Importance of a good franchise agreement proven once again

A good franchise agreement determines whether your collaboration with a franchise system develops into a successful business or results in a protracted conflict. The contract stipulates what the franchisor may demand of you, the fees you pay, how the system supports you, and what happens if the collaboration ends. Moreover, since the Franchise Act (January 1, 2021), mandatory minimum requirements apply that protect you as a franchisee. Time and again, practice shows the same thing: those who have the contract thoroughly reviewed beforehand are in a much stronger position in the event of a dispute than those who sign blindly.

What is a franchise agreement?

A franchise agreement is the contract between a franchisor (the owner of the formula, the brand, and the method of operation) and a franchisee (the independent entrepreneur who operates their own establishment under that formula). In exchange for payment, the franchisee is permitted to use the franchisor's brand, know-how, and business formula, and adheres to the agreed rules and standards in return.

The franchisee remains a legally and financially independent entrepreneur: he bears the entrepreneurial risk and is not an employee of the franchisor. It is precisely this combination of independence and adherence to a formula that makes the agreements crucial. What the franchisor may and may not require of you stands or falls with the wording of the contract and the limits imposed by law.

Why the importance of a good franchise agreement becomes apparent time and again

The same pattern recurs time and again in case law: conflicts between franchisors and franchisees almost always arise on points that are regulated unclearly or unbalancedly in the agreement. Examples include disagreements regarding the amount and basis of the fee, mandatory purchasing from prescribed suppliers, territorial protection, or what happens to accumulated goodwill when the partnership ends.

Before the Franchise Act came into effect, the franchisee was often in a weak position in such disputes. Many standard contracts were drafted unilaterally in favor of the franchisor, and the franchisee sometimes signed without considering the consequences. The common thread in those cases remains unchanged: a franchisee who had the agreement critically reviewed beforehand held a significantly stronger negotiating and litigation position afterwards.

The lesson is therefore simple but important: never sign a franchise agreement without first having it thoroughly checked. Below, you can read about the legal protection you currently have and what to look out for in the contract itself.

A typical example from practice

A franchisee enthusiastically signs a contract for an attractive formula, without having the fine print reviewed. Years later, he wants to sell the branch or terminate the partnership. It then turns out that the contract contains a broad non-compete clause, that nothing concrete has been agreed upon regarding the accumulated goodwill, and that there are hefty penalties for leaving. What should have been a nice exit turns into a costly battle. Virtually all of these pain points would have been visible beforehand with a proper contract check, and some of them are even no longer permitted since the Franchise Act.

The Franchise Act: legal protection for the franchisee

Since January 1, 2021, the Franchise Act has been in force in the Netherlands, incorporated into the Civil Code (Title 7.16, Article 7:911 et seq.). This law is largely mandatory: you cannot deviate from it in the agreement to the detriment of the franchisee. The Act sets minimum requirements for the cooperation on four main points.

1. Pre-contractual information and cooling-off period

Before you sign, the franchisor must provide you with all information you reasonably need to make an informed decision in a timely manner. This includes the draft contract and information regarding the franchise system and the partnership. Subsequently, a so-called standstill period: a statutory cooling-off period of at least four weeks during which the franchisor may not amend the contract to your disadvantage and may not induce you to make payments or investments. This period is intended to give you ample time to study the offer and, if necessary, engage an expert.

2. Mandatory agreements regarding goodwill

The agreement must specify how any accumulated goodwill is determined, to what extent it accrues to you as a franchisee, and how it is compensated upon termination. This prevents you from being left empty-handed at the end of the road, after having built up the value of the location for years.

3. Limits to the non-compete clause

A franchise agreement often contains a post-contractual non-compete clause: a prohibition against starting a competing business after the termination of the agreement. The Franchise Act (Article 7:920 of the Dutch Civil Code) imposes strict requirements on this. Such a clause is only valid if it has been agreed upon in writing, relates solely to competing goods or services, is indispensable for protecting the transferred know-how, lasts no longer than one year after the end of the agreement, and is geographically no broader than the area in which you were active as a franchisee. If the clause does not meet these requirements, it is, in principle, void.

4. Right of consent for substantial changes

If the franchisor wishes to make substantial changes to the formula or introduce new derivative formulas that affect you financially, you have the right of consent regarding this, subject to certain conditions. The franchisor therefore cannot simply implement such changes unilaterally.

Please note: for agreements that were already in effect before 2021, some of these components (regarding goodwill, the non-compete clause, and the right of consent) only applied after a transitional period. Are you unsure whether your contract complies with current law? Then have it reviewed.

