Buying a franchise: check the initial franchise fee

An initial franchise fee may seem reasonable: you pay to join an established franchise network. Yet the amount alone tells you little. Does it simply give you access to the franchise system, or does it also cover specific services to help you launch? Before signing, find out what you are buying, when you must pay and what happens if your outlet never opens.

1. Clarify what you are paying for

The initial franchise fee is usually a one-off payment made when you join. What it covers varies between franchises. Sometimes it includes introductory training and support for your opening; sometimes these are billed separately. Do not rely on descriptions such as ‘complete start-up package’ or ‘turnkey concept’.

Ask for a written breakdown, split into two categories:

• Access to the franchise system: the right to join and use the system under the agreed terms.
• Specific start-up services: for example, training, site assessment, fit-out advice or support during the opening.

For each start-up service, have the agreement specify what will be delivered, by whom and when. For training, for example, you will want to know how many people can attend, which topics are covered and whether travel and accommodation cost extra. For opening support, check how long it lasts, whether someone will be on site and what expertise will be available.

A franchisor does not have to base its initial fee solely on hours worked. Access to an established business concept can also have value. However, you should be able to identify exactly what you are paying for and which promises are recorded as enforceable commitments.

2. Check the information and payment schedule

The Netherlands has specific franchise legislation: the Dutch Franchise Act (Wet franchise), incorporated into Title 16 of Book 7 of the Dutch Civil Code on 1 January 2021. Article 7:913 of the Code requires franchisors to provide advance information about, among other things, the fees, investments and other financial contributions required of you. This includes the initial franchise fee.

Ask not only about the amount, but also about any VAT, additional costs, the payment due date and the conditions for price adjustments before you join. Have any separately agreed terms included in the contract or a clear appendix. A verbal assurance that ‘training is included’ leaves unnecessary room for dispute.

Article 7:914 of the Code also provides for a period of at least four weeks between receipt of the legally required information and signing the franchise agreement. During this period, the franchisor may not require payments or investments connected with the proposed franchise agreement.

Be alert, therefore, to requests to transfer an initial fee, reservation fee or advance payment at this stage. Giving a payment a different name does not automatically make it permissible. Seek advice on whether any requested payment is connected with the proposed franchise agreement.

Once this period has ended, there is no automatic statutory right to pay in instalments. You can, however, negotiate this, for example by linking payments to signing, completion of training and the actual opening.

3. Agree what happens if the launch falls through

The most important question is often not how much the initial franchise fee is, but who bears the risk if the outlet does not open. Your finance might fall through, a proposed site might be rejected, or the handover of the premises might be delayed.

For each scenario, agree on three points:

• Can you terminate the agreement, or will it lapse under an agreed condition?
• What proportion of the initial franchise fee will be refunded?
• Which demonstrably delivered services or incurred costs may be deducted?

Suppose, for example, that your application for finance is rejected after you have completed the introductory training. Without clear terms, a dispute may arise over both whether you remain bound by the contract and what you owe for the training. Agree in advance what supporting documents are required, the deadline for invoking the relevant condition and how the final financial settlement will be handled.

The Dutch Franchise Act does not provide a general, automatic right to a full refund if your business plans fall through. The contract, the circumstances and general contract law all matter. If the franchisor fails to meet its obligations, different rights may apply from those available when you decide not to proceed. Have a legal adviser review sweeping clauses such as ‘non-refundable under any circumstances’.

4. Compare what you receive, not just the price

Compare initial franchise fees only once you can assess them on a like-for-like basis. A lower entry price may come with separate bills for training, access to systems or opening materials. Equally, a higher fee is not in itself proof of better preparation.

For each franchise, draw up a single overview showing the initial fee, included services, separate start-up costs, payment dates and refund terms. Also check that the same start-up service does not appear both within the initial fee and on a separate quotation. If anything is unclear, ask for a written explanation.

Practical conclusion: do not pay for an undefined start-up package. Before signing, secure a clear breakdown, a suitable payment schedule and agreed terms for a delayed or cancelled opening.