Testing an Outlet Before Franchising Your Business

Your first shop has strong sales, but is that enough to start franchising the business? Not yet. Its success may depend on your presence, loyal customers who know you personally, or low rent. Before inviting franchisees to join your network, run an outlet pilot: prove that another manager can replicate the results with a realistic investment and the support you can provide.

1. Define what you need to prove

An outlet pilot is not simply a matter of opening another shop. It is a planned assessment of whether the business works without advantages that would be difficult to pass on to a franchisee.

You can use an existing outlet for the initial assessment, provided you keep separate records and put another manager in charge. If you test a new location, choose somewhere similar to the sites you intend to offer prospective franchisees—not just the best spot you can secure.

Before starting, write down the questions you need to answer:

• Can quality be maintained without you always being there?
• Are profits sufficient once all realistic costs are included?
• Can a new team learn the job through the planned training programme?
• Are supplies and support reliable when something goes wrong?

Set criteria for acceptable results too. No single number of months or outlets automatically proves that a business is ready. Match the testing period to the business cycle, including both quiet and busy trading periods.

2. Establish the outlet’s true profitability

Keep separate records of sales, costs and cash coming in and going out. Do not assume the outlet is financially healthy simply because there is money left in the till.

Include a manager’s salary, even if you are doing the job yourself for now. If you own the premises, also run a separate assessment using a realistic rental cost. Identify any head-office support that is not yet charged to the outlet, such as deliveries, repairs and management oversight.

Track the following:

• Sales and transactions: which come from normal customer demand, and which are driven by temporary promotions?
• Product costs: include spoilage, waste and missing stock.
• Staffing and operations: wages, electricity, water, rent and routine maintenance.
• Cash requirements: when must you replenish stock before the expected sales revenue has come in?

If you plan to charge ongoing franchise fees, include them in a separate calculation for prospective franchisees. These are not actual costs for an outlet you own, so clearly label them as assumptions in the assessment. The aim is to establish whether the outlet would be viable under the proposed arrangement, not to make projected returns look more attractive.

3. Test operations without stepping in yourself

Appoint a manager with clear authority to make routine decisions. Provide the training and tools you intend to give franchisees, then reduce your direct involvement.

Record every occasion when the team needs your help. What was the problem? Why could the team not resolve it? How long did it take to get an answer? Repeated calls to the owner indicate gaps in the system or training.

Also assess how the team handles common disruptions: staff absences, delayed supplies, equipment breakdowns and customer complaints. Do not deliberately create risks to food safety, general safety or workers’ livelihoods. Use discussion-based exercises for scenarios that would be unsafe to test in practice.

Measure the time and cost involved in providing support, too. If your team struggles to support one outlet, you need to address capacity before promising to support many.

4. Link the pilot to legal preparation

The Philippines has no single comprehensive law covering all franchises. However, that does not mean there are no specific regulations.

Executive Order No. 169, series of 2022, establishes protections for franchise agreements involving micro, small and medium-sized enterprises. These include minimum terms that agreements must contain and registration of covered agreements with the Department of Trade and Industry (DTI). Have its application to your proposed arrangement reviewed, and confirm the relevant procedure with the DTI.

The Civil Code also governs contracts, while the Intellectual Property Code applies to the use of trade marks and related rights. The pilot outlet must comply with applicable employment, tax and consumer protection laws, as well as local permit requirements.

There is no general obligation to provide a standardised pre-contract disclosure document for every franchise. However, this is not permission to mislead. When presenting pilot results, disclose the period, location, special conditions and any excluded costs. Do not present projections as guaranteed profits.

5. Make an evidence-based decision

At the end of the pilot, compare the results with the criteria set before it began. Decide whether to proceed, make improvements and test again, or postpone offering franchises.

Do not let strong sales obscure low profits, quality problems or excessive dependence on you. Keep the records and the reasons for your decision so that the next step has a clear basis.

Practical reminder: Before taking on your first franchisee, prove that the outlet can operate, make a profit and resolve everyday problems without you stepping in each day.