Franchising in a BV

Franchisees are also increasingly setting up private limited companies. Usually prompted by reasons of a fiscal nature. However, not all franchise agreements are tailored to the fact that the franchisee is no longer a natural person, but a private company. This can lead to all kinds of ambiguities. For example, to whom are the obligations in the franchise agreement addressed insofar as they are personal in nature? Is the quality of the management sufficiently guaranteed?

It is therefore recommended in such a situation to carefully check the text of the franchise agreement and to adjust it if necessary, or to agree on an addition to it.

A problem of a different nature is that due to the contribution of the franchise company to a private limited company, recourse against the private assets of the franchisee is no longer possible. It is therefore wise to make additional arrangements for this with the director and major shareholder of the private limited company. Examples include guarantees and/or joint and several liability.

Finally, franchise organizations benefit from knowing who is being franchised with. In the case of a private company, this is by no means certain. After all, the articles of association can contain many provisions whereby the shares can be alienated and/or the control in the private limited company is transferred to another person or pledged. In the worst case, the bank and/or the competitor can exert a major influence on the franchise business to be operated. It is therefore also recommended that the contribution of a franchise agreement be partly dependent on the prior approval of the articles of association of this company. By amending the articles of association and/or additional provisions regarding the control of the company in the franchise agreement itself, an attempt can be made to create more guarantees against unintentional alienation of the franchise company.

Of course, when amending the franchise agreement and/or amending the articles of association, it should always be remembered that the franchise entrepreneur remains independent and does not create a disguised employment contract because too much influence is exerted on the franchisee’s business. From a competition law perspective, the formation of cartels must also be prevented. If both franchisor and franchisee properly consider the mutual opportunities, threats and opportunities in advance when entering into a franchise relationship with a private limited company and/or contributing the existing franchise business to a private limited company, then the risk is minimized that third parties unintentionally exercise influence on the franchise company and/or it is unclear who has which obligations, as well as recourse in problem situations appears to be illusory.

Ludwig & Van Dam franchise attorneys, franchise legal advice