Agreeing goodwill and exit arrangements in your first franchise agreement

When turning an existing business into a franchise network, your first thought is usually opening new locations. Yet the end of the relationship deserves attention before the first agreement is signed. What happens if a franchisee sells, closes or chooses not to renew? Clear goodwill and transfer arrangements protect both your franchise model and the business owners building your franchise community.

1. Understand what the Dutch Franchise Act requires on goodwill

The Dutch Franchise Act has been in force in the Netherlands since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Article 7:920 requires the franchise agreement to specify how the existence of goodwill is established, how its value is determined and to what extent it is attributable to the franchisor or franchisee.

Goodwill is the economic value of a business above the value of its individual assets less its liabilities. Examples include a loyal customer base, a strong local reputation or a well-organised team. In franchising, that value may stem both from your franchise model and from the franchisee’s entrepreneurial efforts.

The agreement must also set out how the franchisee will be compensated for goodwill attributable to them if you acquire their business to operate it yourself or transfer it to a new franchisee.

This is not a general statutory guarantee of a goodwill payment whenever a franchisee leaves. The position may differ if the business closes, is sold to a third party or reaches the end of its agreement without being acquired. Make sure the agreement specifies exactly which arrangements apply to each exit scenario. The statutory franchise rules cannot be departed from to the detriment of a franchisee established in the Netherlands.

2. Choose a workable valuation procedure

A clause stating that ‘goodwill will be determined by mutual agreement’ offers little certainty if the parties later disagree. You do not need to know the future sale price of a franchise outlet now, but you can agree a clear procedure.

Specify at least:

• The valuation date: at what point will the business be valued?
• The information required: which annual accounts, interim figures and contracts are needed?
• The valuation method: how will profitability, business continuity and risks be assessed?
• The allocation: how will value derived from the franchise model be distinguished from value built locally?
• The expert: who will carry out the valuation if there is a disagreement, and who will pay the costs?

Discuss with a valuation expert how the owner’s remuneration, one-off income and deferred maintenance will be treated. Otherwise, apparently high profits may give a misleading picture.

Avoid an arbitrary fixed percentage split between franchisor and franchisee. A local customer base may, for example, have developed partly through national marketing and partly through years of personal service. Choose criteria that can be objectively assessed and document how double counting will be avoided: the same earning capacity must not inadvertently be included both in the business valuation and in an additional goodwill payment.

3. Make the transfer process predictable

A sound agreement on price is of little use if it is unclear who may buy the business. Set out the process from the initial notice of an intended sale through to completion of the transfer.

Agree when the franchisee must notify you of their intention to sell, what information you will receive and how quickly you must respond. Do you want an obligation to offer the business to you first, or a preferential right to buy? Have a legal adviser draw up the pricing procedure and response deadlines too. This helps prevent an exit from becoming unnecessarily stalled.

Set objective requirements for a successor, such as relevant experience, the ability to secure funding and a willingness to complete the training. Make clear whether the buyer will enter into a new franchise agreement or whether the existing agreement is intended to be transferred. This affects the documentation and timetable, including any pre-contractual disclosure requirements and the statutory minimum four-week period.

Check other dependencies as well. A buyer cannot automatically take over a lease, permit, financing arrangement or supplier agreement. Include a transfer checklist identifying who is responsible and which consents are required. Also establish carefully which customer data may be transferred; a sale does not override data protection rules.

4. Protect your franchise model without making exit impossible

After termination, you will want to prevent confidential knowledge of your franchise model from being freely used for a competing concept. However, post-termination non-compete clauses are subject to limits.

Under Article 7:920 of the Dutch Civil Code, such a restriction must be recorded in writing and relate to competing goods or services. It must be indispensable to protecting the know-how transferred, last no longer than one year and cover no wider a geographical area than the territory in which the franchisee operated the franchise.

A standard ban covering the whole of the Netherlands is therefore not necessarily enforceable. Have its necessity and scope assessed separately. Also distinguish the non-compete clause from obligations concerning confidentiality, the return of documentation and the cessation of brand use.

Set out practical details: when signage must be removed, who manages digital accounts and how outstanding orders, warranties and complaints will be handled. A carefully managed exit also protects customers’ trust in the franchise community.

Practical conclusion: before entering into your first franchise agreement, work through three scenarios: a sale to a third party, an acquisition by you and closure without a successor. Have the valuation arrangements, deadlines, payments and transfer process legally reviewed for each scenario. This makes exit something you can discuss before tensions arise.