Franchise Renewal: What to Check Before Buying in the Philippines

Before buying a franchise, ask not only when you can expect to recover your investment, but also how long you are assured of being able to operate. It may take several years to recoup the cost of equipment and fitting out your premises, while the contract has a fixed term. If your expected returns depend on a further agreement, it is important to examine the renewal terms now.

1. Establish whether renewal is a right or merely a possibility

The Philippines has no single comprehensive franchise law. Key legal frameworks include the Civil Code for contracts and the Intellectual Property Code for the use of brands, know-how and business systems.

Nor is there a general statutory right for franchisees to renew automatically. There is no automatic entitlement to compensation if the contract is not renewed, even if you have built a loyal customer base. The precise wording of the agreement therefore matters.

For franchises involving micro, small and medium-sized enterprises (MSMEs), Executive Order No. 169, series of 2022, sets minimum requirements for franchise agreements. These include provisions on the term and renewal, as well as termination and its consequences. It also directs the Department of Trade and Industry (DTI) to establish a register of agreements and requires franchisors to register under the prescribed arrangements. Ask the DTI to confirm the current process and applicable rules.

These requirements do not guarantee renewal. Distinguish between three possible types of provision:

• A right to renew if clear conditions are met: Identify the conditions and how you can demonstrate that you have fulfilled them.
• Renewal subject to approval: Your application may be refused even if you want to continue; examine the criteria for the decision.
• A new contract that must be agreed: Fees, territory and obligations may change.

2. Align the contract, lease and investment payback period

Create a single schedule of key dates: the franchise term, the start and end of the lease, loan repayments and expected equipment replacement. Identify any mismatches.

If the franchise expires before the lease, you may still have obligations to the landlord even though you can no longer use the brand. If the lease is shorter, you could lose your premises while the franchise agreement is still in force. A landlord's agreement to let you stay does not guarantee franchise renewal either.

When assessing profitability, prepare two separate calculations:

1. Without renewal: Include only earnings up to the current expiry date, then deduct closure costs and outstanding liabilities.
2. With renewal: Factor in new fees, refurbishment, equipment replacement and possible increases in recurring charges.

Do not treat earnings beyond the period covered by a signed agreement as certain. If you cannot recover your investment within the current term, your purchase clearly depends on renewal—a risk that should be discussed before you pay.

3. Ask for clear conditions and the full cost

A statement such as “you can renew” is not enough. Request the full draft contract and all accompanying documents that affect your ability to continue operating.

Ask for written answers to the following:

• How far in advance must you submit a renewal request, and by when must the franchisor respond?
• Are there requirements relating to sales, operational assessments or compliance with the franchise system?
• Will you have an opportunity to remedy a breach before renewal is refused?
• How will the renewal fee and other charges be calculated?
• Must you sign the latest standard contract, even if its terms have changed?
• Is refurbishment or new equipment compulsory, and when will a cost estimate be provided?

The Philippines does not have a general mandatory pre-sale franchise disclosure system comparable to those in some other countries. DTI Bureau Order No. 10-24 advises prospective buyers to request information for due diligence; it does not automatically require franchisors to provide everything requested.

Also ask current and former franchisees about their experiences: were their agreements renewed, what costs arose, and how long did they wait for a decision? Use their answers to cross-check information, not as a substitute for the contract.

4. Put a plan in writing in case renewal does not happen

Check who will be responsible for removing signage, returning materials, dealing with remaining stock and reinstating the leased premises. Do not assume that equipment or stock will be bought back unless there is a clear obligation to do so.

Ask a lawyer experienced in franchising to review any non-compete restrictions, personal guarantees and obligations that continue after the contract ends. Align the relevant dates with your landlord and lender wherever possible.

Practical takeaway: Before paying, make sure you can accept the outcome even without renewal. A promise that you can continue is only valuable if the conditions, costs and protections are clear in the written agreement.