Sale of franchisee business and goodwill

Selling or transferring the franchise business

For the franchisee, the sale of a franchise business is often the moment when years of entrepreneurship are cashed in. Unlike with a conventional business, the franchisee is not free in this regard: the franchise agreement and the Franchise Act impose conditions on the transfer. The franchisor typically has a right of approval regarding the buyer, sometimes a preferential right to purchase itself, and goodwill is frequently a subject of discussion. Thorough preparation is crucial for the proceeds and a smooth transfer.

Who do we work for?

We assist franchisees who wish to sell their business, buyers who wish to acquire a franchise business and join the franchise system, and franchisors who are assessing a proposed transfer or who wish to exercise a right of first refusal themselves. The position of goodwill, the buyer's entry into the franchise system, and the settlement of the seller's non-compete clause affect all these parties.

Approval and Preferential Rights

Most franchise agreements stipulate that the franchisee may not transfer their business without the franchisor's approval. This is understandable: the franchisor wishes to safeguard the quality of the formula and be able to assess the new franchisee. However, approval may not be withheld on unreasonable grounds; the principles of reasonableness and fairness (Article 6:248 of the Dutch Civil Code) set limits to this. In addition, some agreements include a right of first refusal, allowing the franchisor to purchase the business itself with priority. The structuring and exercise of these rights are often the subject of dispute.

Goodwill upon sale

Goodwill is the added value of the enterprise above the book value of the assets, built up by the customer base, location, reputation, and the efforts of the franchisee. In the event of a sale to a third party, the goodwill is factored into the purchase price. A particular point is the extent to which the goodwill is attributable to the franchise system or to the franchisee, and what portion accrues to the franchisee upon sale. Article 7:920 of the Dutch Civil Code obliges the parties to include a goodwill arrangement in the agreement, which also serves as a guideline in the event of a sale.

The position of the buyer

A buyer acquiring a franchise business typically joins the existing franchise system or enters into a new franchise agreement with the franchisor. In this context, the pre-contractual duty of disclosure and the standstill period apply anew to the buyer: the franchisor must inform the buyer, as a prospective franchisee, in a timely and complete manner. The buyer would be well advised to conduct due diligence regarding the business, the ongoing agreement, the lease, the goodwill, and any potential disputes.

The seller's non-compete clause

After a sale, the selling franchisee is generally bound by a post-contractual non-compete clause, which, pursuant to Article 7:920 paragraph 2 of the Dutch Civil Code, may be valid for a maximum of one year, is geographically limited, and must be indispensable for the protection of the know-how. For the seller, it is important that this clause does not unnecessarily restrict the value of the sale and his future opportunities; for the buyer and the franchisor, it is important that the formula remains protected.

Our working method

We first assess the franchise agreement regarding transfer, approval, and pre-emption rights, the goodwill arrangement, and the non-compete clause. Subsequently, we guide the sale or transfer: from negotiations with the buyer and franchisor to the purchase agreement, the buyer's entry, and the settlement of the goodwill. In the event of disputes regarding goodwill or a refused approval, we determine the most effective course of action.

When is goodwill compensation legally required?

Here, the Franchise Act makes an important distinction that is often overlooked during a sale. The statutory entitlement to goodwill compensation under Article 7:920, paragraph 2 of the Dutch Civil Code applies only when the franchisor acquires the franchisee's business to continue operating it itself or to transfer it to a successor franchisee with whom the franchisor concludes a new agreement. If, on the other hand, the franchisee sells his business directly to a third party – for example, to another franchisee or an external buyer – then that statutory goodwill entitlement does not apply, and the goodwill is simply factored into the mutually agreed purchase price. It is therefore important for the franchisee to determine, even before the sale, which route yields the most value: a free sale to a third party or acquisition by the franchisor under the statutory goodwill arrangement.

How is goodwill calculated?

Article 7:920 paragraph 2 of the Dutch Civil Code (BW) obliges parties to stipulate in the franchise agreement whether goodwill exists within the business, the extent of that goodwill, and the degree to which the goodwill is attributable to the franchisee. The law does not prescribe a fixed calculation method. In practice, goodwill is determined using a calculation model stipulated in the contract—for example, a factor times the average profit or turnover—or through a valuation by an independent expert. The pivotal point is attribution: the added value arising from the formula, the brand name, and national marketing accrues to the franchisor, while the value built up by the franchisee through their own customer loyalty, location, and entrepreneurship accrues to the franchisee. A clear goodwill arrangement prevents protracted disputes regarding this matter upon sale; if such an arrangement is lacking or unclear, we assess whether the outcome can withstand the reasonableness test of Article 6:248 BW.

The purchase agreement: assets or shares

The sale of a franchise business can be structured as an asset-liability transaction (the business with its assets, contracts, and goodwill) or, if the business is incorporated as a private limited company, as a share transaction. The choice has implications for liability, taxation, and the transfer of ongoing obligations. In both forms, the lease of the business premises (and the landlord's permission), the transfer of personnel, and the transfer of permits and supplier contracts require special attention. The buyer would be wise to conduct due diligence regarding the ongoing franchise agreement, the financial figures, the goodwill, and any potential disputes, while the seller will wish to carefully limit their warranties and indemnities. We draft or review the purchase agreement to ensure that the arrangements regarding the purchase price, goodwill, and transfer are watertight.

Disputes regarding goodwill and refused approval

The two most common points of contention in the sale of a franchise business are a goodwill dispute and the refusal or delay of the buyer's approval. With regard to goodwill, the dispute usually revolves around the attribution and the amount of the compensation; with regard to approval, it concerns the question of whether the franchisor is refusing cooperation on reasonable grounds. The franchisor may not withhold approval on unreasonable or improper grounds – the principles of reasonableness and fairness under Article 6:248 of the Dutch Civil Code limit this – and delaying the transfer can be unlawful. We determine the most effective route for each situation, whether that involves negotiation, mediation, or litigation, and represent the interests of the franchisee, the buyer, or the franchisor. From an internationally operating franchise system to the independent entrepreneur around the corner: our lawyers and in-house counsel are familiar with both the Franchise Act and the practice of acquisitions.

Franchise Legal Advice

The sale of a franchisee business and goodwill are part of our broader expertise in Franchise Legal Advice. Within this area, we guide franchisees, buyers, and franchisors through all phases of the partnership – from reviewing the franchise agreement and pre-contractual obligations to termination, non-compete clauses, and the settlement of goodwill. Our mixed teams of lawyers and in-house counsel are ready to assist both large corporations and individual entrepreneurs.