A letter of intent for your first franchisee

You want to expand your existing business into a franchise network and have found an interested entrepreneur. You both want to move forward, but the funding, premises and contract are not yet in place. A letter of intent can help give this interim stage a clear structure. However, it needs to set out a process for investigating the opportunity without inadvertently creating an obligation to enter into a franchise relationship.

1. Decide what the letter of intent should cover

A letter of intent is not a mandatory part of setting up a franchise. Use one only if there is genuine preparatory work to allocate, such as assessing a location, exploring funding options or discussing the draft agreement with advisers.

The aim is not to tie the candidate down as quickly as possible. In a healthy franchise network, both parties must be able to assess whether the proposed relationship is viable. Start by setting out which questions still need answering before you make a final decision.

Then distinguish between three types of provision:

• Shared intentions: you want to explore whether a franchise relationship is possible.
• Process arrangements: who will provide which information, who will investigate what, and when will you discuss the findings?
• Binding obligations: for example, handling confidential information with care or agreeing to a limited period of exclusive negotiations.

State explicitly which provisions are binding and which are not. Simply calling the document a ‘non-binding letter of intent’ is not enough if its contents impose an obligation to purchase, make payments or sign an agreement.

Also make clear that the candidate is not yet authorised to act on behalf of your franchise, use the brand or make commitments to customers. An interest in joining does not amount to permission to start operating a franchise outlet.

2. Let the Dutch Franchise Act determine the sequence

The Dutch Franchise Act (Wet franchise) has been in force in the Netherlands since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Among other things, it sets out rules on disclosure before a franchise agreement is concluded. The title of a preliminary document does not alter those statutory protections.

As a franchisor, you must provide, among other things, the draft agreement and its appendices, information about fees and investments, and relevant financial information. Once the legally required information has been provided, a minimum four-week period must elapse before the franchise agreement can be concluded.

During that period, you must not require the candidate to make payments or investments connected with the proposed franchise agreement. Nor may you conclude that agreement, make changes to it that disadvantage the candidate or, in principle, enter into agreements inseparably linked to it. Confidentiality agreements are exempt from this last restriction.

A letter of intent is therefore not a licence to collect an initial franchise fee, a reservation fee or a compulsory training contribution in advance. You should also have the document reviewed to establish whether its substance makes it an inseparably linked agreement that is itself prohibited during this period.

Do not build an automatic signing date into your timetable if it would conflict with this statutory sequence. Ask a lawyer specialising in franchise law to review the letter of intent alongside the draft contract: inconsistencies between the two documents are particularly risky at this stage.

3. Be specific about due diligence, costs and exclusivity

Turn the outstanding questions into a simple due diligence plan. For each topic, set out who is responsible, what information is needed and when you will discuss the findings. Bear in mind the candidate’s own duty to investigate: they must take steps to avoid basing their decision on incorrect assumptions.

For example, you might provide the available data on your existing business, while the candidate asks an accountant to assess the financial assumptions. A location assessment can be arranged separately. Make clear that the findings do not constitute a turnover guarantee.

Also distinguish between each party’s own advisory costs and work commissioned jointly. Do not simply stipulate that the candidate must reimburse your development costs if the relationship does not go ahead. In practice, this could restrict their freedom to decide not to join. Check every arrangement concerning costs against the statutory disclosure and protection requirements.

Do you want to agree not to negotiate with other candidates about the same location for a limited period? Define the scope of that exclusivity clearly:

• Which location or specific proposed arrangement does it cover?
• When does it start and end?
• Which due diligence steps do you expect to complete during that period?
• What happens if funding or suitable premises cannot be secured?

Avoid allowing temporary exclusivity to turn inadvertently into a permanent right to a territory.

4. Set out how the process can end

A useful letter of intent describes not only the route to signing, but also an orderly way out. Identify the conditions that must first be met, such as securing funding, finding suitable premises and reaching agreement on the final documents.

Set out how either party should notify the other that they are withdrawing, and what will then happen to confidential documents, shared files and any work commissioned from third parties. Specify which provisions will remain in force, such as confidentiality obligations.

Do not promise that negotiations can be broken off without consequences in every circumstance. General principles of Dutch contract law may also come into play, depending on how the negotiations have progressed and the expectations created. Confirm important decisions in writing and avoid making commitments that go beyond the document.

Practical takeaway: use the letter of intent as a roadmap for due diligence, not as a disguised franchise agreement. Set out responsibilities, limits and exit options, and have its legal terms reviewed before anyone signs or incurs costs.