The concept of the Franchise Act: impact for franchisors and franchisees – dated February 5, 2019 – mr. AW Dolphin

Ludwig & Van Dam Advocaten believes that if the draft of the Franchise Act actually becomes law, a lot will change for franchisors and franchisees. The proposed rules make good consultation between franchisors and franchisees even more important. On the other hand, if the consultations do not lead to a solution, the legal rules can encourage escalation and those rules are put in place. In any case, the new rules will have a significant impact.

1. The recruitment of franchisees

The draft Franchise Act requires franchisors to provide all relevant information when recruiting franchisees. There is no such hard rule now. If a franchisee has to contend with disappointing results, a discussion may arise as to whether the franchisor has communicated all relevant information to the franchisee in advance and should not also have pointed out risks. The concept of the Franchise Act aims to prevent franchisees from being insufficiently informed by franchisors.

According to Ludwig & Van Dam attorneys, it will be of great importance in the future, even more than is currently the case, for the franchisor and the franchisee to properly document which questions they have asked each other and how they have been answered. Disagreement about this is a source of conflict. This will not always ease the commercial aspects of recruitment and negotiation.

2. The cooling-off period for the aspiring franchisee

A term will soon apply to the provision of information when entering into a franchise agreement. Four weeks prior to entering into a franchise agreement, all potentially relevant information must be communicated to the prospective franchisee. Within that period, the proposed cooperation may not be changed. No (other) agreement may therefore be concluded between the parties. The purpose of the proposed rule is to create a cooling-off period. This gives the entrepreneur the time and the peace of mind to carefully consider the offer. Not only can this prevent hasty and ill-considered decisions, the time can also be used to seek advice from experts. Ludwig & Van Dam Advocaten believes that aspiring franchisees should use this reflection period to, for example, properly calculate the financial estimates. However, it is also conceivable that entrepreneurs do not always need a month to make a good decision. Sometimes speed is required, for example because people are also in the race to rent a retail property. The aspiring franchisee must then be able to act decisively with the franchisor in order to ensure that the race to rent the retail property is won, but that the agreements between franchisee and franchisor are also clear in that race. The obligation to observe a cooling-off period can therefore be at the expense of acquiring a good business location. Then it is only disadvantageous that the parties are not allowed to do anything at all during that period.

Franchise agreements are also often difficult to read for non-attorneys, so that franchisees only realize afterwards what they have committed themselves to. Unfortunately, we encounter this too much in practice. Of course, a franchisor is also not waiting for such a situation.

3. Mandatory Assistance by the Franchisor

The franchisor is obliged to provide ‘assistance as well as commercial and technical support’ to the franchisee. Providing assistance may include providing support to the franchisee through continued commercial and technical assistance by the franchisor to achieve a win-win situation. This obligation can be referred to as a duty of care on the part of the franchisor and could be all the more onerous the greater the franchisee’s dependence on the franchisor.

The proposed regulation aims to promote a win-win situation. The transfer of knowledge and skills by the franchisor in order to achieve and maintain a win-win situation is of course an important starting point in franchising.

4. Right of Consent of Franchisees

Franchisees are given a certain right of consent. The draft bill stipulates that changes that the franchisor wishes to make, which may have a significant impact on the franchisee’s operation, may only be made with the consent of the franchisee. Ludwig & Van Dam Attorneys indicates: ‘In almost all formulas, the house style changes periodically, investments in software and inventory are required, or other measures are prescribed by the franchisor. On the other hand, unilaterally increasing the franchise fee at once, without a valid reason, is of course not something that should be possible just like that.’

If franchisees unite, the proposed arrangement will provide better means to guard against making unwelcome changes. On the other hand, the right of consent can also have a paralyzing effect on innovation of the formula, especially in the case of a conflict situation.

5. No competing formula, without permission

In principle, the franchisor will not be allowed to operate any other formula that fully or largely corresponds to the franchise formula operated by the franchisees. This requires the consent of the franchisees.

Franchisees do not get very excited if the franchisor starts operating a different format that may compete with the existing format. However, there may also be advantages for franchisees, such as economies of scale and lower purchase prices. An advanced reasoning is therefore appropriate here.

6. More emphasis on good agreement goodwill

There will be rules about the franchise company and the end of the franchise agreement. Sometimes, in practice, there is no agreement at all about goodwill. If a franchisee has built up a customer base, but is no longer allowed to use this customer base after the end of the franchise agreement, then the question is how to deal with this. The franchisor can benefit from this by taking advantage of this accumulated customer base. The franchisor may also believe that the customers are not connected to the franchisee, but to the formula.

According to Ludwig & Van Dam attorneys, it is good that there is an incentive to think in advance about what will apply at the end of the franchise agreement. This also applies to how to deal with any claims to goodwill.

7. Mandatory consultation between franchisee and franchisor

The law also says that franchisors and franchisees have consultations about the cooperation at least once a year. Ludwig & Van Dam attorneys: ‘At the moment there is no legal obligation to consult. It has not been precisely determined who should take the initiative for consultation, but it seems that in any case the franchisor must make sufficient efforts to sit down with the franchisee.’ A legal obligation to consult will in any case be an incentive to meet periodically at the table. All the points mentioned above could be discussed during the consultation to be held.

It should be the intention of the franchisee and franchisor not only to avoid misunderstandings and disagreements by conducting consultations, but above all to explore creatively how the cooperation can lead to even more success. A statutory obligation to consult could contribute to this. On the other hand, there is also a danger in the regulations. With the legal provisions at the ready, differences of opinion may also escalate more easily if the intended consultation does not lead to solutions.

Mr AW Dolphijn – Franchise lawyer

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