The Franchise Act: Implications for Franchisor & Franchisee

The Dutch Franchise Act was passed by the House of Representatives and the Senate and has been in effect since January 1, 2021. The purpose of the Franchise Act is to strengthen the legal position of franchisees. The Franchise Act included a two-year transition period for some elements, but this transition period has now also ended, making the entire law fully applicable to all franchise collaborations since January 1, 2023. But what does the Franchise Act specifically mean for franchise formulas, and what adjustments have been made to franchise contracts and recruitment & selection processes since its introduction?

The Dutch Franchise Act emphasizes four components

The Dutch Franchise Act emphasizes four components that, according to the legislator, are crucial for balanced franchise relationships:

1. The pre-contractual exchange of information.
2. The interim amendment of an ongoing franchise agreement.
3. The consultation between franchisor and its franchisees.
4. The termination of the franchise collaboration.

Each component is briefly explained below (in non-legal language) on what the Franchise Act stipulates in this regard.

Pre-contractual exchange of information

The Franchise Act stipulates what information franchisors must minimally share with prospective franchisees. The goal is to enable candidate franchisees to make an informed decision to join or not join a franchise formula.

Information must be provided timely

At least four weeks before the franchise agreement is signed, all information must be provided to the candidate franchisee. This includes all information that the franchisor knows, or should reasonably suspect, is important for the franchisee to make an informed choice.

Stand-still period of four weeks

These four weeks comprise a stand-still period. During this period, no additional conditions may be imposed, nor changes made, that could negatively impact the candidate franchisee. Additionally, the franchisor may not encourage a potential franchisee to make investments “in advance” or to sign any agreement. The reason is that this might put pressure on the candidate franchisee, making them less likely to feel free to decide against becoming a franchisee after reviewing the information or seeking advice.

All relevant information must be shared with candidate franchisees

This means at least:

1. The franchise agreement to be signed, including appendices.
2. Overview of all fees and surcharges and other contributions, including an explanation of their purposes.
3. Overview of the investments that the new franchisee must make.
4. Information on how and how often franchise consultation will occur.
5. Contact details of the representative body of franchisees (if available).
6. Information on the financial health of the franchisor.
7. Financial information about the intended location where the new franchisee will operate, or information from comparable franchise locations.
8. All other potentially relevant information for the candidate franchisee.

Such an information obligation has existed in Belgium for years. Just like in Belgium, it has become customary in the Netherlands under this new Franchise Act to draft a Pre-Contractual Information Document (PID) to be provided to the candidate franchisee.

Interim amendment of an ongoing franchise agreement

Stagnation leads to decline. This is true for every organization, including franchise organizations. Good franchisors are always working to further develop their franchise formula. Most often, this is positive. By continuing to develop, a franchise formula, and thus both the franchisor and connected franchisees, become more successful. McDonald's has been a good example of this for decades.

However, further development can sometimes also require significant investments from franchisees. Certain formula developments can also negatively impact a franchisee’s sales or profitability.

Franchisor must provide information about changes

The franchisor must inform franchisees in advance if they wish to implement changes to the formula. For example, if:

• The franchisor wants to amend the franchise agreement;
• The franchisee must invest in their business;
• The franchisor wants to launch a derivative formula (such as a retail chain launching a webshop or stripped-down shop-in-shop variant).

Franchisor must provide information on the use of various fees

In addition to information on proposed changes to the formula, the franchisor must also provide details on how the various fees are spent. This particularly concerns common fees such as a marketing fee or an IT fee. The idea is to enable consultation on the optimal expenditure by the franchise organization by obliging the franchisor to share this information.

Approval rights for franchisees over large investments or potential sales impairment

The Explanatory Memorandum to the Franchise Act advises including a threshold in the franchise agreement. This threshold specifies up to what amount the franchisor can unilaterally implement changes. For changes with a greater impact than this threshold, approval is required from:

• A majority of the franchisees (50% + 1), or
• The affected franchisees.

This threshold must not be set so high in the contract that approval is never required. These thresholds apply to investments or costs the franchisee must incur.

Investments exceeding these thresholds can only be imposed with the approval of the majority of franchisees or with the consent of the affected franchisees. Similarly, this applies if the franchisor wants to launch an alternative derivative formula that is expected to result in a loss of sales for the existing operations.

In practice, it’s important to determine the right thresholds. On the one hand, the franchise formula must remain agile, as it isn’t feasible to require franchisee approval for every formula change, regardless of how small. On the other hand, the law seeks to prevent thresholds from being so high that the franchisor can unilaterally make decisions that have too great an impact on the franchisee’s results.

The consultation between franchisor and its franchisees

Franchise is a partnership. It only works effectively if there is good communication. Therefore, the Franchise Act stipulates that the franchisor must have regular consultations with franchisees. For instance, about proposed changes to the franchise formula. The law literally states that there must be at least one meeting per year between the franchisor and the franchisee. In practice, most formulas already did this several times a year prior to the introduction, so it had little practical impact.

The Franchise Act also states that franchisors must provide their franchisees with regular support within the framework of the franchise formula. Most franchise formulas already consistently did this. The support, and not being alone, is often the reason for a franchisee to join a franchise formula.

The termination of the franchise collaboration

A good franchise collaboration creates a win-win situation for both the franchisor and the franchisee. It may happen that the franchisor wants to make changes to the formula that the franchisee no longer foresees or experiences as win-win. Then it is important that the franchise collaboration can be terminated properly.

Clarity about the valuation of the franchise location

The agreement must clearly state how the value of the franchise location is determined when a franchisee wants to terminate the franchise collaboration and sell their location to the franchisor. This can involve a specific calculation method. However, often a process will be described in the franchise agreement and manual. For example, that an independent third party professionally determines the value.

It must also clearly describe how any goodwill from the franchise location is distributed between the franchisor and franchisee upon sale to a succeeding franchisee. In practice, this often belongs to the franchisee, but there used to be discussions about this in the past. Especially since there was often little or nothing about it in the franchise agreement before the law was implemented.

Limited non-compete clause

The Franchise Act states that a franchisee’s non-compete clause may not last longer than a year and may not extend beyond the exclusive territory where the entrepreneur was active. This clause aligns with existing case law and therefore has little practical impact.

Not mandatory when franchisee is based abroad

The Franchise Act is mandatory law for all franchisors with franchisees based in the Netherlands. If the franchisor is established in the Netherlands but the franchisee is based abroad, deviations from the Franchise Act are allowed. This is also true if Dutch law has been declared applicable to the franchise agreement.

In some cases, it may be attractive to deviate from this Franchise Act. On the other hand, there may be advantages to keeping processes and agreements consistent for both Dutch and foreign franchisees. This is a decision that must be made separately for each franchise formula.

Ensure compliance with the law

Working in full compliance with the Franchise Act requires adjustments to the franchise contract, franchise manual, and recruitment & selection process. Not sure if you are fully compliant with the law? Feel free to contact us!