Franchise Renewal: Set the Rules Before Offering a Franchise

Before franchising your existing business, plan not only for opening day but also for the end of the initial agreement. Franchise renewal should not depend on last-minute discussions or personal favours. A clear process helps both the franchisor and the franchisee plan their investment, operations and next steps.

1. Distinguish renewal from automatic continuation

First, decide whether the franchisee has a right to renew once the conditions are met, or whether renewal requires fresh agreement from both parties. These are different arrangements. Avoid promising that the business can ‘continue indefinitely’ when the right to use the brand and system has a fixed expiry date.

The Philippines has no single comprehensive law covering every aspect of franchising. However, specific regulations do apply: Executive Order No. 169, series of 2022, sets out minimum terms for agreements with franchisees that are micro, small and medium-sized enterprises (MSMEs). These include the franchise term and renewal conditions, as well as the consequences and grounds for terminating the agreement.

The Civil Code also applies to obligations and contracts, while Republic Act No. 8293, or the Intellectual Property Code, governs the use of trade marks and related rights. Have a lawyer review the final provisions. EO No. 169 does not automatically grant a perpetual right to renew.

Specify the length of the new term, who may request renewal, and whether it will require a new agreement or a written extension. Also clarify what happens if nothing has been signed before the expiry date.

2. Establish measurable, verifiable criteria

Before taking on your first franchisee, decide what evidence will inform renewal decisions. A vague requirement such as ‘acceptable to the franchisor’ is not enough. It leaves room for disputes and makes it harder for the outlet to prepare.

The assessment may cover:

• Payment status: reconciliation of both parties’ records and clear identification of any disputed amounts.
• Compliance with standards: inspection reports and evidence that significant shortcomings have been addressed.
• Ability to continue operating: adequate rights to occupy and use the premises, and a realistic operating plan.
• Required changes: specific training, repairs or replacements needed for the next term.

Distinguish minor shortcomings from serious issues affecting safety, the integrity of records or the use of the brand. A past mistake that has already been corrected should not simply be treated as a current breach.

Prepare a standard assessment checklist for comparable outlets. Where exceptions are made, record the reasons and who authorised them. This helps explain decisions without relying on personal relationships.

3. Set the timetable and disclose the full costs

Work backwards from the expiry date to create a timetable. Allow time for reminders, the franchisee’s renewal request, assessment, corrective action, the decision and signing. These periods should be clear in the contract; do not present deadlines you have set yourself as statutory requirements.

Assign responsibility for each stage. For example, the outlet operations manager might gather the records, while a different authorised officer approves renewal. Record when each notice and document is received.

Disclose all expected costs. Under EO No. 169, the minimum terms include full disclosure of pre-signing, initial and recurring fees. For renewal, clarify whether there is a separate fee, how it will be determined and when it is payable.

Beyond the fee, new equipment or outlet refurbishment may be required. Distinguish mandatory changes from recommendations. Do not let a franchisee spend heavily on refurbishment while it remains unclear whether their renewal will be approved.

4. Prepare the written decision and next steps

Use clear decision categories: approved, approved subject to specific conditions, or not approved. For each, state the reasons, required actions, deadlines and a contact person for clarification.

Where conditions must be met, specify the evidence required and who will assess it. If renewal is not approved, explain the contractual grounds and any agreed review or dispute resolution process.

If a temporary extension is needed while the paperwork is finalised, put its scope, fees and end date in writing. Do not assume that continuing to accept payments provides sufficiently clear consent to a new term.

Practical step: Before offering a franchise, prepare a one-page renewal timetable and a checklist of criteria. Have these reviewed alongside the contract so that both parties understand how to continue the relationship smoothly.