Disclosing Fees Before Franchising Your Business

If you want to franchise your existing business, setting an attractive starting price is not enough. You need to explain what is included, what costs extra and what your future franchisee will pay on an ongoing basis. In franchising, clear fee disclosure before signing is an important foundation for trust. Here is a practical way to prepare a schedule that reflects both your actual operations and your contract.

1. Separate the franchise fee from the total investment

Start with the actual costs of your existing shop or pilot branch. Do not simply copy prices from other franchise offers. The fee for granting the right to use your system is distinct from the investment needed to open a business.

Organise the schedule into four categories:

• Initial franchise fee: Define what it covers, such as use of the brand and system, initial training and pre-opening support.
• Opening costs: List equipment, fit-out work, initial stock, rental deposits and permits separately.
• Recurring fees: Set out royalties for continued use of the system, advertising contributions and charges for required technology.
• Working capital: Explain the need to set aside funds for wages, rent, electricity and stock replenishment while cash inflows remain insufficient.

For each amount, state whether it is a fixed charge, an estimate or a payment to a third-party supplier. Also specify whether applicable taxes are included. Where costs depend on location, give the basis of the estimate and the date it was reviewed.

2. Make every charge open to scrutiny

Create a single master schedule to use when explaining the offer, preparing proposals and drafting the contract. For each charge, answer these questions: how much is it, how is it calculated, when is it due, who receives it and what service or right does it cover?

If a charge is calculated as a percentage of sales, clearly define “sales”. Does it include tax? How will discounts, cancelled transactions, refunds and delivery platform commissions be treated? Simply saying “based on total sales” is not enough if the two parties understand that phrase differently.

Also disclose charges that may arise later, such as renewal fees, transfer fees, additional training, equipment replacement or relocation costs. If a fee can change, have a lawyer set out the permitted grounds, procedure and notice requirements. Do not rely on a broad right to increase fees at any time.

For the advertising fund, explain who manages it, what it can be spent on and what reports will be provided. Do not imply that a franchisee’s entire contribution will be spent in their local area if it can be used for wider campaigns.

3. Align the schedule with Philippine requirements

The Philippines has no single comprehensive franchise law, but that does not mean franchising is unregulated. The Civil Code is important to contractual validity, performance and liability. The Intellectual Property Code, or Republic Act No. 8293, covers trade mark rights and related licensing.

Executive Order No. 169, series of 2022, establishes protections for franchise agreements involving micro, small and medium-sized enterprises. The minimum required content of agreements within its scope includes full disclosure of fees, such as initial fees, ongoing fees, advertising contributions and other related charges. It also requires other provisions; a fee schedule alone is not enough.

The order also directs the Department of Trade and Industry (DTI) to create a registry of covered agreements. Before offering a franchise, confirm with the DTI and a lawyer which current implementation and filing procedures apply to you. Do not confuse business name registration with registration of a franchise agreement or trade mark protection.

Nor should you assume there is a generally applicable deadline for providing a separate disclosure document, as there is in some other countries. Providing your schedule early is good practice, but it does not replace your legal obligations or the contract itself.

4. Test the explanation before accepting payment

Ask someone who was not involved in preparing the schedule to review it. Can they identify the funds needed before opening, the regular fees and the possible additional costs? If they have to guess, revise the explanation.

Next, ensure that the schedule, agreement, operations manual and statements made by your franchise recruitment team are consistent. You should not promise that “everything is included” if there are separate mandatory purchases or monthly charges.

Give applicants sufficient opportunity to ask questions and consult their own advisers. Record the version and date of the document provided, along with any written clarifications. If anything changes before signing, provide the revised schedule again. Do not present estimates drawn from your existing branch as a guarantee of earnings.

Practical takeaway: Before accepting the first payment, make sure every mandatory charge appears in the schedule and no promise contradicts the contract. Growth rests on firmer foundations when the terms are clear from the outset.