The importance of a Pre-contractual Information Document

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

What requirements does the Act impose on the selection process?

The Franchise Act prohibits prospective franchisees from being encouraged to make payments or investments related to the franchise agreement during the pre-contractual phase.

The franchisor must also provide certain information. This is often done in a Pre-contractual Information Document (PID). During the (at least) four weeks that follow, the so-called standstill period, the prospective franchisee has time to fulfill their due diligence obligation.

Standstill period

The standstill period was created to provide franchisees with greater protection. During this four-week period, the franchisee can make a well-considered decision after receiving the PID, without pressure from the franchisor. During this period, the franchisee, regardless of their due diligence obligations, has the opportunity to carefully review the information and, if necessary, seek advice from third parties. This allows them to avoid entering into an agreement based on incorrect or overly optimistic assumptions. Therefore, no agreements relating to future franchise cooperation may be signed during this standstill period. The information provided in the PID, including the draft franchise agreement, may not be changed during the standstill period if this would be detrimental to the franchisee. Should this happen, the standstill period will be reset. A new four-week period will then commence.

The Precontractual Information Document (PID)

This article has already mentioned a Precontractual Information Document (PID), but what does it actually entail? The Franchise Act prescribes several information topics that franchisors must provide to prospective franchisees. These topics are usually included in the Personal Information Document (PID):

1. The franchise agreement to be signed, including appendices.
   Is the franchisee clear about what is described in the franchise agreement and does he or she agree with it?
2. An overview of all fees, surcharges, and other contributions to be paid, including an explanation of their purpose.
   The franchise agreement describes the level of the fee structure. A requirement of the Personal Information Document (PID) is that an explanation be provided of what these fees are used for.
3. An overview of the investments the new franchisee must make.
   What investments must the franchisee make, in addition to paying the entry fee? This includes renovation and inventory costs based on historical data from other franchisees.
4. Information about the manner and frequency of franchise consultations.
   The manner of consultation within a franchise organization can reflect the level of mutual ties
5. Contact information of the franchisee's representative body (if applicable). Using the contact information, the prospective franchisee can contact franchisees to inquire about their experiences within the franchise formula.
6. Information about the franchisor's financial health.
   The franchisor is obligated 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 about comparable franchise locations.
   This may include previous revenue, location surveys, research into local purchasing power, or rental prices.
8. Any other potentially relevant information for the prospective franchisee.
   If there is any information not listed above that is relevant to the franchisee's decision, this information is also required to be included in the PID.

Like the manual, the PID is a living document. For each new prospective franchisee who wishes to join, (minor) adjustments will generally need to be made. Our advice is to develop a basic template tailored to the franchise formula. The PID is therefore also a legal document. So don't take it lightly!

We're happy to help you create a Pre-contractual Information Document. Interested? Please contact us using the form below.