The Franchise Act: Implications for Franchisor & Franchisee

The Franchise Act was adopted 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 expired, meaning the entire act has been fully applicable to all franchise partnerships since January 1, 2023. But what does the Franchise Act specifically mean for franchise formulas, and what changes have been made to franchise contracts and recruitment and selection processes since its introduction?

The Franchise Act emphasizes four components

The 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 existing franchise agreement.
3. The consultation between the franchisor and its franchisees.
4. The termination of the franchise partnership.

Below, we briefly explain (in non-legal language) the provisions of the Franchise Act in this regard.

Pre-contractual exchange of information

The Franchise Act prescribes the minimum information franchisors must share with potential franchisees. The goal is to enable prospective franchisees to make a well-informed decision about whether or not to join a franchise formula.

Information must be provided in a timely manner

At least four weeks before the franchise agreement is signed, all information must be provided to the prospective franchisee. This includes all information that the franchisor knows, or could reasonably suspect, is important for the franchisee to make a well-informed decision.

Four-week standstill period

This four-week standstill period is a standstill period. During this period, no additional conditions may be imposed or changes implemented that could have a negative or onerous effect on the prospective franchisee. Furthermore, the franchisor may not encourage a prospective franchisee to make investments or sign any agreement "in advance." This is because prospective franchisees may no longer feel free to decide not to become franchisees after reviewing the information or seeking advice from an advisor.

All relevant information must be shared with prospective franchisees.

This means, at a minimum:

1. The franchise agreement to be signed, including appendices.
2. An overview of all fees, surcharges, and other contributions to be paid, including an explanation of their purpose.
3. An overview of the investments the new franchisee will be required to make.
4. Information about the manner and frequency of franchise consultations.
5. Contact details of the franchisee's representative body (if applicable).
6. Information about the franchisor's financial health.
7. Financial information about the intended location where the new franchisee will operate, or information about comparable franchise locations.
8. All other information potentially relevant to the prospective franchisee.

Such a disclosure requirement has existed in Belgium for years. Just as in Belgium, this new Franchise Act has made it customary in the Netherlands to draw up a Pre-contractual Information Document (PID) that is provided to prospective franchisees.

Interim amendment of a current franchise agreement

Standing still means going backwards. This applies to every organization, including franchise organizations. Good franchisors are therefore constantly developing their franchise formula. In the vast majority of cases, this is positive. By continuing to develop, a franchise formula, and therefore both the franchisor and affiliated franchisees, becomes increasingly successful. McDonald's has been a prime example of this for decades.

However, continued development can sometimes require significant investments from franchisees. Certain formula developments can also have a negative impact on a franchisee's turnover or profitability.

Franchisors must provide information about changes

The franchisor must inform franchisees in a timely manner if they intend to implement changes to the formula. For example, if:

• the franchisor wishes to amend the franchise agreement;
• the franchisee needs to invest in their business;
• the franchisor wishes to roll out a derivative formula (such as a retail chain launching a webshop or a stripped-down shop-in-shop version).

The franchisor must provide information about the use of various fees.

In addition to information about proposed formula changes, the franchisor must also provide information about how the various fees are spent. This primarily concerns standard fees such as marketing fees or IT fees. The idea behind this is that by requiring the franchisor to share this information, consultation can take place regarding the optimal allocation by the franchise organization.

Right of consent for franchisees regarding large investments or potential loss of turnover

The Explanatory Memorandum to the Franchise Act recommends including a threshold value in the franchise agreement. This threshold describes the amount up to which the franchisor can unilaterally implement changes. For changes with an impact exceeding this threshold, the consent of:

• the majority of the franchisees (50% + 1), or
• the franchisees concerned is required.

This threshold may not be so high in the contract that consent is never actually required. These thresholds apply to investments or costs incurred by the franchisee.

Investments exceeding these thresholds can only be imposed by the franchisor with the consent of the majority of the franchisees, or with the consent of the franchisees concerned. The same applies, for example, if the franchisor wants to launch an alternative derivative formula that is expected to result in a loss of turnover for the existing one.

In practice, it is therefore important to determine the correct thresholds. On the one hand, the franchise formula must remain effective, and it is unworkable if every change to the formula, no matter how small, requires the consent of franchisees. On the other hand, the law aims to prevent thresholds from being so high that franchisors can unilaterally make decisions that have an excessive impact on franchisees' results.

Consultation between franchisors and their franchisees

Franchisors are a partnership. This is only effective when there is proper consultation. Therefore, the Franchise Act stipulates that franchisors must regularly consult with franchisees. For example, regarding proposed changes to the franchise formula. The law literally states that consultations between the franchisor and franchisee must take place at least once a year. In practice, most formulas already do this several times a year before implementation, so this had little practical impact.

The Franchise Act also stipulates that franchisors must regularly provide their franchisees with support regarding the franchise formula. Most franchise formulas already provided this support consistently. This support, and the fact that they are not alone, is often the reason why franchisees join a franchise formula.

Terminating the franchise partnership

A successful franchise partnership creates a win-win situation for both the franchisor and franchisee. It's possible that the franchisor may want to implement changes to the franchise formula that no longer provide or experience a win-win situation for the franchisee. In such cases, it's important that the franchise partnership can be terminated properly.

Clarity regarding the valuation of the franchise location

The agreement should clearly state how the value of the franchise location will be determined if a franchisee wishes to terminate the franchise partnership and sell their location to the franchisor. This may involve a specific calculation method. However, the franchise agreement and handbook often describe a process. For example, an independent third party should professionally determine the value.

It should also be clearly stated how any goodwill associated with the franchise location will be allocated between the franchisor and franchisee in the event of a sale to a successor franchisee. In practice, this often falls to the franchisee, but in the past, this has sometimes led to disputes. Particularly because, until the law was introduced, franchise agreements often contained little or nothing about it.

Limited non-compete clause

The Franchise Act stipulates that the franchisee's non-compete clause may not exceed one year and may not extend beyond the franchisee's exclusive operating area the entrepreneur was active. This clause is in line with existing case law and therefore has little practical impact.

Not mandatory if the franchisee is established abroad

The Franchise Act is mandatory law for all franchisors with franchisees established in the Netherlands. If the franchisor is established in the Netherlands but the franchisee is established abroad, the Franchise Act may be deviated from, even if Dutch law has been declared applicable to the franchise agreement.

In some cases, it may be advantageous to deviate from this Franchise Act. On the other hand, it can also be advantageous to keep the processes and agreements the same for both Dutch and foreign franchisees. This is a consideration that must be made separately for each franchise formula.

Ensure you comply with the law

Fully complying with the Franchise Act requires adjustments to the franchise contract, the franchise manual, and the recruitment and selection process. Not sure you are fully compliant? Feel free to contact us!