Franchising in the Philippines: Assessing Mandatory Purchasing Requirements

The initial franchise fee may be affordable, but the daily cost of ingredients, stock and packaging can be substantial. If you can buy only from a single designated supplier, your outlet’s costs and ability to keep trading depend on that supplier. Consistent quality matters in franchising—but prices, obligations and remedies when supplies fail must also be clear.

1. List what you must buy and from whom

Before choosing a brand, ask for a written list of everything you must buy from the franchisor or an approved supplier. Do not limit your review to the main product. Include packaging, uniforms, cleaning products, equipment, spare parts and anything that needs replacing regularly.

For each item, ask:

• Is the supplier exclusive, or are there alternatives?
• What is the minimum order quantity or value?
• How long does delivery take after placing an order?
• Who pays for delivery, storage and insurance in transit?
• Can the list change without your consent?

Also establish who actually sells the goods and receives payment. If the supplier is a separate company, ask for its name and its relationship with the brand owner. This matters when determining whom to pursue over defective products or missed deliveries.

2. Calculate the true cost of each purchase

Comparing list prices alone is not enough. What matters is the total cost of getting usable products to your outlet.

Use this simple formula: purchase cost, plus delivery and other charges, plus expected losses from damage, spoilage or expiry, minus any guaranteed discounts or rebates.

Ask for a current price list, sample delivery charges for your location and the policy on price changes. If possible, request previous price lists to see how costs have changed and how often. This does not guarantee future prices, but it gives you a basis for planning.

Prepare three forecasts: normal trading, slower sales and higher supply costs. Check whether you can afford the minimum orders even when sales are weak. Excess stock ties up money that could otherwise pay wages, rent and electricity bills.

If you are borrowing to fund the business, align supplier payments and loan repayments with your expected cash inflows. Do not assume you will immediately be offered extra time to pay.

3. Understand the legal rules on purchasing restrictions

The Philippines has no single comprehensive franchise law. The Civil Code is important for contractual obligations, while Republic Act No. 8293, or the Intellectual Property Code, governs matters relating to brand use and technology transfer.

Section 87.1 of RA 8293 is particularly relevant. For agreements covered by the technology transfer provisions, generally prohibited clauses include requirements to obtain capital equipment, intermediate products, raw materials or technology from a specific source. Section 91 provides a mechanism for approving exceptions.

An explanation such as “that is how all franchises work” is therefore not enough. Equally, do not assume that every purchasing requirement is automatically invalid. Ask a lawyer with intellectual property expertise to review the actual clause, the scope of the agreement and any relevant approval from the Intellectual Property Office of the Philippines (IPOPHL).

For agreements within its scope involving micro, small or medium-sized enterprise franchisees, Executive Order No. 169, series of 2022, sets minimum contract requirements and requires agreements to be registered with the Department of Trade and Industry (DTI). Important required terms include detailed fees and the responsibilities of both parties.

There is also no general mandatory pre-sale franchise disclosure system. DTI Bureau Order No. 10-24 advises prospective buyers to request information; it does not automatically oblige franchisors to provide everything requested.

4. Put remedies for supply shortages or failures in writing

There should be a clear process, not merely a promise of support. Ask for the contract or an accompanying agreement to specify:

• Short or late deliveries: when notice must be given and what interim solution will apply.
• Defective products: how to report them, what evidence is required and when replacements or refunds will be provided.
• Products nearing expiry: the minimum remaining shelf life acceptable on arrival.
• Price increases: how much advance notice will be given and how confirmed orders will be treated.
• Supply shortages: whether temporary alternatives may be used, who approves them and how quickly a decision must be made.

Speak to existing franchisees about actual delivery performance and complaint handling. Compare their experiences with the written promises, but do not treat one account as evidence of performance across the entire brand.

Practical takeaway: Before signing, make sure you have a clear list of mandatory purchases, realistic cost calculations and written remedies for supply problems. If any of these are unclear, resolve them before taking on the obligation.