The importance of a Pre-contractual Information Document

With the introduction of the Dutch Franchise Act on January 1, 2021, the Franchise Act includes what information a franchisor must provide to the franchisee during the pre-contractual phase. In other words, during the selection process preceding the signing of the franchise agreement.

What requirements does the law impose on the selection process?

The Franchise Act prohibits inducing the candidate franchisee to make payments or investments related to the yet-to-be-signed franchise agreement during the pre-contractual phase.

Moreover, the franchisor is required to provide certain information, often done in a Precontractual Information Document (PID). In the (at least) four weeks that follow, the so-called stand-still period, the candidate franchisee has the time to fulfill their duty to investigate.

Stand-still period

The stand-still period was created to offer more protection to the franchisee. During this four-week period, the franchisee can make an informed decision, after receiving the PID, without pressure from the franchisor. During this period, the franchisee has the opportunity, which is also their duty to investigate, to study the information carefully and possibly seek advice from third parties. This allows them to avoid entering into an agreement based on incorrect and overly optimistic assumptions. During this stand-still period, no agreements can be signed that relate to the future franchise collaboration. The information provided in the PID, including the draft franchise agreement, may not be altered during the stand-still period if it is to the detriment of the franchisee. If this occurs, the stand-still period is reset. A new period of four weeks then begins again.

The Precontractual Information Document (PID)

This article frequently references a Precontractual Information Document (PID), but what does it entail? The Franchise Act prescribes several topics on which the franchisor must provide information to candidate franchisees. These topics are usually included in the PID:

1. The franchise agreement to be signed, including appendices.
   Is it clear to the franchisee what is described in the franchise agreement, and do they agree with it?
2. An overview of all fees, surcharges, and other contributions to be paid, including an explanation of their purposes.
   The franchise agreement describes the fee structure. A requirement of the PID is that an explanation is provided on how these fees are used.
3. An overview of the investments the new franchisee must make.
   What investments must the franchisee make besides paying the entrance fee? Consider refurbishment and inventory costs based on experience from other locations.
4. Information on the manner and frequency of franchise meetings.
   The manner of consultation within a franchise organization can indicate the level of interconnectedness among members.
5. Contact details of the representative body of franchisees (if present).
   With the contact details, the candidate franchisee can contact franchisees to inquire about their experiences within the franchise formula.
6. Information on the financial health of the franchisor.
   The franchisor is obliged to provide the franchisee with available and relevant information about their financial position.
7. Financial information about the intended location where the new franchisee will operate, or information from similar franchise locations.
   This can include previous revenue, as well as site studies, research on local purchasing power, or rental prices.
8. All other potentially relevant information for the candidate franchisee.
   If there is information not mentioned above but relevant for the franchisee to make an informed decision, it must also be included in the PID.

Like the handbook, the PID is a living document. For each new candidate franchisee wanting to join, adjustments will generally need to be made. Our advice is to develop a basic template tailored to the franchise formula. The PID is also a legal document; hence, don't take it lightly!

We are happy to assist you in setting up a Precontractual Information Document. Interested? Please contact us via the form below.