How do you prevent delays in the selection process due to the Dutch Franchise Act?

You may have already noticed; since January 1, 2021, the Dutch Franchise Act has been in effect. Franchisors had until December 31, 2022, to adjust the franchise agreement for the franchisees already affiliated at that time. When bringing on new franchisees, you are obliged to offer a franchise agreement in accordance with the Franchise Act along with the Pre-Contractual Information Document. It is extremely important to comply with the Franchise Act since mandatory law applies (also see our article: What are the consequences of not complying with the Franchise Act?). If, due to unforeseen circumstances, you have not yet adjusted your legal package, we advise you to address this as soon as possible.

You certainly do not want to end up in the following situation:

Yes, finally found a franchisee!

Good news; the recruiters have had excellent discussions with a candidate franchisee for a location in Leeuwarden. It took a lot of effort to find a suitable candidate franchisee and a property. The final conversation between the candidate franchisee and the franchisor is scheduled, and both parties are enthusiastic. However, the offer for the rental property is only valid for two weeks. The franchisor does not want to lose the property and wants to prevent losing the interest of a candidate franchisee, as finding a suitable property can take a long time. But now, what to do? All legal documents need to be drafted, including a Pre-Contractual Information Document with a stand-still period of at least four weeks. These four weeks are not feasible right now. The franchise system decides to engage in talks with the candidate franchisee and has 'persuaded' the candidate franchisee to commence the franchise agreement in two weeks. This opportunity is too good to pass up. The stand-still period is thus skipped, and the provision of information has been minimal.

Signed a lemon?

The franchisee eagerly started with their location in Leeuwarden. Initially, there was a lot of attention from the franchisor, customers were enthusiastic, and business was thriving. As time passed, the franchisee noticed the results were disappointing. He had expected higher revenues and lower expenses. This was what the recruiters and the franchisor had outlined during discussions. The franchisee decided to talk with other franchisees and heard they experienced the same. They were also presented with a rosy picture and did not receive comparable figures from other locations. The franchisee in Leeuwarden now has a financial problem.

Franchisee supported by the Dutch Franchise Act

The franchisee decided to seek legal advice. The lawyer confirmed that the franchisor did not comply with the Franchise Act. The franchisee in Leeuwarden decided to inform the other franchisees about this. After several meetings, the franchisees decided to collectively sue the franchisor. After a long and complex process, the franchisees won the lawsuit. The judge determined that the franchisor did not comply with articles 7:913 (the obligations to provide certain information during the term) and article 7:914 (the provision of information must occur at least four weeks before the conclusion of the franchise agreement and the prohibition to incite payments or investments during the stand-still period). The consequence is the annulment of the agreement with corresponding repayments and/or compensation from the franchisor.

How to prevent this situation?

Firstly, we cannot stress it enough; comply with the Dutch Franchise Act, make sure these legal requirements are embedded in your organization and processes. There have already been several lawsuits regarding this, and you do not want to find yourself in a situation like the one described above, with all the discomforts, (financial) consequences, and potential reputational damage that entails. However, several franchisors report that, among others, providing the PID delays the onboarding process, and as a result, candidate franchisees drop out due to not finding a suitable property in time. This is not a desirable situation, but there are indeed multiple solutions for this, depending on the specific situation. For example, streamlining the selection process or having a preliminary agreement signed immediately after the stand-still period expires. Are you also experiencing problems within your franchise organization due to the Franchise Act and/or are you looking for a solution for it? Please contact us via the form below.