Franchising in the Philippines: Assess the Cost of Ending the Agreement

Opening a business is not the only thing to prepare for when buying a franchise in the Philippines. You also need to understand how the relationship can end if you can no longer continue, either party breaches the agreement, or promised support is not delivered. In franchising, a clear termination process protects both parties. Before signing, check whether you can meet the obligations that will remain even after the outlet has closed.

1. Distinguish voluntary exit from termination for breach

Not all ways of ending an agreement are the same. The agreed term may expire, both parties may agree to end the relationship, or one party may terminate the agreement because of a breach. Choosing to close because of poor sales does not automatically give you the right to walk away without paying.

Look for answers to these questions in the draft agreement:

• Can you request an early exit even if you have not breached the agreement?
• What grounds allow the franchisor to terminate the agreement?
• Do you have the right to terminate if the franchisor fails to provide the promised training or support?
• Is written notice required, and to whom must it be delivered?

Avoid relying on verbal assurances that “we can discuss it”. If the right to exit matters to you, the conditions, process and applicable fees should be set out in writing.

2. Understand the protections required by law

The Philippines has specific rules for certain franchise agreements under Executive Order No. 169, series of 2022. It sets out minimum provisions for agreements between franchisors and franchisees that are micro, small or medium-sized enterprises.

The required provisions include the grounds for and consequences of termination, a cooling-off period after signing, and a dispute resolution mechanism. The order also contains rules on registering agreements with the Department of Trade and Industry, or DTI. Ask the DTI or a lawyer to confirm the current procedures and scope applicable to your transaction.

This does not mean you can walk away at any time without liability. Examine the actual clause: how long you have to change your mind, how to exercise that right, and what happens to any money already paid.

The Civil Code of the Philippines is also relevant, particularly its rules on obligations, contracts, breaches and damages. An association’s code of conduct is not a substitute for the law or your agreement. Likewise, a business franchise is not the same as the public service franchises addressed in the Philippine Constitution.

3. Check the notice requirements and opportunity to remedy a breach

A minor mistake can have serious consequences if the process is unclear. For example, submitting a report late is not the same as deliberately using the brand after authorisation has ended.

Ask for the following to be clearly defined:

• breaches that can be remedied;
• the time allowed to remedy them;
• the evidence needed to show that the problem has been resolved;
• situations that may lead to immediate termination.

Also check whether a breach of one agreement is grounds for terminating your other agreements with the same brand. This matters if you intend to open more than one outlet.

Ask a lawyer to review overly broad wording, such as any conduct supposedly “harmful to the brand”, where no clear standard is given. Wherever possible, ask for specific examples and a fair process for challenging a decision.

4. Prepare a separate exit budget

The final payment to the franchisor may be only a small part of the total cost. Prepare a list based on the actual draft agreement, lease and other obligations.

Include potential costs such as:

• outstanding royalties and advertising contributions;
• early termination fees or agreed damages;
• remaining rent and the cost of reinstating the leased premises;
• removing signage and changing the outlet’s appearance;
• obligations to employees, tax liabilities, loan repayments and amounts owed to suppliers.

Do not assume that a loan disappears when the franchise ends. Pay particular attention to whether you have given a personal guarantee.

Also establish who owns the equipment and whether there is a written obligation to buy back remaining stock. Without such a commitment, do not count an expected buy-back as money you are certain to recover.

5. Clarify what happens after closure

Some obligations may continue after termination: confidentiality, restrictions on using the brand, and limits on setting up a similar business. Have any non-compete restriction reviewed for its scope, geographical reach and duration; not every written restriction is automatically reasonable or enforceable.

Also agree how customer advance payments, outstanding complaints, keys, equipment and records will be handled. Find out where and how disputes will be resolved, as mediation, arbitration and court proceedings also involve costs.

Practical reminder: Before buying, prepare a one-page exit plan covering the grounds for termination, notice, the opportunity to remedy a breach, total costs and continuing obligations. If these are not clear in the contract, seek clarification before signing.