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Advisory on Due Diligence by a Prospective Franchisee

In order to protect the interest and welfare of a prospective franchisee, the DTI-Bureau of Trade Regulation and Consumer Protection (BTRCP) has issued the following Advisory:

1. Scope and Coverage

  • This advisory is addressed to persons engaged or interested in the franchise business.

2. Definition of Terms

2.1 “Franchise Agreement” is a written contract or agreement between two or more parties by which a Franchisor grants the Franchisee the right to engage in the business of offering, or distributing goods or services under a marketing plan/system/concept, for a certain. consideration. Unless otherwise provided, said right includes the use of a trademark, service mark, trade name/business name, know-how, logo-type advertising, or other commercial symbols associated with a particular business.

2.2 “Franchisor” is a person, individual or a corporation, duly registered with the Department of Trade and Industry (DTI) or the Securities and Exchange Commission (SBC).

2.3 “Franchisee” is a person, individual or a corporation, duly registered with DTI or the SEC.

2.4 “Franchise Disclosure Information” refers to a set of information and documents that needs to be disclosed by the franchisor to the franchisee and/or prospective franchisee.

3. Due Diligence to be undertaken by a prospective franchisee

Before a person decides to engage in or acquire a franchise business, due diligence should be done by the prospective franchisee.

3.1 Secure or ask Disclosure Information from the Franchisor as follows:

  • 3.1.1 Business address, email address, internet home page/website, fax numbers and other contact details;
  • 3.1.2 Copy of DTI or SEC Registration Numbers;
  • 3.1.3 Parent companies and affiliates, if any, and their respective roles in the Franchise, and franchisor’s declaration if an affiliate  is a supplier and what they will supply;
  • 3.1.4 Names of the Board of Directors and officers with a brief description of their qualifications and background, ownership of interests and references;
  • 3.1.5 The contact number and business location of existing Franchisees;
  • 3.1.6 Executed promotional/marketing materials;
  • 3.1.7 Description of the business concept, which includes: brand image, brand personality, unique selling proposition, target market, mission and vision, among others;
  • 3.1.8 Basic information on training, commercial and/or technical assistance;
  • 3.1.9 Certificate that the Franchisor is a member in good standing of any Franchisor Association and that the Franchisor has no pending administrative, civil or criminal case;
  • 3.1.10 Declaration of the Initial Fee; amount that will be collected and services covering these fees;
  • 3.1.11 Training that will be provided: number of persons, how long and training modules;
  • 3.1.12 Number of years company has operated and number of years it has franchised with corresponding numbers of company owned branches and franchised branches;
  • 3.1.13 Draft Franchise Agreement;
  • 3.1.14 Full disclosure of the financial requirements of the franchise business;
  • 3.1.15 A provision that requires the franchise applicant to seek adequate legal and financial counsel before signing the Franchise Agreement; and
  • 3.1.16 Mechanisms for dispute resolution.

3.2 Call or visit or consult any of the following:

  • 3.2.1 Franchisor Association
  • 3.2.2 Nearest DTI Regional or Provincial Offices
  • 3.2.3 Securities and Exchange Commission
  • 3.2.4 DTI Direct (Telephone Number: 751-3330)
  • 3.2.5 Certified Franchise Executive
  • 3.2.6 Franchise Consultant.

4. Franchisor Association or Organization

To establish a databank of Franchisor association or organization nationwide, franchisor association or organization should submit to DTI-Bureau of Trade Regulation and Consumer Protection (BTRCP) the following documents:

  • 4.1 A certified true copy its articles of Incorporation and By-Laws;
  • 4.2 A current certified true copy of Certificate of Good Standing from the SEC;
  • 4.3 Updated list of trustees, officers and members of the organization including their addresses; and
  • 4.4 Other pertinent documents such as By Laws, Code of Ethics and Standards.

5. Self-Policing of Members

This Advisory aims to promote and encourage the franchise industry self-police its own ranks by setting a Code of Ethics and Standards grievance or dispute resolution mechanism to redress complaint against its members, including issues arising from any transactions wit their franchisees, prospective or otherwise.

6. Publication

This Advisory shall be published in newspapers of general circulation and shall be part of the DTI’s Information, Education and Communication Program.

source: DTI Bureau Order No. 10-24, November 17, 2010

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