Many franchise agreements, particularly where retail situations are concerned, contain one or more clauses regarding the return and/or takeover of goods and inventory upon termination of the franchise agreement. These clauses often turn out to be quite different in nature. Some terms assume a completely non-binding position on the part of the franchisor, both with regard to the possibility of taking back goods and/or inventory, and with regard to the determination of prices with regard to goods and/or inventory. Other stipulations are based on a mandatory return, linked to market prices for goods and inventory. There are also clauses obliging the franchisor to take back goods and inventory at market prices for the goods, less obsolete stock and the value of the inventory less relevant depreciation. The latter stipulations are most closely related to the franchisee’s generally existing financial obligations towards the bank in practice. The franchisor is then involved in this in relation to the relevant financing arrangement and then agrees on such an arrangement in accordance with such arrangement. This arrangement does not necessarily have to be included in the franchise agreement, but can also be arranged by the parties in underlying financing agreements. However, it is not uncommon for such an obligation to be included in the franchise agreement. After all, it concerns an important obligation of the franchisor and franchisee towards each other.
Franchisor and franchisee would be wise to realize in advance what a possible buy-back arrangement means in practice. In this way, it is prevented that any open-ended arrangements can arise that prove to be insufficiently safeguarding the interests of either the franchisor, the franchisee, or both at the time of invocation.
Ludwig & Van Dam franchise attorneys, franchise legal advice