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

It probably hasn't escaped your notice; since January 1, 2021, the Franchise Act has been in effect. Franchisors had until December 31, 2022, to adjust the franchise agreement for the franchisees affiliated at that time. When onboarding new franchisees, you are required 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 because imperative law is applicable (also see our article: What are the consequences of not complying with the Franchise Act?). If, due to unforeseen circumstances, you haven't yet adjusted your legal package, we advise you to address this as soon as possible.

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

Yes, finally found a franchisee!

Good news; the recruiters had successful conversations 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 valid for only two weeks. The franchisor doesn't want to lose the property and wants to avoid losing the interest of a candidate franchisee because finding a suitable property can take a long time. But now, what? All legal documents need to be prepared, including a Pre-Contractual Information Document with a stand-still period of at least four weeks. These four weeks are inconvenient at this moment. The franchise system decides to talk to the candidate franchisee and has 'persuaded' the candidate franchisee to start the franchise agreement in two weeks. This opportunity is too good to pass up. As a result, the stand-still period is skipped, and the information provided was minimal.

Signed a pig in a poke?

The franchisee started with enthusiasm their establishment in Leeuwarden. Initially, there is a lot of attention from the franchisor, the customers are enthusiastic, and business is going well. As time goes on, the franchisee notices that results are disappointing. He expected sales to be higher and costs to be lower. This was outlined by the recruiters and the franchisor during the conversations. The franchisee decides to talk with other franchisees and hears that they experienced the same. They, too, were presented with a rosy picture and did not receive comparable figures from other locations. The franchisee in Leeuwarden now faces a financial problem.

Franchisee supported by the Dutch Franchise Act

The franchisee decides to seek legal advice. The lawyer confirms that the franchisor has not complied with the Franchise Act. The franchisee in Leeuwarden decides to inform the other franchisees. 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 obligation to provide certain information during the term) and article 7:914 (the provision of information must occur at least four weeks before entering into the franchise agreement and the prohibition to prompt payments or investments during the stand-still period). The result is the annulment of the agreement with accompanying repayments and/or damages to be paid by the franchisor.

How can you prevent this situation?

First of all, we can't stress it enough; comply with the Franchise Act, ensure these legal requirements are embedded in your organization and processes. There have already been several lawsuits on this matter, and you do not want to find yourself in a situation like the one described above with all its discomforts, (financial) consequences, and potential reputational damage. However, we hear from multiple franchisors that providing the PID, among other things, delays the onboarding process and that candidate franchisees drop out due to, for instance, not finding a suitable property in time. This is not a desired situation, but there are indeed multiple solutions available, depending on the specific situation. For example, structuring the selection process more tightly or having a pre-agreement signed immediately after the stand-still period ends. Are you also experiencing problems within your franchise organization due to the Franchise Act and/or are you looking for a solution to this? Contact us via the form below.