What to look out for in a franchise agreement

In addition to the statutory minimum requirements, the specific wording of the contract determines your daily practice and your risks. In any case, critically review these points before signing:

• Fee structure: how are the entry fee, the ongoing franchise fee, and any marketing contributions structured, and what are they calculated on?
• Purchasing and supplier obligations: are you required to purchase from certain suppliers, and under what conditions?
• Territorial protection: do you have an exclusive territory, and may the franchisor become active there themselves or through others (for example, online)?
• Term and renewal: for what period are you entering into the commitment and how does a potential renewal proceed?
• Cancellation and termination: under what conditions can you (or the franchisor) cancel, and what are the consequences?
• Acquisition and succession: are you allowed to sell the establishment, and what rights does the franchisor have then?
• Fine and sanction provisions: what fines apply to violations, and are they proportionate?

If you do not understand a provision or if it feels unbalanced, ask for an explanation or adjustment before you sign. After signing, you are in principle bound by the agreements.

Risks of a bad or unbalanced agreement

An unclear or one-sided contract can hit you hard as an entrepreneur. The most common consequences:

1. Unexpected costs: vague fee stipulations or mandatory investments that you had not foreseen beforehand;
2. Limited freedom: strict regulations that leave you little room to respond to your local market;
3. Conflicts regarding territory protection: for example, if the franchisor starts operating online or through a new branch in your territory;
4. Problems upon termination: disputes regarding goodwill, an overly broad non-compete clause, or high penalties upon departure.

The common thread: virtually all of these problems can be prevented by having the agreement thoroughly reviewed in advance and, where necessary, adjusted. Is there already a dispute regarding outstanding invoices or fees? Then a targeted approach via debt collection sometimes a faster route than lengthy legal proceedings.

Step-by-step plan: how to check your franchise agreement

Do you want to start structuring things yourself before hiring a lawyer? Follow these steps:

1. Gather all documents: the draft contract, appendices, the handbook, and the pre-contractual information.
2. Check the legal points: is there a goodwill arrangement included, is the non-compete clause correct, and have you been granted the four-week standstill period?
3. Assess your money and freedom: calculate the fees and map out how much entrepreneurial freedom you retain.
4. Think about the ending: how will you get out of it, what will it cost, and what goodwill will you take away?
5. Have it reviewed: present points of doubt to a lawyer and negotiate adjustments before you sign.

Frequently asked questions about the franchise agreement

Is a franchise agreement legally required?

Since the Franchise Act, a franchise partnership must be recorded in writing and comply with legal requirements. The law stipulates, among other things, that agreements regarding goodwill must be included and that you receive the correct information and a cooling-off period in advance. A franchise relationship without a proper written agreement is therefore both unwise and legally problematic.

Can I request changes before I sign?

Yes. In principle, a franchise agreement is negotiable. During the statutory cooling-off period (standstill period), you can carefully study the draft and propose amendments. If a provision feels unbalanced, submit it to a lawyer and discuss the adjustment with the franchisor before signing.

How long may a non-compete clause last after the franchise?

Under the Franchise Act, a post-contractual non-compete clause may apply for a maximum of one year after the termination of the agreement and may not extend geographically beyond the territory in which you were active. Additionally, it must be recorded in writing and be indispensable to protect the know-how. If the clause does not meet these requirements, it is, in principle, void.

What happens to the goodwill when the franchise ends?

The agreement must specify how goodwill is determined and to what extent it accrues to you. The idea behind the statutory regulation is that you do not lose the value you have built up during the collaboration without compensation. The precise implementation depends on what has been agreed in your contract, so that provision deserves extra attention.

Can I get out of an unfavorable franchise agreement?

Sometimes yes, but that depends heavily on the facts and the content of the contract. Consider invoking a violation of the Franchise Act, incorrect or incomplete pre-contractual information, or provisions that are void or voidable. Always have your situation legally assessed before taking any action.

Do I need to have my franchise contract reviewed by a lawyer?

This is highly recommended. A lawyer recognizes unbalanced or void clauses that you might easily overlook yourself and can help negotiate better terms during the cooling-off period. The cost of such a check is usually small compared to the damage caused by an unfavorable contract that continues for years.

Have your franchise agreement reviewed by MKB Juristen

Whether you are about to start a franchise or have been operating under a franchise formula for years, a good franchise agreement protects your position. Our legal experts review your contract against the Franchise Act, point out risks and unbalanced provisions, and help you negotiate better terms. See what we can do for you regarding franchise agreements and, more broadly, in the field of contract law.

Are you already in conflict with your franchisor or franchisee? Even then, we can help you move forward with a well-founded approach. Schedule a no-obligation intake meeting and discover how to stand your ground.