The New Franchise Act: who owns goodwill?

24 November 2020 – Annelies van Zoest

The Franchise Act will (almost certainly) enter into force on January 1, 2021. This will be a historical event for the Netherlands, for it is the first actual Dutch Franchise Act. The impact of the new Act on practices of franchise organizations is major and requires adjustment not only as to method of operation but also of franchise agreements. The Act is of imperative law and cannot be simply ignored in contracts.

Franchise agreements must contain a clause on how goodwill, if any, must be assessed  within the franchise company upon termination of the franchise agreement (Article 7:920 Dutch Civil Code). The majority of current franchise agreements have no clause on goodwill. As a result, a long existing  debate revives: who owns goodwill? Is it solely connected to the formula or is the franchisee entitled to a part of it?

It is irrelevant whether a fixed sum has been agreed beforehand. The Act lays down that the franchise agreement should provide for the method of identification,  whether the enterprise of a franchisee has any goodwill at all, if so, its extent and to what degree this can be attributed to the franchisee. For instance, the parties may lay down in the franchise agreement that a specific assessment method will be used or an expert will be hired for this.

How to determine beforehand what part of the goodwill is attributable to a franchisee? Several aspects are relevant here, such as effort and marketing of the franchisee and the nature of the formula. Do most customers come through the national website or is the franchisee in question a “local hero” with a large group of regular customers in his shop?

Ultimately, it is not always mandatory to pay out goodwill. The goodwill in the enterprise could be nil, e.g. due to consistent poor performance of the franchisee. Furthermore, goodwill fees are only due, if the franchisor benefits from the goodwill created by the departing franchisee. This is the case if after termination of the franchise agreement the franchisor takes over the franchised outlet and/or operates the outlet through a successive franchisee.

What practical measures exactly should a franchisor take?

  • Choose taking a method in which the goodwill will be identified and its attribution;
  • Review or draw up a goodwill clause that can be added to new franchise agreements as of January 1, 2021. A transition period of two years maximum applies to effective franchise agreements

Annelies van Zoest