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A franchise agreement is a contract between a franchisor (formula owner) and a franchisee (local operator). Since January 1, 2021: Franchise Act — mandatory content, pre-contractual information obligation, and strengthened franchisee rights. For SME formulas, this is a serious legal investment. Below are mandatory components, fees, and pitfalls under the new law.
The short answer
- What: Contract between franchisor and franchisee under the Franchise Act.
- Law: Franchise Act (since 1 January 2021).
- Pre-contractual obligation: provide information 4 weeks prior to signing.
- Required content: formula, fees, territory, exclusivity, exit rights.
- Fees: entry fee + ongoing royalty (typically 5-10% of revenue).
What is franchising?
Franchise: formula owner (franchisor) grants the right to a local operator (franchisee) to operate under its brand/formula. Well-known examples: McDonald's, Albert Heijn, Hema franchises, Domino's Pizza.
Two perspectives for SMEs:
- Franchisor: roll out own formula via partners — scale quickly without own capital.
- Franchisee: adopt existing formula — less risk than own brand.
Franchise Act (since 2021)
Important changes since January 1, 2021:
1. Pre-contractual duty to provide information
The franchisor must provide 4 weeks before signing:
- Draft franchise agreement.
- Financial forecasts for franchisees.
- Investment conditions.
- Substantiation of profitability.
- Previous performance of other franchisees.
2. Goodwill compensation upon termination
The franchisee is entitled to compensation for the established customer base upon termination of the franchise (provided the agreement does not terminate due to breach of contract).
3. Consent to changes
Significant formula changes require franchisee consent (depending on impact).
4. Non-compete clause after termination
Maximum of 1 year, limited to region and activity.
Mandatory content of the agreement
- Identification of parties.
- Formula description: brands, processes, know-how.
- Area: exclusive geographical area.
- Exclusivity: other franchisees in the area?
- Fees: entry fee (one-time), royalty (ongoing), marketing fee.
- Duration: typically 5-10 years.
- Renewal conditions:criteria for renewal.
- Franchisor obligations: support, training, marketing.
- Franchisee obligations: quality standard, minimum turnover, opening hours.
- IP rights: use of trademarks, licensing.
- Confidentiality: formula know-how.
- Restriction of competition:during and after franchise.
- Termination: grounds and procedure.
- Goodwill compensation: upon termination.
- Dispute resolution:mediation, arbitration, or court.
Fee structure
Entry fee
One-time payment upon joining — for formula, training, and setup. Typically €10,000–€75,000 for an SME franchise.
Royalty
Running percentage of revenue — typically 5-10%. Some formulas: fixed monthly fee instead of royalty.
Marketing fee
Contribution to national marketing budget — typically 1-3% of revenue.
Plus indirect
- Mandatory purchasing from the franchise owner (margin on products).
- Training fees for new employees.
- Software/IT licenses.
For franchisor
Making your own formula franchisable requires:
- Proven profitable concept (own location for at least 2-3 years).
- Scalable process.
- Strong brand and marketing.
- Training program.
- Support organization.
- Legal framework (franchise agreement, handbook).
Setup costs: €25,000-€100,000+ including legal, marketing, and training.
For franchisee
Advantages:
- Proven formula — lower risk.
- Brand awareness.
- Support and training.
- Purchasing advantage through collective purchasing.
Disadvantages:
- Limited freedom (strict formula).
- Royalty on revenue — even with poor margins.
- Long-term commitment.
- Compensation to formula owner.
Honest recommendation
For the franchisor: invest in a sound legal structure (€15,000–€50,000 for a complete package: agreement, handbook, training materials). Franchise Act makes a careless approach costly. For the franchisee: have the agreement thoroughly reviewed before signing (€1,500–€5,000). Make use of the pre-contractual duty to provide information — request forecasts and figures from previous franchisees.
For other topics: license agreement, trademark registration and cooperation agreement ..
Frequently Asked Questions
Contract between franchisor (formula owner) and franchisee (local operator) under the Franchise Act (since 2021). Regulates the formula, territory, fees, term, exit, and mutual obligations.
The franchisor must provide the following four weeks prior to signing: draft agreement, financial forecasts, investment conditions, substantiation of profitability, and previous performance of franchisees. This protects the franchisee against unexpected risks.
Entry fee €10,000-€75,000 one-off. Royalty 5-10% of current revenue. Marketing fee 1-3%. Plus indirect costs: mandatory purchasing with margin, training fees, software licenses. Total: significant portion of revenue.
Typically 5-10 years with an extension option. Short term: lower risk for the franchisee. Longer: more commitment, often better terms. Extension criteria are an important point of negotiation.
Since the Franchise Act: the franchisee is entitled to compensation for the established customer base upon termination of the franchise — provided it does not end due to breach of contract. The calculation is complex; often compared to the commercial agency regulations.
The Franchise Act limits non-compete clauses after termination to a maximum of one year and focuses on region and activity. Longer or broader clauses: court annuls. Level of protection greater than before 2021.
For franchisor: complete package (agreement, handbook, training) €15,000–€50,000. For franchisee: assessment and advice €1,500–€5,000. The investment pays for itself with a sound decision and a strong contractual position.
