should train the franchisee in handling the business. Common examples are car dealerships and service station businesses.

Manufacturing Franchising

Here, the franchisee does not only have the right to sell the products but also has the right to manufacture the product following the manufacturing guidelines. An example is the food and beverage company, Coca-Cola. The franchisor only supplies the syrup ingredients to soft drink bottlers (franchisee) who then proceeds to mix, bottle, and distribute the final product.

Business Format Franchising

In a business format franchise, the franchisor does not only allow the distribution of the products but also gives franchisees the right to the franchisor’s business concept or model.

Here, the franchisor gives the franchisee access to its overall business methodology. An excellent example of this is the food cart franchise.

In this kind of franchise, you have a cart that sells street food to the masses. This has now become a trend in the Philippine market and is a very lucrative business since Filipinos love food. A food cart franchise is the choice of inspiring entrepreneurs because of its promising low initial investment and high returns in the long run.

Looking for more information about franchising in the Philippines? Click here!
 

Pros and Cons of Franchising

Just like any other investment, franchising also has its pros and cons that every franchisee must evaluate before anything else. 

Franchising Advantages

Capital Investment

Franchising offers an advantage as an alternative form of capital acquisition. Any aspiring entrepreneurs who want to venture into franchising are possible because it lets them start a business without the risk of debt or the cost of equity.

Motivation and  Management

Having the best people in the field is important. Hence, being motivated brings the most competent individuals in the business. But this is not always the case, although a big percentage of franchisors are able to retain deserving employees to help in the business.

Lower Risk

In terms of security, a franchise is a more secure investment than new business. This is because they are supported by an established business in the market with an effective business model that has been tested over time locally or internationally.

Loyal Customers and Brand Recognition

Building a strong customer database is a challenge for most new businesses. However, with franchising, you already have a list of your loyal customers and patronizers. It is an actual advantage to bypass a lot of the work that goes into marketing and branding a new business if you opt to have a franchise.

Buying Power

Remember that you get the best connections and network when you buy a franchise. As you become part of the franchise system, you will be in touch with the franchisor's established relationships with suppliers. In other words, all materials needed in the business will be less expensive because of the franchisor’s collective buying power.

Extensive Franchisor Support

One of the busiest people in franchising is the franchisor itself. This is because all-out support is needed to make the franchise a success. Most franchisors prioritize supporting their franchisees, especially during the early years of the business.

Be Your Own Boss

Owning a franchise gives you the chance to be your own boss. You can enjoy a flexible schedule, have autonomy in your career, and even decide where you work. In other words, you run a business with a support system available when problems arise.

Franchising Disadvantages

High Initial Investment

It is a fact that in franchising, the initial investment can sometimes be hefty. This is usually determined based on the type of franchise you choose to invest in. Moreover, for big-name franchises, expect to have a big initial investment to complete the deal.

Limited Creativity

A franchise is an established brand so everything that has to do with branding and innovation is considered predetermined. As a franchisee, it is impossible for you to add anything to the existing business system unless approved by the franchisor. There is a creative limitation for the brand’s innovation.

Shared Corporate Financial Information

If you value privacy, then you need to be a bit lenient when it comes to franchising. Franchisors continuously collect financial information from their franchisees in order to improve its business model, and to audit the royalty payments (if there is). Technically, you do not have any financial privacy when it comes to this.

So, what’s your verdict on this? Read more on the pros and cons of franchising.

How to select a franchise

Franchising is a great venture. It is promising and the industry is competitive. It offers great opportunities, but how do you select it?

Here are some tips.

Understanding the Franchise

Understanding every aspect of the franchise is technically the first step to consider when selecting a franchise. Learn the concept straight from your heart and consider franchising as a gateway for your entrepreneurial dream. If you are not a risk-taker enough to start your own business, then franchising is an alternative option. Yet, you need to be ready for opportunities always.

Finding the Great Common Trait

Just to set anyone's expectation right, franchising is not always a  win-win situation because it is entirely subjective in the first place, meaning there are still franchisors who do not consider their franchisees as partners.

There is no transparency at all, although not every franchisor is like that. Hence, the key is finding the trait that you both have in common.

