Giving your first franchisee room to do their due diligence

If you are turning an existing business into a franchise, you know your own operation inside out. A prospective franchisee does not have that advantage. They need to assess whether your way of working, obligations and financial assumptions are compatible with running an independent business. So, alongside providing information, make room for critical scrutiny. This creates a solid foundation for a franchise community in which both parties understand what they are taking on.

1. Distinguish between providing information and conducting due diligence

In the Netherlands, the Franchise Act has been in force since 1 January 2021. Its provisions are set out in Book 7 of the Dutch Civil Code. Alongside the franchisor’s duty to provide information, the Act places a duty on the prospective franchisee to investigate: within the bounds of reasonableness and fairness, they must take steps to avoid entering into the agreement on the basis of incorrect assumptions.

That does not mean you can simply tell the candidate to find everything out for themselves. Your duty to provide information remains. Among other things, you must supply the draft agreement and its appendices, explain the financial obligations and provide relevant financial data. The candidate assesses that information, asks questions and seeks expert advice where necessary.

Make this distinction clear during your initial discussions:

• You provide and clarify: facts, proposed terms, supporting evidence and known limitations.
• The candidate investigates: whether the business is viable for them, the risks involved and the implications of the obligations.
• Independent advisers scrutinise: matters such as financial assumptions and legal consequences.

A signed declaration that someone has ‘carried out sufficient due diligence’ is no substitute for a thorough process. Nor should you use due diligence as a way to shift responsibility for incomplete or misleading information.

2. Give access to the reality behind your franchise model

When recruiting your first franchisee, there are no existing franchise partners whose experience the candidate can draw on. Say so explicitly. Your own outlet can provide valuable information, but it does not automatically prove that an independent operator elsewhere will achieve the same results.

Offer a due diligence visit that shows the candidate more than a successful day’s trading. For example, show how you cope with peak demand, how much time administration takes and what work you do as the owner outside opening hours. Also discuss which tasks will fall to the franchisee and which will remain with your organisation.

During the visit, clearly distinguish between three categories:

• Observed practice: what actually happens in your existing business.
• Proposed franchise arrangements: what you have developed for the partnership but have not yet put into practice with a franchisee.
• Uncertainty: what will still depend on location, business skills or market developments.

Where appropriate, let the candidate speak to employees about their work, without asking them to act as salespeople for the franchise concept. Do not share personal data or confidential customer information that is unnecessary for the assessment. A suitable confidentiality agreement can protect commercially sensitive information without preventing the candidate from seeking independent advice.

3. Organise questions and independent scrutiny

Keep a single question log. For each question, record the topic, date, your answer, the relevant document and anything that still needs investigating. This helps prevent verbal explanations from becoming disconnected from the agreement or financial information.

Encourage the candidate to ask about more than expected turnover. Relevant due diligence questions include:

• Which tasks performed by the owner are not yet reflected in staffing costs?
• Which expenses will continue if the opening is delayed?
• Which elements of support are already available, and which are still being developed?
• How affordable will the financial commitments remain if turnover falls short?
• Which contractual obligations restrict the scope to reduce costs?

Have financial questions answered by someone who can explain the figures. Have legal interpretations checked by a lawyer specialising in franchising. Agree who may answer questions on behalf of your organisation, so that an enthusiastic colleague does not make a promise you cannot keep.

Encourage the candidate to choose their own accountant or legal adviser. Your adviser can explain your documents, but that does not make them an independent representative of the candidate’s interests. Make clear which assumptions come from you and which calculations the candidate has made themselves.

4. Complete due diligence without pressure to sign

The Dutch Franchise Act requires a period of at least four weeks between providing the legally required information and entering into the franchise agreement. During that period, restrictions apply to matters including entering into contracts, making changes detrimental to the candidate, and requiring franchise-related payments or investments. Schedule due diligence visits and advisory meetings so that the candidate can make proper use of this time.

The end of the four-week period does not automatically mean that every question has been resolved. Before signing, discuss any outstanding points. If essential information is missing, postpone the decision and seek advice on what additional information or changes mean for the remaining process and the statutory period.

Record any answers that change the agreed terms in the appropriate contractual documents. A reassuring email alongside a contradictory contractual provision only creates further uncertainty.

The practical takeaway: make critical scrutiny a standard step towards your first franchise agreement. Give candidates access to the day-to-day business, provide answers they can verify and allow room for independent advice. A well-informed decision is worth more to your franchise community than a quick signature.