Franchising in the Philippines: Scrutinise Multi-Outlet Commitments

An offer to open several outlets under one brand can be appealing. But before signing, establish whether you are simply buying an opportunity to expand or committing to open outlets even if your funding and management capacity are not yet in place. In the Philippine franchise market, it is important to assess expansion obligations separately from the appeal of the first outlet.

1. Distinguish the right to expand from the obligation to open

Permission to add outlets is not the same as a commitment to open a specified number within a set period. With the former, you can decide based on business performance. With the latter, missing the schedule could put you in breach of contract.

Ask for all documents relating to expansion, not just the contract for the first outlet. There may be a separate area development agreement as well as individual contracts for each outlet.

Clarify the following:

• How many outlets must open, and by when must each one open?
• What counts as opening: starting construction, a soft opening or fully opening to customers?
• Does each location and each contract require fresh approval?
• Can you decide not to proceed with the next outlet if the previous one performs poorly?

Permission to look for a site is not the same as approval of that site. If there is a fixed opening deadline but no clear timeframe for the franchisor's review, meeting your commitment may be outside your control.

2. Calculate funding needs as overlapping commitments

Do not simply compare the discount on upfront fees for multiple outlets with the cost of buying them individually. The more important question is when you will need the money for each outlet.

Prepare a month-by-month schedule. Include the development rights fee, each franchise fee, rental deposits, equipment, opening stock, pre-opening wages and the cost of managing multiple locations. Identify which payments are due immediately and which depend on site approval.

Also obtain written confirmation of whether the initial fee will be credited towards fees for subsequent outlets. If this is unclear, do not assume that any credit applies or that an unused portion will be refunded.

Test a cautious scenario: the first outlet is not yet generating surplus cash when you need to fund the second. Can you proceed without drawing on money needed for day-to-day operations?

If you plan to borrow, compare the loan disbursement schedule with the payment deadlines. Expected bank approval is not the same as available funds. Show your financial adviser the full expansion commitment, not just the budget for the first outlet.

3. Check whether the outlets' futures are linked

Check whether failing to open one outlet could affect outlets that are already operating successfully. Losing the right to add outlets may be different from losing the right to continue your existing business.

Ask a lawyer to explain each possible consequence:

• Would you lose only the rights to outlets that have not yet opened?
• Would any fees remain payable even if the expansion does not proceed?
• Would a breach of one agreement be treated as a breach of all contracts?
• Could a successful outlet continue under its own contract?

Discuss including a review before starting each subsequent outlet. This could take account of your actual management capacity, the availability of a suitable site and confirmed funding. These conditions need to be agreed; the buyer has no automatic right to change the schedule.

Ask for the process for reducing the number of outlets or postponing openings to be set out. A clear process is easier to assess than a verbal assurance that the other party will be flexible.

4. Have the entire arrangement reviewed under Philippine law

The Philippines has no single comprehensive law covering every aspect of franchising. However, Executive Order No. 169 focuses on protecting micro, small and medium-sized enterprises in the franchise sector. It does not replace the need to examine each obligation you undertake.

The Civil Code is also important. Under Article 1306, parties may set contractual terms provided these do not contravene the law, morals, good customs, public order or public policy. You should therefore not assume that a commitment to open multiple outlets is invalid simply because it is burdensome to fulfil.

For agreements involving the transfer of technology or systematic knowledge, Republic Act No. 8293, the Intellectual Property Code, is relevant. Sections 87 and 88 address prohibited and mandatory provisions. Have the main agreement and individual outlet contracts reviewed as interconnected documents.

Practical takeaway: Before committing to expand, make sure every deadline, fee, approval condition and consequence of not proceeding is clear. Choose a level of commitment you can fund and manage—not simply the offer with the biggest discount.