Recording Sales Before Franchising Your Business

Before franchising your existing business, make sure you and your prospective franchisee share the same understanding of what counts as sales. Where ongoing franchise fees are based on sales, cancelled orders, discounts and payments not yet remitted by intermediaries can become sources of dispute. In franchising, sound records are a foundation for trust, not simply a way to collect fees.

1. Define which sales will form the basis of fees

Do not settle for the phrase “a percentage of total sales”. Draw up a clear definition, have it reviewed by a lawyer and an accountant, and include it in the agreement and the associated reporting procedures.

Start by answering these questions:

• Will the amount used to calculate fees include or exclude tax?
• How will legitimate discounts and refunds be deducted?
• When will sales made through delivery apps be recognised?
• Will intermediaries’ commissions be deducted from the amount used to calculate fees?
• How will advance payments, coupons and orders that do not go ahead be recorded?

For example, the amount paid by a customer differs from the amount received by the outlet after delivery commission has been deducted. This does not automatically mean that franchise fees should be based only on the money received. The agreed basis must be clear.

Keep the contractual definition separate from the requirements for correct tax reporting. Your agreement cannot alter obligations under tax law.

2. Establish a single record-keeping process

List every sales channel: tills, your own ordering website, delivery apps and bulk orders. Each transaction should have a unique reference that allows the order, payment, refund and receipt of funds to be matched.

Set a daily closing procedure. The records should show total transactions, cancellations, discounts, refunds and a breakdown by payment method. Distinguish money you expect to receive from funds that have actually arrived.

Separate system permissions are important. A cashier may accept payments, but deleting a transaction or approving a large refund should require separate authorisation. Keep an audit trail of changes: who made them, when and why.

If connectivity is lost, there should be a temporary record and rules for entering it once the system is back online. Use references that prevent duplicate entries. The aim is to maintain a continuous trail of evidence, not simply to produce a total at the end of the day.

3. Test reconciliation in your own outlet

Before introducing the process to a franchisee, run it in full within your own operations. Choose a period that includes ordinary sales, discounts, refunds and payments through intermediaries. Do not test only straightforward transactions.

At each accounting close, reconcile three things:

1. Order records: what was sold and which orders were amended or cancelled.
2. Payment records: how much was collected and by which method.
3. Evidence of funds received: how much was deposited or remitted, and what deductions were applied.

Keep a log of discrepancies. These may arise from delayed remittances, incorrect dates, duplicate entries or unrecorded refunds. Not every discrepancy is fraud; first seek an explanation and supporting documents.

Have someone other than the person who prepared the original report carry out the review. If your personal explanation is still needed to reach the correct result, the procedure is incomplete. Fix it before handing it over to a prospective franchisee.

4. Include review and correction procedures in the agreement

Specify the reporting schedule, the documents that may be requested, the review process and the time allowed to respond to discrepancies. Explain how overcharges or underpayments will be corrected. Do not automatically treat every mismatch as a breach without allowing an opportunity to explain.

The Philippines has no single comprehensive franchise law. However, Executive Order No. 169, series of 2022, sets specific rules for franchise agreements involving micro, small and medium-sized enterprises. It prescribes minimum contractual provisions and requires covered agreements to be registered with the Department of Trade and Industry (DTI). Have the applicable obligations and current procedures reviewed before offering a franchise.

The Civil Code is also relevant to the validity and performance of contracts. Republic Act No. 9178 concerns barangay micro business enterprises — micro businesses at the local community level — and is not a franchise law. For records containing personal information, also comply with Republic Act No. 10173, the Data Privacy Act: limit the data collected and access to it to what is genuinely necessary.

Practical step: Before charging your first franchisee, prepare a complete sample report tracing transactions from orders through to the calculation of fees. If both parties cannot explain and verify it, improve the system first.