Cooling-off Periods in New Franchise Agreements

Before franchising your existing business, prepare for the possibility that a new franchisee may change their mind. A clear cooling-off period after signing is more than a cancellation mechanism: it protects against hasty decisions. Within the franchise community, it helps build trust before a long-term relationship begins.

1. Understand the rules in the Philippines

The Philippines has no single comprehensive law covering all franchise matters. That does not, however, mean there are no specific regulations. Executive Order No. 169, series of 2022, sets out protections for micro, small and medium-sized enterprises (MSMEs) taking on a franchise.

The minimum required content of agreements covered by the order includes a cooling-off provision, giving the MSME franchisee an opportunity to terminate the agreement. The order also requires full disclosure of fees and registration of agreements with the Department of Trade and Industry (DTI), in accordance with the applicable procedures.

Do not assume a fixed number of days or an automatic full refund without checking the current rules and the contract itself. Have a lawyer review the provision’s duration, starting point, scope and effects, and confirm the current requirements with the DTI.

The Civil Code remains important for obligations and contracts, as does Republic Act No. 8293 for the licensing of trade marks and other intellectual property rights. Republic Act No. 9178 concerns barangay micro business enterprises, a Philippine category of small local businesses; it is not a general franchise law.

2. Make the start and end points clear

A sentence stating that a franchisee “may withdraw within the agreed period” is not enough. Applicants and your staff should be able to follow the process without guesswork. Also distinguish between the time allowed to review a draft before signing and the right to withdraw after signing.

Prepare the following details for legal review:

• Triggering event: Specify which event starts the clock, in line with the applicable rules.
• Counting the days: Clarify whether calendar days or working days apply, and how public holidays are treated.
• Notice of withdrawal: State who must receive the notice and which official delivery method must be used.
• Proof of receipt: Establish a way to verify when the notice arrived.
• Next steps: Identify who will explain the refund arrangements and close out any outstanding tasks.

Do not make acceptance of the notice dependent on approval from the staff member responsible for recruiting franchisees. There should be an alternative recipient if the main contact is unavailable.

3. Plan for refunds and early expenditure

Withdrawal becomes difficult when the initial payment has already been spent. Before accepting money, ensure that your refund policy, contract, receipts and staff explanations are consistent. One should not promise a full refund while the agreement says something different.

Create a schedule of each type of fee: when it is charged, what it covers and how it will be handled if the right to withdraw is exercised. Have any proposed deductions reviewed first for their legal basis, reasonableness and clear disclosure. Do not simply impose a penalty that could render the right meaningless.

As an operational precaution, consider postponing expenditure that is difficult to recover, such as commissioning bespoke equipment or printing large quantities of packaging. If spending is necessary immediately, explain the risk in writing and obtain the appropriate consent.

Distinguish payments made to you from obligations to third parties. Withdrawal from the franchise agreement does not automatically cancel a separate lease, loan or equipment purchase.

4. Test the process before taking on a franchisee

Run a practice exercise in which a new franchisee withdraws. Have the notice drafted, received by the designated staff member, and any refund due calculated. Check that the contract and the actual process match.

Assign responsibility for each step: receiving the notice, verifying the date, reviewing payments, approving the refund and issuing written confirmation. Include the return of equipment or documents and the cessation of trade mark use, where applicable.

Do not use pressure or intimidation to prevent someone from properly exercising their right. Record the reason for withdrawal respectfully; it may reveal an unclear explanation or unrealistic expectations that need to be addressed.

Practical summary: Before offering a franchise, make sure the cooling-off period, notice procedure, handling of money and each staff member’s responsibilities are clear. A fair withdrawal process is part of a trustworthy franchise community.