Franchising in the Philippines: Check the Minimum Sales Requirements

Not every sales target is simply a guide. In some franchise agreements, it can be a binding obligation that carries additional fees, loss of rights or termination of the agreement. Before entering the Philippine franchise market, find out what happens if your outlet fails to meet the required minimum. The key question is: is the standard realistic, and is your opportunity to put things right clearly defined?

1. Distinguish forecasts from obligations

Ask for the full agreement and all attachments containing performance standards. Look for provisions on minimum sales, transaction volumes, required growth and performance reviews. They may use different terms but have the same effect: you must meet a threshold to retain certain rights.

Get written confirmation of whether the target presented is merely a forecast, a benchmark for guidance or a binding obligation. Do not assume that the illustrative sales figures in the brand’s presentation are also the contractual minimum.

Clarify the following:

• Measure: Is the target based on sales value, product volume or the number of transactions?
• Calculation: How are tax, cancelled orders, discounts and returned products treated?
• Period: Is performance assessed monthly, quarterly or annually?
• Start date: Does assessment begin as soon as the outlet opens, or is there a settling-in period?
• Changes: Who can raise the target, when and on what basis?

Ask for a worked example too. If you arrive at different results using the same sales records, the provision is not yet clear enough.

2. Test whether the location can meet the target

Strong results at another outlet do not automatically prove that you can meet the same minimum. Customer footfall, opening hours, outlet size and local conditions vary.

Ask how the target was set for the proposed location. If records from comparable outlets can be shared, establish how long they have been operating and whether the figures reflect typical months or exceptionally busy periods. You do not need customers’ personal information to assess overall sales.

Prepare three forecasts of your own: a weak, an average and a strong month. For each, estimate the number of daily transactions and the average spend per purchase. Compare these with the required minimum.

For example, if meeting the target requires a very large number of customers each day, check whether the location, equipment and staffing can accommodate that demand. Do not rely solely on promises that customer numbers will eventually grow.

Where possible, speak to existing franchisees about how targets are enforced. Ask whether they receive written notice and meaningful support when sales are weak, rather than simply asking how much they earn.

3. Understand the legal limits of the agreement

The Philippines has no single comprehensive law covering every aspect of franchising. Executive Order No. 169 sets out franchise-related protections for micro, small and medium-sized enterprises. General contract law and intellectual property rules also matter.

Under Article 1306 of the Civil Code, parties may set contractual terms provided these do not contravene the law, morals, good customs, public order or public policy. Describing a clause as a ‘standard term’ is therefore not enough to establish its validity.

For agreements that fall within the scope of technology transfer arrangements, the prohibited and mandatory provisions in Sections 87 and 88 of Republic Act No. 8293, or the Intellectual Property Code, are important. Section 87 includes restrictions on the volume and structure of production. Not every minimum sales target automatically amounts to such a restriction; the actual wording and effect of the condition must be examined.

Have a lawyer familiar with franchising review the target, associated penalties and any claimed exemptions. A condition is not guaranteed to be fair simply because it appears in a printed contract.

4. Negotiate a clear opportunity to put things right

Before signing, ask for the process following a missed minimum to be specified. It should be clear whether a single weak month constitutes a breach or whether repeated shortfalls are required.

Propose written notice, a joint review of the records and a reasonable period to implement a performance improvement plan. Specify the support the franchisor will provide and how recovery will be measured.

Discuss the impact of mandatory closures, disasters or supply shortages beyond your control. Do not assume the target will automatically be suspended: include any agreed adjustments in the contract.

Practical reminder: Before signing, you should be able to explain how the minimum is calculated, why your outlet can achieve it and what happens if you fall short. If any of these points are unclear, seek written clarification first.