Termination of franchise formula

Termination of a franchise formula or franchise agreement

The end of a franchise relationship takes two forms that differ significantly from a legal perspective. On the one hand, there is the termination of an individual franchise agreement between a single franchisor and a single franchisee, for example through notice of termination, dissolution, or the expiration of the term. On the other hand, there is the termination of an entire formula, where the franchisor decides to discontinue, sell, restructure, or integrate the formula into another chain. In both cases, sensitive issues come together: goodwill, non-competition clauses, inventory, investments, and the future of the franchisee's business.

Who do we work for?

We assist both franchisors and franchisees. Our clients are formula owners and franchisors in retail, hospitality, services, and healthcare; individual franchisees and groups of franchisees; master franchisees; and investors acquiring or winding down a formula. Our role varies depending on the position: for the franchisor, the emphasis is on a controlled winding-down and limiting claims; for the franchisee, on preserving the business, reasonable goodwill compensation, and the scope to continue doing business after the termination.

The Franchise Act and the termination of the agreement

Since January 1, 2021, the Franchise Act (Article 7:911 et seq. of the Dutch Civil Code) has been in effect, containing mandatory provisions that play a major role specifically regarding termination. The Act regulates, among other things, goodwill compensation, the non-compete clause after the termination of the agreement, and the information and consultation obligations that also apply in the event of a proposed termination or modification of the franchise formula. Provisions that deviate from the law to the detriment of the franchisee are void or voidable to the extent provided by law.

Termination and dissolution

A franchise agreement terminates upon the expiration of the fixed term, by termination at the end of the term or early if the agreement permits, or by dissolution due to breach of contract (Article 6:265 of the Dutch Civil Code). Reasonableness and fairness (Article 6:248 of the Dutch Civil Code) may entail that termination requires a reasonable notice period and sometimes compensation, certainly in long-standing relationships in which the franchisee has invested significantly. In the event of dissolution, it is important whether the breach justifies the dissolution and whether a notice of default was required.

Goodwill compensation

Article 7:920 of the Dutch Civil Code obliges parties to include a provision in the franchise agreement regarding the manner in which it is determined whether goodwill exists in the franchisee's business, the amount of that goodwill, and to what extent it accrues to the franchisee upon termination of the agreement. If such a provision is absent or defective, disputes usually arise regarding the valuation and the question of whether the accumulated goodwill is attributable to the franchise formula or to the efforts of the franchisee.

Non-compete clause after the end

Article 7:920 paragraph 2 of the Dutch Civil Code sets strict limits on post-contractual non-compete clauses. The clause must be agreed upon in writing, may relate exclusively to goods or services that compete with those of the franchise formula, must be indispensable to protect the know-how, may not extend geographically beyond the area within which the franchisee has operated the formula, and may apply for at most one year after the termination of the agreement. Clauses that exceed these limits are void.

Settlement: inventory, investments and acquisition

In addition to goodwill and non-compete clauses, practical settlement questions arise upon termination. Who takes over the inventory and at what price? What happens to formula-specific fittings and investments? Is there an obligation to acquire or repurchase? How is the lease or sublease of the business premises settled, especially when the franchisor is the main tenant? And how are the intellectual property rights regarding the trademark, trade name, and formula protected after the termination? These matters deserve a comprehensive arrangement to prevent long-running disputes.

Termination of an entire formula

When a franchisor decides to discontinue, restructure, or integrate a franchise formula, specific considerations apply. The information and consultation obligations under the Franchise Act remain in force, and a substantial modification of the formula may entail the franchisees' right of consent (Article 7:921 of the Dutch Civil Code). A controlled phase-out requires careful communication, a reasonable timeline, and attention to the goodwill and non-competitive positions of all involved franchisees simultaneously.

Our working method

We first assess the franchise agreement, the term, the grounds for termination, the goodwill and non-compete clauses, and the actual course of events. Subsequently, we determine whether the most effective route lies in negotiation, mediation, summary proceedings, or main proceedings. At every step, we think ahead: how will the goodwill be substantiated, how will the non-compete clause hold up, and how will the franchisee's business be safeguarded or the winding down managed?

Termination of an indefinite franchise agreement

A franchise agreement entered into for an indefinite period and lacking a termination clause is, in principle, terminable. However, termination is not always without obligation. The requirements of reasonableness and fairness (Article 6:248 of the Dutch Civil Code) may entail that termination is only possible on the grounds of sufficient gravity, that a longer notice period must be observed, or that the termination must be accompanied by compensation. The longer the cooperation has lasted and the greater the franchisee's investments, the more weight these requirements carry. Case law has held that a notice period that fluctuates with the duration of operations – for example, a fixed period per year that the establishment has been active – may be reasonable. Whether termination without compensation is tenable depends on all the circumstances of the case.

Compensation upon termination

In addition to the statutory goodwill compensation, a franchisee or franchisor may claim damages if the termination is unlawful or irregular. Early termination of a fixed-term agreement without the agreement permitting such termination may result in an obligation to compensate the other party for the damage suffered as a result. Even in the case of a legally valid termination, the principles of reasonableness and fairness (Article 6:248 of the Dutch Civil Code) may require that appropriate financial compensation be offered, particularly in long-term relationships involving significant investments. In the event of dissolution due to breach of contract (Article 6:265 of the Dutch Civil Code), damages may also be claimed pursuant to Article 6:74 of the Dutch Civil Code. Careful substantiation and assessment of the damages are decisive in this regard.

Common mistakes when terminating a franchise

Many disputes do not arise from the termination itself, but from the manner in which it is initiated. The most common mistakes are: using a notice period that is too short or unreasonable; dissolving without the required notice of default and allowing default to occur; invoking a non-compete clause that is broader than permitted by law; or ignoring or incorrectly applying the goodwill arrangement. On the franchisor's side, an uncontrolled winding down often leads to an accumulation of claims; on the franchisee's side, seeking legal advice too late leads to a weaker negotiating position. We assess in advance which course of action is viable, ensuring that the termination does not result in unnecessary damage or a lost legal proceeding.

Termination of franchise formula: lawyer and legal expert from MKB Juristen

The termination of a franchise formula or franchise agreement requires a combination of keen contractual insight and litigious acumen. At MKB Juristen, lawyers and in-house counsel work together in mixed teams for clients ranging from international corporations winding down entire formulas to the local baker seeking to safeguard their own business. We advise and litigate regarding termination, dissolution, goodwill, non-compete clauses, and the settlement of inventory, lease, and intellectual property rights. This page is part of our broader expertise in Franchise Legal Advice. Read more also about non-compete clauses, the sale of the franchisee business, and goodwill and franchise and tenancy law.