Often, it is associated with a franchisor that cares for his/her franchisees as much as they care for the business.

Finding the Perfect Investment Opportunity

Franchising is always an investment opportunity. As an investor, you weigh things and the factors to consider by doing thorough research first before paying anything.

If you get the secret on how to make this venture worthwhile, congratulations! It is the best opportunity for you other than real estate or mutual funds. Check more as to why you should franchise when you have other options!

Moreover, do you want to know more useful tips? Check out this guide on how to select a franchise. 
 

Questions to Ask From a Franchisor

As a franchisee, you all have the right to ask questions to your franchisor. It is necessary to gauge how knowledgeable the franchisor is when it comes to the business. 

Make use of the franchise’s Discovery Day because it allows you to interact with the franchisor, and build rapport.

Franchise’s Discovery Day

Before a business deal gets signed, the franchise’s Discovery Day or the one-on-one talk with the franchisor plays a great role in your decision-making.

This meeting lets you understand the business and why you must become a franchisee. In return, it is a way for the franchisor to check if you’re a good fit in terms of knowledge, experience, attitude, and culture.

There are thousands of questions to ask, but if you are still unsure, here are some useful questions to consider.

1. Ask about the litigations that the business has faced.

It pays to do research first about the business. If you get information that the business has faced litigations, ask about it. Moreover, if the franchisor has many franchise failures and is involved in a bankruptcy, then you must ask about it.

2. What are your competitors, especially in the local market? How should we address them based on your market analysis?

Asking this question will give you an idea about how strong the current market competition is. Franchisors usually have their action plans and marketing strategies to overcome this concern.

However, its efficiency still needs to be evaluated and tested directly on the market. A good franchisor must have an answer to this question.

3. What kind of changes are expected based on the business concept? How about marketing and operations?

Of course, even if the business is well-established, there are still repercussions that may come in the way. Such consequences may cause changes to the business, so it will be helpful to have some background on the possible changes, especially in the marketing and operation side.

4. How will you respond to the competitive threat posed by current competitors? Potential competitors?

Again, going back to competitions. There are no what if’s. The franchisor must bear in mind that there is always a pose of competitive threat in the market, no matter how strong the business is now.

The business must always stick to its unique selling point (USP) and avoid impulsive decisions to join the trend without evaluating first its impact on the current business model.

Moreover, potential competitors are like spies. They will continue to delve more information about the business, and it is the franchisor’s job to protect the identity of the business.

Hence, there is a need to leverage all products and services offered by the business at all times.

5. What’s the biggest competitive threat in the marketplace? What’s the biggest opportunity?

When it comes to this, we have an important note for you. Remember that you must pay close attention here. If you feel that you don’t get a substantive answer from the franchisor, it is either you’re being sold, or you’re dealing with someone who simply doesn’t know the answer. Well, in either case, always be wary and rational.

Moreover, at this point, any franchisor should have presented their Strengths, Weaknesses, Opportunities, and Threat (SWOT) analysis report to give you a more detailed overview of the threats in the market. At the same time, you get to know the opportunities that can possibly happen once the business thrives in the economy.

6. Who is your customer at the end-user level? What’s happening to this market?

Every business knows its customers. Given this, the franchisor should give you a definite answer to this question. Experienced and dedicated franchisors have details about the customers at the end-user level and the market itself. There is no doubt that they can be a reliable franchisor for the business you want.

7. What are you really selling?

Well, this one’s obvious. The franchisor must know exactly the product that he or she is selling. If it is a service, then it is also important the franchisor can define the kind of service that he or is providing to the people.

8. What’s happened to the market over the past five years? To your market share? To your strategy? What new competitors have surfaced, and why?

If the franchisor is already doing the business for many years, there is no doubt that there is already a five-year evaluation available for future franchisees. This must include details about the market share of the company and the strategy employed in the business. 

Such evaluation must also include assessment done about the competitors within the past years and their impact on the business.

9. Who are your major vendors? Do they give terms on initial inventory? What terms? What terms do they provide on ongoing purchases?

