Buying a franchise: scrutinise the letter of intent

A letter of intent can be a useful intermediate step when buying a franchise in the Netherlands. It sets out how you and the franchisor will assess whether joining the franchise network is feasible. But a document labelled ‘non-binding’ may still contain binding obligations. So check not just the intended purpose of the relationship, but, above all, what you are already promising, paying and putting at risk.

1. Separate intentions from obligations

A letter of intent is not a legal requirement for joining a franchise. It is an agreement that allows the parties to structure their negotiations. Its legal effect depends on its contents and the circumstances, not just its title.

For example, a letter may state that neither party is obliged to enter into the final franchise agreement, while provisions on exclusivity, costs and confidentiality take effect immediately. Read each clause separately.

Before signing, draw up a list with three categories:

• Immediately binding: provisions that create obligations as soon as you sign.
• Conditional: provisions that apply only once a clearly defined condition has been met.
• Non-binding: proposed terms that the parties still need to negotiate.

Ask for an explicit clause stating that the letter does not, in itself, create an obligation to enter into a franchise agreement. Then check that other passages do not undermine that principle. An obligation to open on a fixed date, for instance, may conflict with an agreement that your due diligence has yet to begin.

The signed document is not the only thing that matters. Keep accompanying emails and confirm important verbal explanations in writing. This helps prevent the parties from later attaching different expectations to the same wording.

2. Set clear limits on conditions and exclusivity

A general phrase such as ‘subject to finance’ provides less clarity than a detailed provision. What funding is needed? By when must it be confirmed? What steps must you take, and what happens if the lender declines?

Also specify which other matters must first be sufficiently clear. These might include your legal review of the franchise agreement or the findings of a site assessment. Describe how you can invoke a condition, the deadline for doing so and what supporting evidence is required. Ask a lawyer to advise on wording suited to your circumstances.

Pay particular attention to exclusivity. A franchisor may expect you not to speak to other franchise brands for a limited period. If so, ask what you receive in return. Will a proposed site actually be reserved for you, or will the franchisor continue approaching other candidates at the same time?

Limit exclusivity to a clearly defined period and scope. Agree that any extension must be made in writing. This prevents slow-moving negotiations from unnecessarily putting your search on hold.

3. Check costs and payments against the Dutch Franchise Act

The Dutch Franchise Act has applied since 1 January 2021 and is incorporated into Title 16 of Book 7 of the Dutch Civil Code. Among other things, it sets out disclosure obligations that apply before a franchise agreement is concluded. Prospective franchisees must also carry out reasonable due diligence to avoid signing on the basis of incorrect assumptions.

The franchisor must provide the legally required information at least four weeks before the franchise agreement is concluded. During this statutory period, the franchisor must not, among other things, require payments or investments connected with the proposed franchise agreement. In principle, the franchisor must not enter into a franchise agreement or an agreement inseparably linked to it during this period either; confidentiality agreements are an exception.

A letter of intent therefore offers no automatic way around these rules. Have its contents, timing and any payment obligations checked for compliance.

For each proposed fee, ask:

• What specific service or work does it cover?
• Who is commissioning the research or assessment?
• Is there a cap on costs?
• What happens to the money if the relationship does not go ahead?
• Can you keep and use the resulting report?

Distinguish between the costs of your own advisers and amounts requested by the franchisor. Do not pay a reservation fee or an advance on the initial franchise fee simply because it is said to be ‘standard practice’.

4. Agree in advance how the process ends

Include an end date and a clear withdrawal procedure. Specify whom you must notify, which costs may still need to be settled and which obligations will survive termination. Avoid an unlimited obligation to reimburse all costs incurred or income lost by the other party.

Even without a final franchise agreement, withdrawing is not necessarily free of legal risk. If negotiations break down, factors such as the expectations created and the parties’ conduct may be relevant. Make sure your communications remain consistent with the conditions in the letter: do not present your decision to join as final while essential checks are still outstanding.

Practical conclusion: sign a letter of intent only once you can identify what is immediately binding, which conditions remain outstanding and how you can withdraw without uncertainty over costs. A good letter structures your due diligence; it does not prejudge the outcome.