Explaining your financial health as a franchisor

Running a profitable company-owned outlet does not automatically make you a financially stable franchisor. A prospective franchisee needs to assess whether you can continue to provide the agreed support, systems and development of the franchise concept. Within the franchise community, trust therefore starts with transparency about your own financial position. How do you provide that transparency when you begin franchising an existing business?

1. Understand what the Dutch Franchise Act requires

The Netherlands has specific franchise legislation: the Dutch Franchise Act (Wet franchise), which came into force on 1 January 2021 and is incorporated into Book 7 of the Dutch Civil Code. It requires franchisors to provide information about their financial position, among other things, before entering into an agreement. You must also disclose information that you know, or can reasonably be expected to suspect, is important to the decision to enter into the franchise agreement.

This obligation is separate from the requirement to provide financial information about the proposed outlet or comparable outlets. The focus here is not the prospective franchisee’s expected turnover, but the financial capacity of their future business partner.

The legally required information must be provided at least four weeks before the franchise agreement is concluded. During this standstill period, you must not, among other things, require franchise-related payments or investments. Plan to explain your financial position well in advance, rather than treating it as a final appendix just before signing.

The law does not prescribe a single standard set of financial documents for every franchise concept. The explanation needed depends partly on your circumstances. Ask a lawyer specialising in Dutch franchise law to assess whether your disclosures are sufficiently comprehensive, and an accountant to help present the figures clearly.

2. Make clear which business the figures relate to

An established business often combines several activities. Your own shop or service business generates income, while the franchise organisation still needs to be built. Perhaps a new Dutch private limited company (bv) will sign the franchise agreements, while staff, software and trade mark rights sit within other entities.

A prospective franchisee needs to understand which entity is contractually responsible and what resources it actually has at its disposal.

Prepare a simple overview of:

• the entity signing as the franchisor;
• the activities and income within that entity;
• related entities providing essential services or resources;
• arrangements for funding or support from those entities;
• significant dependencies, such as a loan from the owner.

Do not present figures for your existing business as though they necessarily reflect the financial position of a new franchise bv. If that company has not yet completed a financial year, explain this and use appropriate up-to-date information, such as an opening balance sheet, interim figures and a budget supported by clear assumptions.

A wealthy parent company does not automatically provide security either. Distinguish between a willingness to step in and legally binding funding commitments or guarantees.

3. Explain what the accounts mean for business continuity

Simply sending annual accounts does not make your position clear. Add a factual explanation showing what the figures mean for the franchise relationship. Keep historical results, current developments and forecasts clearly separate.

Profit or loss: explain what drives your results. For example, a one-off gain from a sale says little about the recurring income available to fund support.

Liquidity: describe how you meet your ongoing obligations. A business can be profitable yet have little cash available, for example because money is tied up in stock or outstanding invoices.

Debts and commitments: explain relevant repayments, financing terms and other significant commitments. Also disclose dependencies that could affect your ability to fulfil the franchise agreement.

Forecasts: set out the assumptions behind your budgets. These might include the number of new franchisees, when fees will be received and the cost of providing support.

A useful internal check is to ask: can we continue supporting our first franchisee if the next one joins later than expected? Work through that scenario. Present it not as a statutory stress test, but as a practical way to identify vulnerabilities.

Do not hide uncertainty behind optimistic turnover forecasts. Explain what action you can take and which funding is not yet firmly secured.

4. Arrange explanations and updates

Date every financial document and state which entity and period it covers. Specify whether the figures are provisional, final or reviewed by an accountant. Avoid giving the impression that an internal spreadsheet is a set of audited annual accounts.

Then arrange a meeting where the prospective franchisee and their adviser can ask questions. Answer important questions in writing so that the explanation does not later depend on anyone’s recollection. A confidentiality agreement can protect sensitive information, but it does not replace your disclosure obligations.

If something material changes before signing, such as funding falling through, update the information and seek legal advice on what this means for the next steps and the statutory time limit. An acknowledgement of receipt does not make outdated information adequate.

Practical takeaway: before signing your first franchise agreement, prepare a dated explanation of your financial position: who is signing, what resources are available, what dependencies exist and how will you remain able to meet your obligations? Have the figures and the accompanying explanation checked together.