This one is more on the operations side and the availability of the resources for the business. It is essential that a franchisee must ask the franchisor about their vendors and the terms of business doing with them.

10. What are you doing to secure the best prices on products?

In terms of this, you must also know about the negotiation on service and equipment vendors which includes the insurance, office equipment, etc.

Wondering what other questions to ask? We have some more for you! Check these 21 questions you must ask during the Discovery Day!

Things to Consider Before Buying a Franchise

So, you are now ready to get a franchise business but have you thought about the things to consider before buying one?

Being ready does not always mean you are well-prepared about what lies ahead of you. Sometimes, you still need to consider a few tips coming from the franchise experts.

Here are some of the most useful tips you must know.

Franchising Tips in the Philippines: Tips and Traps

Given the high success rate of franchising in the country, the Philippine Franchise Association (PFA) has been consistent in guiding prospect franchisees. This is especially true in choosing the kind of business they must acquire.

Hence, PFA pointed out some of the known franchising tips in the Philippines and misconceptions associated with it.

Do a self-assessment

The belief that ‘franchising is easy’ becomes the most common misconception these days. Franchisees are lured with the idea that all they need to do is to shed out money, and everything will fall into place.

By doing a self-assessment, you must ask yourself if you can commit 24/7 of your time in the business or if you have a commitment to embark on this endeavor until it becomes another successful franchise business entity.

Study the concepts

Another trap that brings negative outcomes when franchising is the belief that ‘franchising means instant success.’ It is a fallacy that led some franchisees to fail in the long run. Hence, it is essential to study every franchising concept. There is a lot of work in franchising and familiarizing the needed ideas can ease the workflow.

Research the market

‘Franchising can be everywhere’ is another misconception that can cause long term damage to your business. Doing market feasibility is reasonable, and this saves you from any problems concerning who will buy your products. Market research is considered to be an additional cost but could save you in the end.

Take your time

Franchising is neither a race nor a game. You do not need to be in a hurry to accomplish everything. Sometimes, the discount offers of some franchisors in the fees and other franchising payments can make you opt right away in the business, which must not be the case. Remember that an upfront discount does not necessarily mean a good deal. You may save a few pennies, but you compromise the chance to review the business thoroughly.

Hence, in times like this, it is better to stay rational and do not ever be in a rush. Do the math, do your research, read the agreement thoroughly, and if needed, consult your lawyer. It is best to be cautious while searching for the best franchise.

If you are ready to leverage your franchising journey, use this guide for more tips.

Advantages and Demands

The primary advantages for most franchisees joining franchising are capital, business growth, motivated management, and risk reduction, etc. Considering these factors is actually beneficial to both franchisees and franchisors if taken seriously.

As per the demands, franchising is an industry that is versatile. It adapts to the current changes well and can overcome the challenges of the industry through the help of the franchisor. It is somehow demanding since there are many things to fulfill in one go.
However, regardless of the complexities, you must strive hard to become the best franchisee you can be. If you are the franchisor, take the extra mile in leveraging the business in the market and beat the competition quietly. 
 

Business Legal Requirements and Fees

Let’s talk now about legalities. Every country has its own constitution to follow and has a set of rules and regulations governing the business market.

Franchising is a business, and while there are some requirements specific to a franchise, it is still most likely similar to the general legal requirements for businesses in the Philippines.

The best way to start your business and make it successful is to comply with all the crucial requirements mandated by the government of the Philippines. Before that, it is significant that you identify first the kind of business that you want to venture in terms of ownership and business structure. 

Here are some of the legalities of a business in the Philippines:

1. Register your business

There are three types of business ownership, and there are two offices that process the registration of your business based on ownership. For sole proprietorship, register with the Department of Trade and Industry (DTI).

For partnerships and corporations, the Securities and Exchange Commission (SEC) can accommodate your registration. It is in this process that you will register your business name.

You may visit DTI’s website to know more about registering your business and read some references that may be useful for your journey as the next successful entrepreneur. For partnerships and corporations, you may access the SEC’s website.

2. Secure a Mayor’s business permit

The local government unit of the place where you want your business to operate is responsible for processing your business permit.

