Mr DL van Dam – Franchise lawyer
Exit arrangements Franchise agreements and comparable cooperation agreements regularly include a provision under which the rights under that agreement, whether or not jointly with the franchisee’s company, can be transferred under specific conditions included in that agreement. An example of such a condition is that the rights in question must first be offered to the franchisor. If the latter is not interested after a reasonable period of time has elapsed, the franchisee is generally permitted to transfer the rights to a third successive prospective franchisee, but generally not on more favorable terms than the franchisor’s offer. A condition is usually also included that the franchisor must then agree with the (person of the) ultimate acquiring party.
Conditions such as the above are permissible in themselves, provided that they should not form such a barrier that transfer is unnecessarily impeded for the franchisee in question and for any third party joining the franchise organization. Recent jurisprudence has determined that such an obstacle may exist if, for example, 10% of the annual turnover of the franchisee’s business must be paid to the franchisor upon transfer. Such regulations are deemed to impede accession to the organization and the ultimate market forces to such an extent that they are illegal under competition law.
It is possible, and in many cases also advisable, to record the principles for valuation upon transfer in advance. What is important is that the result of this is that the value of the franchisee’s business is at least somewhat market-compliant. Disputes are lurking here, so it is also recommended to include a provision for this in the agreement, for example because the parties refer to the opinion of a binding advisor. However, if the arrangement included in the agreement is sound, such disputes will not easily arise, since the criteria for valuation are fixed.
Particularly in the case of a partnership in the provision of services, there can quickly be specific transfer of portfolios and customer files. In that case, the regulation outlined above will usually suffice. The parties may, however, choose to assign a specific value to the portfolio and/or customer base, agreed in advance. In some cases, this is mandatory, for example when there is mediation within the framework of the Insurance Brokerage Act, and it also concerns products that award a mandatory goodwill distribution to the transferring intermediary on the basis of that law. This is usually the franchisee and sometimes the franchisee and the franchisor together, whereby a distribution key is mutually agreed upon.
Goodwill In the context of the business transfer of franchisees, the question regularly arises as to whether a franchisee can simply claim a goodwill compensation upon termination of the franchise relationship. In general, this question should be answered in the negative, especially if timely notice has been given. In practice, goodwill allocations therefore rarely occur.
The situation is different when the franchisee has operated his business for an objectively long period, for example longer than twenty-five years. Whether a franchisee can then make any claim to distribution of goodwill depends very much on the circumstances of the specific case, but that is not excluded. However, there is no general arrangement for goodwill allocation for the benefit of franchisees. This only changes if agency elements are included in the cooperation agreement. Even then, under certain circumstances, it is still quite possible that the scheme outlined above will be sufficient, although it may then also be decided to agree on another scheme that grants at least some compensation to the remaining agent in an alternative manner. Unlike the franchisee, the agent is generally entitled to this. Here too, the concrete circumstances of the case are ultimately decisive, including with regard to the size of any compensation.
Ludwig & Van Dam franchise attorneys, franchise legal advice