KEY PROVISIONS OF
FRANCHISE AGREEMENTS
Claro F. Certeza
SPCMBLAW
TRAINING/ON-GOING SUPPORT BY
FRANCHISOR
To ensure uniformity of operations and preserve brand
reputation
 Each franchisor has its own training program for
franchisees and their staff, which can include training
done at the franchisee's location or at the corporate
headquarters or a combination.
 Most franchisors offer on-going support including
administrative and technical support.
Training
 Par. 4, A
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Training is given for 2 store manager
Training is given in a training facility or an existing store
Manager to be replace if found not qualified
Attendance at refresher courses is required
Required to allow store to be used as training facility
Territory
To ensure that the outlet’s location is suited to the
franchise concept
 Assigned territory. The Franchise Agreement
designates the territory in which franchisee will
operate
 Exclusivity. A designated area is reserved for
exclusive exploitation of franchisee.
Territory
 Par. 1, D
 Grant is limited to one site
 Cannot operate the store in any other site without prior
written consent subject to payment of fees for
evaluating the new site
 Cannot conduct a competing business at the site
 Cannot sell to third parties for re-sale
 Territorial protection is given within the area designated
in the attachment to FA – provided franchisee is in full
compliance with the FA
Franchise Term
A franchise is a privilege that is given for a limited period
of time only
 Length of Term. The term should be long enough to
allow the franchisee to recoup his investment and
earn a substantial profit.
Franchise Term
Par. 1, D
 Term is 15 years
 No renewal clause
Investment
The FA should state clearly the initial cost of investment to
avoid misunderstanding
 Franchise Fee. Franchisees are required to pay an initial
franchise fee that grants them the right to use the
franchisor's trademark and operating system.
 Investment. There should be an itemized cost for store
construction, insurance, initial inventory, and a schedule
for drawdown.
Investment
 Initial Fee (Par. 3)
 Franchise fee – US $25,000
 When payable – concurrently with the signing of the FA
 Nature – non-recurring, non-refundable, fully-earned
when paid
 Investment
 Par. 2, C – merely requires the franchisee to secure all
financing to develop and operate the store.
On-going Fees
Ongoing fees and expenses should be clearly stated to avoid
misunderstanding
 Royalties. Most franchisors require franchisees to pay an
ongoing royalty, usually a percentage of total sales,
typically on a monthly basis.
 Advertising Contribution. Franchisors require their
franchisees to contribute to a fund for national advertising.
 Security Deposits. Some Franchisors require their
franchisees to make a security deposit to cover obligations
that may arise in favor of the franchisor.
On-going Fees
 Par. 3, B – royalty is fixed at 4.5% gross sales
 Basis for computation – Gross Sales defined in Par. 3,
C
 Interest on late payments – interest is fixed at 1.5%/
month (under Art. 1956 no interest shall be due unless
stipulated in writing)
Trademark
To preserve brand reputation, the use of the trademark
should be regulated.
 Trademark, patent, and signage use. This provision
covers how a franchisee can use the franchisor's
trademark, patent and signage.
 Trademark should be used only in connection with
the operation of the franchised store.
 Trademark can only be used strictly in accordance the
Operations Manual.
Trademark
 Par. 5
 Ownership – derived solely from the FA and limited to
the operation of the store
 Goodwill – redounds to the benefit of the Franchisor
exclusively
 Goodwill – reputation of good name of an establishment
(Anderson vs. Posadas, 66 Phil 29)
 Cannot use the trademark as part of franchisee’s
corporate name
Operations
Success is enhanced by strict adherence to the business format.
 Operating protocol. This section details how franchisees run
their outlets. Operating guidelines found in Franchisor’s
Operating Manual which is made part of the agreement.
 Compliance. Compliance with the Operations Manual is
monitored thru right of inspection by franchisor’s
representatives.
 Operations Manual. The manual is only loaned to the franchisee.
The contents are to be kept confidential by the Franchisee and
must be returned upon termination.
Provisions Re: Operating Standards
 Par. 8
 Operation and maintenance of store in accordance with the
Standards is necessary to preserve goodwill.
 Agree to operate in accordance with system standards.
 Enumerates areas regulated by system standards.
 Agreement that system standards prescribed from time to
time and communicated to franchisee forms part of the FA.
 Commitment that the store shall be under the direct, on
premises management by franchisee or manager designated
by franchisee.
Right to Audit
 Par. 10, B
 Right to conduct audit at any time during business hours
without prior notice
 Covers financial records and access to computer
systems
 If there is variance in Gross Sales reported by more than
5%, reimburse cost of inspection and audit
 Does not cover operations’ audit
Renewal/Termination
Renewal should be clearly defined. Grounds for Termination if
not provided limits the same to substantial breach
 Renewal. Absence of renewal provision implies that
renewal is subject to mutual agreement. Conditional
renewal allows renewal upon franchisee’s meeting certain
conditions.
 Termination. Grounds for termination is listed to cover
violations that are non-negotiable. Further, the effects of
termination is clearly defined.
Sale of Franchise
The franchise is granted upon reliance to the
qualifications of the franchisee, a change in franchisee
requires consent of the franchisor
 Resale Rights. Some franchisors write in buy back or
right of first refusal clauses, which allow the
franchisor to buy back the franchise at a rate
determined by them or to match any potential
buyer's offer who has expressed interest in buying
your franchise.
Sale of Franchise
 Award of franchise is personal to franchisee.
 If franchisee desires to transfer the franchise,
Franchisor’s consent is required.
 The term transfer includes: Sale, transfer, or pledge of
the rights in the franchise.
 Approval to issue if franchisee is not in default under
the FA and transferee meets the standards for new
franchisees.
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