Franchising in the Philippines: Assessing Profit Claims

A franchise promising high monthly earnings and a quick return of your investment can be tempting. But an impressive set of figures is no proof that your outlet will achieve the same results. In the Philippine franchise market, it is important to examine the sources, scope and assumptions behind every projection before paying or signing anything. The aim is not to demand guaranteed success, but to establish whether your purchase has a realistic financial basis.

1. Clarify what “earnings” means

When a franchisor claims that “earnings” are high, ask whether this means total sales, the amount left after deducting product costs, or actual profit after all expenses. These are different measures and can paint very different pictures of the business.

Ask for a written explanation of each figure. It should be clear whether the calculations include:

• Rent, wages, employee benefits, electricity, water and other day-to-day expenses.
• Royalties, marketing contributions and system fees.
• Spoiled or damaged stock, inventory losses, discounts and delivery commissions.
• Taxes, interest on borrowing and reasonable pay for the time an owner spends managing the business.

The last point matters. If you are expected to work full-time without any allowance for your labour, the profit may look more attractive than the actual financial benefit to you.

Also distinguish profit from available cash. Loan principal repayments and equipment purchases affect the cash left over, even though they are treated differently when calculating profit.

2. Check the sources and coverage of the data

Ask whether the results presented come from one exceptionally successful outlet, several outlets or a forecast alone. A franchisor-owned outlet may have different costs from one operated by a franchisee.

Request summary records that can be shared without disclosing private information. Establish the period covered and how the figures were verified. If the underlying documents cannot be provided, ask whether your accountant can review the summary under an appropriate confidentiality agreement.

Important questions include:

• How many outlets contributed to the data?
• Are their size, location, opening hours and outlet format comparable?
• Are weaker months included, or only the strongest months?
• Have outlets that closed or made losses been excluded?
• How long have the outlets used for comparison been trading?

With the owners’ permission, speak to several current and former franchisees. Ask which costs took them by surprise and how closely the original projections matched actual trading conditions. Do not treat one outlet’s experience as proof of what happens across the network.

3. Test the payback projections yourself

Tailor the calculations to your chosen location. Use actual rental quotations, current wage costs and the fees set out in the proposed contract. Simply copying the sales figures of an outlet in a busy shopping centre is not enough if your premises serve a different type of neighbourhood.

Build three scenarios: expected performance, lower sales and higher costs. Check whether the business can still cover operating expenses and loan repayments if the main forecast is not achieved. Also allow for sales to build gradually at a new outlet, rather than assuming it will immediately match an established branch.

When calculating the payback period, include all cash invested before and during the start-up phase. Compare this with the cumulative cash that can actually be returned to you after essential payments and the funds that must remain in the business.

Do not divide your investment by monthly sales. Sales are not cash you can take out of the business. Ask an accountant to review the calculation method, particularly if you are borrowing or your stock requirements fluctuate.

4. Understand the protection against misleading claims

The Philippines does not have a single comprehensive law covering every aspect of franchising. Executive Order No. 169 provides protections for micro, small and medium-sized enterprises, including mandatory provisions and registration requirements for franchise agreements within its scope. It does not guarantee earnings or constitute government verification of sales projections.

Nor is there a generally mandatory, standardised pre-sale disclosure document that verifies every earnings claim. You therefore need to actively request and scrutinise the explanations behind the figures.

The Civil Code’s rules on contracts apply. Under Article 1390, fraud that vitiates consent may provide grounds for annulment. A statement that earnings are not guaranteed does not automatically shield a franchisor from liability for fraud. Equally, failing to achieve a projection is not automatically evidence of fraud; the circumstances and evidence matter.

Keep presentations, messages, explanations and different versions of the calculations. If there are significant discrepancies, have a lawyer review them before you pay.

Practical takeaway: Base your purchase on verifiable data and your own realistic calculations—not on the best results you have been shown.