Franchising in the Philippines: Assess Mandatory Supply Arrangements

Before buying a franchise in the Philippines, establish who you must buy ingredients, stock and other supplies from. Using a single supplier can help maintain quality, but it can also lead to higher costs and stock shortages. In franchising, clear accountability is essential when the franchisor controls your choice of supplier.

1. Identify what you must buy and from whom

Do not settle for a statement that “all supplies will come from us”. Ask for a complete list of the products covered, including current prices, minimum order quantities, delivery lead times and payment terms.

Distinguish between proprietary ingredients essential to the brand and everyday items such as cleaning products, bags and paper. The justification for controlling their supply is not necessarily the same.

Ask whether you are required to:

• Buy exclusively from the franchisor;
• Choose from a list of approved suppliers; or
• Buy from any source, provided the products meet written standards.

These conditions have different implications for your costs and your ability to keep trading when problems arise. Also establish whether new suppliers can be added to the approved list, who assesses them and how long approval takes.

Ask whether the seller is a company affiliated with the franchisor. Also ask whether the franchisor receives a commission or any other benefit from your purchases. These are due diligence questions; do not assume you have a general right to inspect all their commercial agreements.

2. Understand the legal limits on mandatory sourcing

The Philippines has no single comprehensive law covering every aspect of commercial franchising. However, specific rules and general laws must be taken into account.

Executive Order No. 169, series of 2022, sets out protections and minimum agreement requirements for micro, small and medium-sized enterprises taking on franchises that fall within its scope. It should not be treated as automatically validating every supply purchasing condition.

Under Article 1306 of the Civil Code, the parties may agree contractual terms, provided these do not conflict with law, morals, good customs, public order or public policy.

Section 87.1 of the Intellectual Property Code is also relevant where an agreement falls within the rules on technology transfer arrangements. Its prohibited clauses include requirements to purchase capital equipment, intermediate products, raw materials and other technologies from a specific source. The law provides a mechanism for exceptions, so a blanket statement that all exclusive sourcing arrangements are lawful or unlawful is not enough.

Republic Act No. 10667, the Philippine Competition Act, also covers agreements that harm competition. An exclusive agreement does not automatically breach this law; its actual terms and effects matter. Have a lawyer review the clause itself, rather than relying solely on the seller’s explanation.

3. Calculate the true cost of supplies

The listed price is not the full cost. Include delivery, applicable taxes, storage, damaged goods and stock that may expire before it is sold.

Compare each key product by price per usable unit, minimum order quantity, typical usage and shelf life. A bulk order may look cheap but prove expensive if much of it goes unused.

Check payment timings too. If supplies must be paid for before delivery, you will need cash tied up while you wait for the goods and before you can sell them. If you borrow to fund these purchases, include interest and other charges in your projections.

Ask for clear answers about price changes:

• How much notice will you receive?
• Will the price remain fixed for orders already accepted?
• Can you cancel an undelivered order if the price changes?
• Who pays any additional costs if delivery is split into separate shipments?

Stress-test your budget against higher prices and slower sales. Do not rely solely on the current prices shown before you sign.

4. Agree remedies for supply failures

If you cannot freely buy elsewhere, the supplier’s written obligations become even more important. Ask for delivery lead times, quality standards and the remaining shelf life required when products arrive to be specified.

There should be a clear process for dealing with shortages, incorrect items, damaged goods and late deliveries. Set out the deadline for reporting problems, the evidence required and whether the remedy will be a replacement, refund or credit against a future invoice.

Discuss temporary purchasing from another approved source if the main supplier cannot deliver. Do not assume this is automatically permitted during a shortage. Put the conditions, the person responsible for approval and the response deadline in writing.

Practical takeaway: Before paying, make sure the mandatory sourcing requirements, total costs and remedies for supply failures are clear. Control over quality should come with clear accountability.