Turnover and result: the principle of prudence

In various countries in the world, franchising is subject to increasingly stringent regulations. In general, these regulations mainly focus on what is so nicely called “pre-contractual disclosure” in English, known here in the Netherlands as pre-contractual information provision. In the Netherlands we find some rules in this regard in the European Code of Honor regarding Franchising, to which the members of the Dutch Franchise Association are bound in principle. Legislation, however, is not. In short, this means that prior to entering into a contract, a franchisor adequately informs its prospective franchisee(s) with regard to the turnover to be achieved with the franchised company and, more importantly, operating results. In France, an obligation to provide information in this regard has been included in legislation, in the United States and Australia, for example, this obligation extends much further. As mentioned, no such obligation has been included in legislation in the Netherlands, but it remains limited to the framework of the European Code of Honor. Nevertheless, and this has been discussed several times in this section, the provision of information that is as adequate as possible prior to the conclusion of a contract is of the utmost importance. Franchisees have a right to know what they are getting into. Incomplete or incorrect provision of information, leading to the conclusion of a contract, can also lead to substantial liabilities and problems in the business operations of both the franchisee and the franchisor. It is therefore not without reason that various countries have included this in legislation. Unlike in the Netherlands, there is therefore no freedom of choice regarding whether or not to present turnover and result forecasts.

In the Netherlands, there is that freedom of choice. A franchisor can therefore always refrain from giving indications about the turnover and results to be achieved with the franchise company. If a franchisor does provide such information, it should be recalled once again that this information must be based on a thorough and adequately conducted market and location survey, specifically tailored to the franchisee’s intended establishment in question. A critical attitude from the franchisor’s side to the results of such research is also appropriate, even if it is carried out by a market research agency. Due diligence must always be leading. The matter is important enough for that.

Ludwig & Van Dam franchise attorneys, franchise legal advice