Managing Payment Arrears in Your First Franchise Agreement

When turning an existing business into a franchise, the level of fees is usually the first consideration. But what happens if a franchisee fails to pay on time? A predictable approach prevents every overdue payment from becoming an individual negotiation. In a healthy franchise network, clear payment terms and timely support go hand in hand. Before entering into your first franchise agreement, decide how you will identify and discuss arrears and, where necessary, take legal action.

1. Make payment obligations easy to verify

You can only establish whether a payment is overdue if it is clear what is owed and when. Set out not just the franchise fee, but also when invoices will be issued, the payment deadline and the basis of calculation. For a turnover-based fee, for example, specify the period covered and how adjustments will be handled.

Distinguish between different payment streams. A regular franchise fee, a marketing contribution and an invoice for goods supplied may have different payment dates or even be payable to different creditors. Do not present them as a single, unexplained total.

Specify at least:

• which party issues the invoice and what information it is based on;
• when the invoice will be sent and when payment is due;
• how the franchisee should report an error or dispute;
• who reviews and confirms any adjustment;
• what terms apply to interest and any debt collection costs.

Make sure your administrative processes match the contract. If the agreement requires monthly billing but your accounts team sends consolidated invoices at irregular intervals, you are creating uncertainty yourself. Test the entire invoicing process within your existing business first, including a payment reversal and a disputed invoice.

2. Take account of the Dutch Franchise Act

The Netherlands has specific franchise legislation. The Dutch Franchise Act (Wet franchise) has applied since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Among other things, it requires franchisors and franchisees to act towards each other as a good franchisor and a good franchisee. This also calls for a careful, justifiable approach when payment problems arise.

Before entering into the agreement, you must provide information on matters including fees, financial contributions and required investments. Include the payment terms in both the draft agreement and the information supplied in advance. Prospective franchisees must be able to assess the obligations they will take on and the potential consequences of late payment.

There is a statutory period of at least four weeks between providing the prescribed information and entering into the franchise agreement. During that period, you must not, among other things, require payments or investments connected with the proposed franchise agreement. Do not use a direct debit mandate or an advance invoice to circumvent this prohibition.

The general provisions of the Dutch Civil Code are also relevant to payment arrears, including those on breach of contract, default, interest and termination for breach. Which legal steps are available depends on the agreed terms and the circumstances. In particular, have a legal adviser review clauses on debt collection costs, suspension of obligations and termination.

3. Establish a consistent follow-up process

Use a straightforward procedure that every franchisee can understand. The aim is not to impose penalties as quickly as possible, but to distinguish errors from genuine payment difficulties.

Start by checking the facts. Was the invoice received, is the calculation correct, and could a payment have been processed incorrectly? A failed direct debit does not, on its own, prove that a business is financially unhealthy.

Then make personal contact. Ask what caused the delay and when payment can realistically be made. Distinguish between an administrative issue, a dispute over the invoice and a persistent cash shortfall. Each cause needs a different solution.

Confirm the next step in writing. Record the outstanding amount, any disputed items and what both parties have agreed. Maintain a predictable process without automatically treating every situation in exactly the same way.

Appoint one person internally to take responsibility. Avoid situations where the accounts team sends a payment demand while a franchise support manager has already agreed an extension. Share information only with staff who need it to carry out their duties.

4. Keep support temporary and escalate carefully

A payment plan can make sense when the problem is temporary. Record the amount, instalments and treatment of new invoices in writing. Agree what will happen if another instalment is missed. Avoid tacitly allowing payment to be deferred indefinitely.

Also consider whether appropriate commercial or technical support could help. The statutory duty to provide support does not mean you must automatically extend credit or write off debts. However, a specific request for help deserves serious consideration.

If payment remains outstanding, seek advice on the formal steps required. Do not withdraw access to essential systems without a legal review, or terminate the relationship simply because an internal escalation checklist says you should. Such measures could bring the business to a halt and deepen the dispute.

Practical conclusion: before taking on your first franchisee, put together one coherent package: clear payment terms, a consistent follow-up procedure and a template for temporary payment plans. This will help you maintain financial discipline without unnecessarily damaging the working relationship.