The role of goodwill determination in franchise agreements
Goodwill determination: an important role
In the world of franchising, goodwill determination plays a crucial role in establishing agreements between franchisors and franchisees. With the introduction of the Franchise Act, which is in effect in the Netherlands, the rules surrounding goodwill determination are made clearer and more streamlined. This law, active since January 1, 2021, aims to clarify and strengthen the relationship between franchisors and franchisees.
Goodwill, one of the most valuable assets in a franchise business, is defined as the surplus value a company has on top of the sum of tangible assets. In franchise agreements, it is important that goodwill is determined in a fair and transparent manner, both when entering the agreement and in the event of its termination.
Transparency
According to the Dutch Franchise Act, franchisors and franchisees must be fully transparent about the methods and principles they employ in determining goodwill during the pre-contractual phase. This means both parties are obliged to provide all relevant information that can influence the valuation of goodwill. Transparency and honesty are key in this regard.
One of the key aspects of goodwill determination is the valuation of the reputation and image of the franchise formula. This includes factors such as the brand name, customer base, location, marketing efforts, and the general awareness of the formula. During the determination of goodwill, these factors must be carefully analyzed and weighed to form a realistic view of the company's value.
Sustainability
Another aspect to consider is the sustainability of the goodwill. This involves how long the acquired goodwill is expected to last and contribute to the profitability of the company. Factors such as competition, changes in market conditions, and consumer behavior can affect the sustainability of goodwill and therefore must be carefully analyzed.
In recent franchise agreements, either newly drafted or adapted to the Franchise Act, there is currently a lack of specific calculation methods for various scenarios. Particularly noteworthy is the inclusion of procedural agreements regarding the sale by a franchisee. It is common to engage an independent advisor or accountant to determine the final valuation. This often proves to be a wise choice, given the challenge of pre-emptively establishing a suitable calculation method for all situations. Each situation is unique, and moreover, market conditions and competitive dynamics can change in the future. Such an arrangement provides flexibility to offer tailored solutions at that moment.
In summary, goodwill determination plays an essential role in franchise agreements and is further clarified and streamlined by the Franchise Act. Through transparency, honesty, and careful analysis, franchisors and franchisees can lay a solid foundation for successful collaboration, with the value of goodwill determined and allocated in a fair manner.