Franchising in the Philippines: Check How Royalties Are Calculated

When buying a franchise in the Philippines, it is easy to compare royalty rates—the ongoing fees paid for the rights granted under the contract. Yet a lower rate can cost more if it applies to a broader range of sales. Clear calculations are essential to avoiding unexpected charges. Before signing, establish exactly what counts as a sale and when royalties become payable.

1. Examine the definition of sales

Do not settle for the phrase “gross sales”. Ask for the contract to specify which transactions are included, which deductions are allowed and what is excluded. The amount recorded at the till, the amount charged to the customer and the money actually received by the outlet may differ.

Get written answers to the following:

• Tax: Does the royalty calculation include value added tax (VAT), where applicable?
• Discounts: Are royalties calculated before or after discounts? Who bears the cost when the brand owner sets a promotion?
• Cancellations and returns: Are these automatically deducted? What evidence is required?
• Delivery: Are royalties based on the full amount paid by the customer, or the amount received after the delivery platform’s deductions?
• Vouchers and advance payments: When is the sale recognised—when the voucher is purchased or when it is redeemed?
• Uncollected sales revenue: Are royalties payable even if the customer has not yet paid?

There is no single answer that is automatically right for every brand. What matters is that the agreed terms are clear, measurable and affordable. Make sure the same transaction cannot be counted twice, for example when a voucher is purchased and later redeemed.

2. Test the formula using a sample statement

Ask for a sample monthly calculation, rather than relying solely on the seller’s explanation. It should show the starting sales figure, each permitted deduction, the resulting royalty base, the rate and the final charge.

Illustration only: If the royalty rate is 5% and the royalty base is ₱200,000, the fee is ₱10,000. If ₱20,000 in documented cancellations and discounts can be deducted, the base falls to ₱180,000 and the royalty becomes ₱9,000. This is not a standard price; it simply shows why the definition matters.

Repeat the test for a month with weak sales, one with extensive promotions and one in which a large share of sales goes through delivery platforms. Keep royalties separate from other charges so that you do not mistakenly assume everything is included.

Also check whether there is a minimum monthly royalty. You may have to pay this even if the percentage-based calculation produces a lower figure. Ask when it starts, whether it increases annually and whether charges apply during closures for refurbishment or delays to opening. Include these obligations in your cash flow forecasts, especially if you will also be making loan repayments.

3. Read the contract alongside the legal requirements

The Philippines does not have a single comprehensive franchise law equivalent to the mandatory, detailed pre-sale disclosure regimes found in some other countries. However, this does not mean there are no specific regulations.

Executive Order No. 169, series of 2022, sets out safeguards for franchise agreements involving franchisees that are micro, small or medium-sized enterprises. The minimum required content of an agreement includes full disclosure of fees, such as the initial fee and ongoing royalties. It also provides for the registration of agreements with the Department of Trade and Industry (DTI). Have compliance and the applicable procedure checked; registration is not a guarantee of profitability.

Article 1159 of the Civil Code also matters: contractual obligations have the force of law between the parties and must be fulfilled in good faith. Do not therefore rely on verbal promises such as “we will deduct that anyway”. Put the formula and exclusions in the signed agreement or an attachment to it.

Ask a lawyer to check whether the royalty base can be changed simply through a manual or notice. Request clear wording on which changes require both parties’ written consent.

4. Agree a process for checking and correcting charges

Before buying, establish whether you will receive a detailed statement showing the calculation behind each charge. You should be able to reconcile it with your own records of sales, cancellations, discounts and payments received.

Clarify the reporting and payment deadlines, the period allowed for disputing a calculation and the process for refunding or crediting overcharges. If records are audited, specify who pays the cost and when interest or penalties may be imposed. Do not simply deduct amounts without a contractual basis.

Practical takeaway: Before signing, you should be able to reproduce the royalty calculation using your own records. If the charge cannot be explained step by step in writing, get it clarified before committing your capital.