Some cities or municipalities may have quite different requirements and processes from the others in registering your business. You should inquire first for the town or district where your business belongs so you can prepare the necessary documents and other requirements.

Mayor’s business permit is the document that will give you the license to operate in the city or municipality of your choice and payment of your local business taxes. If you are venturing into a food cart business, here is some information about the taxes that you need to pay.

Among the basic requirements that you may need to prepare for your business permit are the following:

• DTI Business Name Certificate for a sole proprietorship, SEC Articles of Partnership or SEC Certificate of Incorporation
• Barangay Clearance/ Permit
• Authorization letter of the owner with ID
• Contract of Lease or Land Title / Tax Declaration
• Sketch of Location
• Occupancy Permit
• Location Clearance
• Public Liability Insurance
• Community Tax Certificate (Cedula)
• Fire Permit
• Sanitary Permit

There are  other additional documents or permits the city or municipality may require from you
You must have an understanding of the annual Mayor’s Permit fees.  It will vary according to your business industry, and the preceding year’s gross sales (if you have been operating for years already) will be used as a basis to calculate the amount of tax you need to pay. Usually, it can be less than 1% to 3% or more. 

If you have just started with your venture, the initial tax for the year will be calculated on the capital investment or paid-up capital, contract of lease, and size of office.

3. Register with the Bureau of Internal Revenue (BIR)

Once you secured all the documents and permits, the next registration you will do is with the Bureau of Internal Revenue. 

Entrepreneurs must have a Taxpayer Identification Number (TIN), which can be obtained from the Revenue District Office (RDO) within the registered location of the business.

There are two types of BIR forms. The kind of form that you will fill out will depend on your business structure. Form 1901 is for those people who are self-employed, single proprietors, or professionals, while Form 1903 is for partnerships and corporations. 
You mustn’t miss registering with BIR to avoid being considered as a tax evader. BIR, like the Mayor’s Business Permit, has its own set of documents that you need to comply with to complete your registration.

The three most important documents you need to have are the (a) Certification (based on your business structure), (b) Contract of Lease or Land Title, and (c) Mayor’s Business Permit. Take note that these three important documents have also their own set of requirements you need to comply with before obtaining them. 

4. Register with the SSS, PhilHealth and Pag-Ibig Fund

You need to register with the three government agencies, such as SSS, PhilHealth, and Pag-Ibig. If you are hiring employees to help you with your business, then you have to register them to the aforementioned government agencies. These three agencies collect from the business owners and the employees for monthly contributions. 

5. Special or other requirements

Additional requirements may be asked from you according to the kind and nature of the business that you want to operate. For example, businesses like banks, financing companies, lending companies, pawnshops, money changers, money remittance business, and other financing institutions are required to be registered with the Bangko Sentral ng Pilipinas (BSP).

Frequently Asked Questions FAQ and Terminologies

The franchise terminologies are sometimes confusing, especially for the newbies. Hence, it is useful to have background knowledge about the franchising concept, the nature of the business you are planning to have, and the do’s and dont’s of the industry. 

This guide intends to help you throughout your franchising journey, especially in familiarizing basic concepts and workflows as needed in the business.

Common Franchising Terminologies and Acronyms in the Philippines

1. Franchise

As per its common definition, the franchise is a method of doing business by which a franchisee is granted the right to engage in a certain business by offering, selling or distributing goods, and services. They follow a marketing plan of the franchisor which is associated with the franchisor’s trademark, name, logo, and advertising.

However, its legal definition defines the franchise as a contract or agreement, whether expressed or implied, oral or written, between two or more persons wherein i) a franchisee is granted the right to engage in the business following a  marketing plan prescribed by the franchisor, ii) the operation of the franchisee’s business must be pursuant to that plan only or system since it is associated with the franchisor’s trademark. The franchisee is required to pay directly or indirectly, a franchise fee.

2. Franchisor

A company/proprietor that is choosing to expand the business via franchising option. It is offering the opportunity for investors who want to run a business in the location or territory of the business.

3. Franchisee

An individual who chooses to invest in a franchise to become a business owner.

