Buying a franchise: check the goodwill provisions

When buying a franchise, you will probably focus first on the investment required and your expected income. But what happens to the value you build during the relationship? Anyone considering a franchise should also address this question before signing. Clear goodwill provisions help prevent you from spending years building a business without knowing what value you are entitled to when you leave.

What goodwill means for your outlet

Goodwill is the value of a business over and above the value of its individual assets less its liabilities. It might arise from an established customer base, a strong local reputation or well-organised operations. It is not the same as the purchase price of your fixtures and equipment or the cost of a refurbishment.

Franchising raises an important further question: how much of that additional value comes from the franchise system, and how much from your own entrepreneurial efforts? The brand may attract customers, while your service and local relationships keep them coming back.

Goodwill does not guarantee a return. A business may have little or no goodwill, for example if its future profit prospects are disappointing. Nor does high turnover automatically mean that a buyer will be willing to pay a substantial premium.

If you are buying an existing outlet, ask how much of the purchase price is attributed to goodwill. Compare the basis for that figure with the provisions that will apply when you eventually leave. You will not necessarily recover what you pay now.

What the Dutch Franchise Act requires

The Netherlands has had a Franchise Act since 1 January 2021, incorporated into Book 7, Title 16 of the Dutch Civil Code. Article 7:920 of the Code sets out specific requirements for goodwill provisions in franchise agreements.

The agreement must specify how the following will be determined:

• whether goodwill exists in the franchisee’s business;
• the value of that goodwill;
• the extent to which that goodwill is attributable to the franchisor.

The contract must also set out how goodwill reasonably attributable to the franchisee will be compensated on termination if the franchisor takes over the business either to continue operating it or to transfer it to a third party with whom the franchisor enters into a franchise agreement.

This is an important limitation. The Act does not automatically entitle a franchisee to a goodwill payment from the franchisor whenever the agreement ends. If the business closes without being taken over, or is sold to a buyer you have found yourself, you will need to examine separately which contractual terms and rights apply.

For franchisees established in the Netherlands, these statutory protections cannot be departed from to their detriment. Ask a lawyer specialising in franchising to check whether the contract actually complies with the law. Simply including the word ‘goodwill’ is not enough.

Make sure the valuation method can be checked

Workable provisions make clear how the parties will arrive at a figure. The Act does not prescribe a universal formula or fixed percentage. An appropriate method depends on the business and its circumstances.

Before signing, ask for a worked example and discuss the following points:

• Valuation date: at what point will the value be assessed?
• Financial basis: which financial results will be taken into account, and over what period?
• Adjustments: how will one-off costs and a market-rate allowance for your own work be treated?
• Attribution: how will the contribution of the franchise system be distinguished from your own contribution?
• Expert: who will carry out the valuation, and who will pay for it?

Watch out for double counting. If fixtures and equipment are being paid for separately, it must be clear how their value relates to the overall business valuation and goodwill. Ask an accountant to check that the calculation also reflects the way the business is being transferred.

During the franchise relationship, keep records that can substantiate your contribution, such as financial results, customer retention figures and demonstrable operational improvements. This will help ensure that any later dispute does not rest solely on people’s recollections.

Agree on the exit procedure too

A valuation formula offers little certainty without a supporting procedure. Agree when the valuation will begin, what information each party must provide and how disagreements will be resolved. An independent expert can help, provided their remit and authority are clear.

Also check when payment is due and whether other amounts may be offset against it. Ask how different reasons for leaving affect your position: expiry of the agreement, a voluntary sale or termination following a dispute. Do not simply assume that a clause removing all entitlement to goodwill is legally valid.

Finally, ask your financial adviser to model a scenario in which you receive no payment for goodwill. This will show whether your financial plan depends on an uncertain sale value. Goodwill can be valuable, but it should not become an unsupported balancing figure in your investment calculations.

Practical takeaway: only sign once you can explain how goodwill is assessed, what proportion is attributable to you and which takeover circumstances trigger payment. Ask for both a worked example and a contract provision reviewed by a legal specialist.