Pre-agreement, letter of intent
A so-called pre-agreement is occasionally concluded before entering into a franchise agreement. This form-free agreement in itself generally obliges the franchisor and franchisee to exchange information, which is fundamental to entering into the franchise relationship. A good pre-agreement contains elements that express which information must at least be made available to the prospective franchisee, namely:
– the franchise agreement;
– a financial estimate for at least three years;
– a complete handbook;
– any financing arrangement;
– the European Code of Honor on Franchising.
These elements are essential for establishing a lasting franchise relationship. Without the franchisee having independently convinced himself of the soundness and acceptability of the above matters, he would be wise not to sign a franchise agreement.
In practice, more far-reaching pre-agreements sometimes want to circulate. These are agreements that oblige the franchisee to enter into the franchise agreement within a certain period after the provision has been made available, unless the financing of the whole does not come about. The result of this is therefore that the franchisee agrees in advance with the content of various documents mentioned above, without these documents being able to form a well-considered motive for him not to do business with the franchisor. After all, if only the financing is a condition for whether or not to eventually enter into the franchise relationship, this means that the content of, for example, the handbook or the financial estimates may apparently no longer form a reason to ultimately refrain from joining. in the intended franchise formula. So a house is bought without having seen it. You can drive by. It goes without saying that such stipulations should not be signed by a prospective franchisee. It gets even worse when (enormous) penalty clauses are attached to a number of things. Suppose the franchisee gets his financing arranged, but cannot agree with the content of the franchise agreement or the handbook and on these grounds does not wish – for reasons of his own – to operate his intended franchise business, then a fine awaits him, without ever engaged in any activity.
Equally absurd is the provision that makes it impossible for the franchisee to work with a competing chain. It is therefore not really possible for a prospective franchisee to orient himself at different franchise chains. It is almost inconceivable that an employee who wants to work at a bank should not be allowed to talk to ING Bank after he decides not to work at Rabobank for reasons of his own. The tenability of such clauses can be guessed by the way. However, prevention is better than cure.
A good pre-agreement is limited in nature and does not create any additional obligations. A good franchisor will also want to offer prospective franchisees every opportunity to learn more about the franchise organization in question. After all, the parties are going to work with each other for the long term and therefore benefit greatly from getting their long-term relationship off to a good start.
Ludwig & Van Dam franchise attorneys, franchise legal advice
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