4. Master Franchisee/Developer/Sub-Franchisor

These terms are all the same. This refers to an individual or organization that is selected by the franchisor to be in charge of building out an entire territory of the business. This person is responsible for recruiting new franchisees and training them. In exchange, the franchisor shares with them a portion of the initial franchise fee and royalty fee revenue.

5. Conversion Franchise

It is under the umbrella of a franchise system. It is usually an independent business that capitalizes on the brand and the systems.

6. Franchise Fee

The initial fee that a franchisee pays to the franchisor. This fee allows you to become a franchisee officially. In return, this fee secures you the right to do business as a franchisee.

7. Royalty Fee

It is an ongoing fee that a franchisee pays to the franchisor. Usually, it is a percentage of monthly franchise sales, but it can also be a predetermined fee.

8. Franchise Broker/Consultant

Consultants are important since their job is to help individuals select the right franchise based on what they want or their financial capability. There are many opportunities that exist in the franchising industry, and having an expert opinion is really helpful. However, before working with a broker or consultant, be sure that he or she is fully knowledgeable about franchising and considers your interests in mind.

Read more about all the common terminologies and facts about franchising.
 

Benefits of Attending Franchise Expos and Seminars

When you are a franchisee, the chance of enhancing your knowledge about the industry is possible, especially during expos and seminars.

Be proactive in joining activities like this because of its wide network and knowledgeable speakers who are willing to partake in the best practices they observe in their businesses.

Here are some of the upcoming events this coming 2020!

• Filipino Franchise & Business Expo 2020
• Franchise Asia Philippines 2020

Tips for Franchising Success

Lastly, you might be wondering if we have tips for you. Definitely, we do! As your franchising portal, Franchise Market aims to provide the most important details that we can share with you. This includes the following franchising tips and of course, a five-point checklist!

The Five-Point Checklist 

The list of franchising tips can go on, but it is also essential to consider having a checklist as your guide. As mentioned, franchising in the Philippines is not a game, and even with the hundreds of successful entrepreneurs in the country, it is recommended to follow this five-point franchising checklist.

Make sure it is a unique and exciting brand you like

In franchising, choose a business concept that you love. Search for a business that you will be proud of, considering the brands that you believe in, or even products and services that are interesting for you. These days, a food cart franchise in the Philippines is the choice of most entrepreneurs given that Filipinos love food all the time.

Evaluate yourself in terms of financial capability and legalities

Venturing into a franchise business requires you to be financially ready. It is crucial to franchise a business that has the right profitability for the investment that you put in. Study the length of time needed to recover your investment. Moreover, understand the monthly profitability of the business.

Choose a franchise with a rigid business model

You must choose a business concept that is well-established and tested over time. You cannot handle a business franchise just by downloading necessary manuals; you need thorough hands and minds as your back-up. Therefore, make sure you understand how your team prepared the overall business franchise program.

Evaluate its marketing program

Even if the business is known in the field, having a hardcore marketing and innovation program is a plus. Franchisors charge a monthly fee for marketing plans, and this is a good sign that the business owner is willing to grow the brand and reach a wider audience. This means there is a continuous effort to strengthen the brand’s image over time.

The franchisor’s all-out support

The 90% franchising success rate is impossible without the aid of franchisors that they give to their franchisees. Make sure that you make the best out of it by understanding the type of support you will get and who will support you from the headquarters.
 

Additional Business Tips for You

• Follow the proven system. Do not attempt to change anything because the current one works well and is proven to give returns.
• Hire the best people and treat them right. In other words, value your manpower.
• Delegate to your employees.
• Use what your franchisor gives you.
• Manage your time efficiently.
• Acknowledge the fact that you will likely need franchise mentoring and assistance.
• Give yourself a chance to work on your business without having to always work in the business.
• Managing a business includes managing the company culture.
• Ensure you have the right group working in the proper roles.
• Have a road map for the next few months and even the next few years.

Conclusion

Your Franchise Market family is hoping that you get the best out of this comprehensive guide. We aim that you embrace the franchising concept in an optimistic manner because it has more advantages than its downfall.

Franchising in the Philippines is an industry that you should consider. As the franchising hub of Asia, there are so many opportunities open for everybody.

Back to Blog