Comply with the franchise law in just 4 steps

New rules franchise law

The franchise law stipulates the minimum information franchisors must share with franchisees or prospective franchisees. The law is based on the principle that the parties conduct themselves as a "good franchisor" and as a "good franchisee."

The purpose of this is so that prospective franchisees can make an educated and conscious decision whether or not to join a formula.

1. Adhere to the pre-contractual phase

At least four weeks before the franchise agreement is actually signed, all information should be given to the prospective franchisee.

This is called the deliberation period. All information that the franchisor knows, or can reasonably suspect, must have been shared by then. This specific information is necessary for a franchisee to make a conscious decision whether or not to enter the franchise.

During this period of at least four weeks, no new terms may be added or changes made that could be negative for prospective franchisees.

You as a franchisor may also not ask the prospective franchisee to "already" make investments, other payments, or have them sign another type of agreement. Consider, for example, a lease agreement.

The new potential franchisee should be able to withdraw if they want to. In the meantime, they study the documents and agreements with an advisor, if necessary.

Sharing a handbook remains the advice. Below are points that are legally stipulated and can be perfectly fine in a digital handbook or quality management system. Transparency is key here.

• The franchise agreement, including all attachments
• Overview of all fees, mark-up or other contributions to be paid. With explanations and
  any unilateral adjustments the franchisee can expect.
• Overview of investments for the new franchisee
• Information on any derivative formulas
• Information about the franchise consultation process, such as how often and when
• Contact details of the representative body of the franchisees (if any)
• Information on financial health
• Financial information on the location where the new
• franchisee will operate, or information from comparable
• franchise locations
• any further useful information for the franchisee

2. Consider interim amendments to a franchise agreement

Developing, growing, managing and improving quality, is what every organization is doing. Even as a franchise. So sometimes you need an investment from a franchisee. Or when there are choices or developments that have a negative impact on the franchise, as a franchisor you need to provide the necessary information in a timely manner. This includes information such as:   

• Modifications to the franchise agreement. Do you have the latest version and can everyone find it? 
• Investments in his franchise business or fees
• New formulas to be developed, such as a web shop

When it comes to fees, think of a marketing fee. The idea behind this is to require the franchisor to share information about marketing. This gives the franchisee a chance to verify that the requested contributions are good. Transparency is very important here.

3. Establish regular agreements

Franchising is a form of cooperation between independent parties or entrepreneurs. Only with clear agreements and regular consultation does it work to cooperate in this way. Otherwise, you are not a formula.

The franchise law therefore requires franchisors to consult regularly with their franchisees. Not only about operational matters, but also, for example, about proposed changes to the franchise formula.

The law states that franchisor and franchisee must consult at least once a year. The Franchise Act also states that franchisors must provide regular support to their franchisees when it comes to the franchise formula.

4. Describe the termination process

A franchise partnership can come to an end. Sometimes the parties no longer want to continue, or you cannot work out a change in the formula. Then it is important to end the cooperation in a good way. The following are the things you should at least include in this process:

Clear about valuation

The franchise agreement should clearly state how the value of the franchise establishment will be determined when a franchisee terminates the partnership and sells his establishment to the franchisor. This may include some method of calculation.

Limited non-compete clause

The franchise law states that the franchisee's non-compete clause cannot exceed one year. In terms of territory, it may not exceed the exclusive operating area in which the entrepreneur was operating.

Other topics

Often, many parts of such a process surrounding a franchise termination are already described in the franchise agreement and manual. Such as an independent third party determining the value, or how any goodwill from the franchise location is divided between franchisor and franchisee. Sometimes discussions arise about this; you can get ahead of that with a good process description.

Transition period franchise law almost over

The 2-year transition period ends January 1, 2023. Did you already have a franchise agreement before 2021? If so, the provisions on the right to consent, valuation and non-compete clauses are now in effect - after all, the transition period was intended solely to give existing franchisors and franchisees time to work things out by mutual agreement. For post-2020 agreements, the franchise law had been in effect for longer.