Buying a franchise: check your exit options and goodwill

When buying a franchise, most people focus first on opening. Yet leaving deserves attention too. As an independent business owner within a franchise network, you build value — but will you be able to sell that value later? Before signing, check the arrangements for transferring the business, valuing goodwill and leaving the network. A strong franchise concept matters; so does a workable exit arrangement.

1. Distinguish between selling, terminating and not renewing

Selling an outlet is not the same as ending the franchise agreement. To sell, you need a buyer, and clarity on the conditions under which that buyer can continue operating the franchise. When the agreement ends, your right to use the franchise system ceases, but obligations to your landlord or lender, for example, may continue.

Read the draft agreement with three scenarios in mind:

• You want to leave early. Can you terminate before the agreed expiry date, on what grounds and with what consequences?
• The agreed term expires. When must you decide about renewal, and what conditions apply?
• You want to sell your business. What consent, procedures and potential costs have been agreed?

Under Dutch law, there is no general statutory right to renew a franchise agreement. Nor does the mere expiry of the contract automatically entitle you to compensation. Do not rely on a verbal assurance that good operators are always allowed to stay.

Review the premises lease, equipment leases and finance agreements alongside the franchise contract. For each document, note the end date, notice period and consequences of leaving early. Have any mismatched terms assessed: the end of your franchise rights does not automatically end the lease on your premises.

2. Understand what the Dutch Franchise Act says about goodwill

The Netherlands has specific franchise legislation: the Dutch Franchise Act (Wet franchise), incorporated into Title 16 of Book 7 of the Dutch Civil Code. Article 7:920 includes rules on goodwill and post-termination non-compete clauses. For franchisees established in the Netherlands, these rules cannot be departed from to their disadvantage.

Goodwill is the value of a business beyond its separately identifiable assets and liabilities, arising, for example, from an established customer base and earning capacity. Within a franchise network, value may stem from both the brand and your own entrepreneurial efforts. That makes it particularly important to clarify in advance how that value is allocated.

The franchise agreement must set out how to determine:

• whether your business has goodwill;
• how much that goodwill is worth;
• the extent to which it is attributable to the franchisor.

The contract must also specify how you will be compensated for goodwill attributable to you when the agreement ends and the franchisor takes over your business, either to operate it directly or to transfer it to a third party with whom it enters into a franchise agreement.

This is not a general guarantee of a payout whenever you leave. If you cease trading without such a takeover, you cannot claim compensation solely on the basis of this provision.

Ask for a worked example of the valuation method specified in the contract. Which financial results are taken into account? How is your own work valued? Who appoints an independent expert if there is a disagreement, and who pays for them? Ask an accountant to assess whether the method is clear and workable in practice.

3. Check whether a transfer is genuinely feasible

The option to sell is worth little on paper if the procedure remains unclear. Ask the franchisor what requirements a successor must meet, and have these recorded in specific terms wherever possible. They may include experience, training, financial standing and participation in a selection process.

Also check whether the franchisor has a right of first refusal to buy the business. Such an arrangement may affect your negotiations with other buyers. Ask when this right must be exercised, how the price is determined and when you are free to continue negotiating with others.

Discuss these practical points too:

• How quickly will a prospective buyer receive a decision?
• Will the buyer take over your agreement or have to sign a new contract?
• What transfer, training or joining fees apply, and who pays them?
• What information may you share with a buyer under a confidentiality agreement?
• When will you be released from personal guarantees or other security arrangements?

Ask both current and former franchisees how previous transfers went. Use their experiences to check how the procedure works, not as a substitute for written agreements. A successful sale elsewhere does not give you an enforceable right to the same treatment.

4. Assess your freedom after leaving

A non-compete clause may restrict the work you can do after the agreement ends. Under Article 7:920 of the Dutch Civil Code, a post-termination restriction is valid only if it meets all the statutory conditions.

The clause must be in writing, relate to competing goods or services, and be indispensable for protecting know-how that has been transferred to you. It may last no longer than one year, and its geographical scope must not extend beyond the area in which you operated the franchise under the agreement.

Ask a specialist franchise lawyer to review related non-solicitation, confidentiality and contractual penalty clauses as well. A clause's label does not tell you everything about its legal effect. Also establish exactly what you must remove, return or hand over when you leave, such as external signage, software access and franchise operating manuals.

Practical conclusion: only buy once you can explain how you would later sell or leave, how your goodwill would be valued, and which obligations would remain afterwards. Turn any unclear points into specific, verifiable terms before signing.