A franchise agreement is often entered into with a view to a long-term partnership. Over the years, the franchisee invests not only financially in their business, but also in building up a local customer base, the reputation of the business and its commercial performance. When the partnership comes to an end, the question therefore regularly arises: is the franchisee entitled to compensation for the goodwill they have built up?
In Belgium, the answer is less straightforward than is often assumed.
What is goodwill?
Goodwill is the economic added value of a business that is not directly apparent from the accounts. It consists, amongst other things, of:
- a loyal customer base;
- a strong local reputation;
- commercial know-how;
- a favourable market position;
- the business’s profit-making capacity.
Within a franchise context, goodwill often arises from a combination of two factors. On the one hand, there is the appeal of the franchise formula itself: the brand name, the concept, the marketing and the franchisor’s know-how. On the other hand, the franchisee also makes a substantial contribution through their entrepreneurship, their local investments and the development of customer relationships.
It is precisely this dual origin that makes the discussion on goodwill particularly complex.
No statutory goodwill payment in Belgium
Unlike commercial agency or exclusive sales concessions of indefinite duration, Belgian law contains no statutory provision imposing a goodwill payment upon the termination of a franchise agreement.
Belgian franchise legislation is primarily limited to pre-contractual information obligations, set out in Book X of the Code of Economic Law. Among other things, the law requires the franchisor to provide comprehensive information prior to the conclusion of the agreement so that the prospective franchisee can make an informed decision. However, the law contains no specific provisions regarding the financial settlement at the end of the partnership, and more specifically regarding goodwill.
Consequently, freedom of contract is the primary principle in Belgium. Whether a goodwill payment is due therefore depends on what the parties have agreed in their franchise agreement. In the absence of a contractual provision, a franchisee will only be able to enforce a payment in exceptional circumstances under general contract law.
Why does goodwill still deserve attention?
Although Belgian law does not provide for a statutory goodwill payment, this does not mean that goodwill is of no importance.
In practice, a franchisee often invests considerable resources over many years in developing their business. Where, following the end of the agreement, the franchisor continues to operate the same premises or immediately appoints a new franchisee who benefits from the established customer base, the question arises as to whether it is reasonable for the entire value of the business to flow to the franchisor without any compensation.
Consequently, there are increasing calls for a balanced contractual arrangement that examines the extent to which the goodwill was actually built up by the franchisee and the extent to which it stems from the franchise formula itself.
European trends towards fair compensation
At European level, there is a clear trend towards greater protection for the franchisee at the end of the partnership.
An important reference is the European Code of Ethics for Franchising, drawn up by the European Franchise Federation. Although this Code of Ethics is not a law, it is regarded in several Member States as an important standard of conduct within the sector. Although the European Code of Ethics for Franchising does not explicitly recognise a right to goodwill compensation, it emphasises that the franchise relationship must be governed by the principles of good faith, loyalty, fairness and transparency throughout the entire duration of the partnership (including the post-contractual phase).
The Belgian Franchise Federation also emphasises in its guidelines the importance of a balanced contractual relationship between franchisor and franchisee, with a focus on proper arrangements for, amongst other things, the transfer of a franchise business and the termination of the partnership. These guidelines are not binding, but they do illustrate the trend towards greater transparency and balance within franchise relationships.
It is also worth noting that some European countries have now gone further than Belgium. For example, since 2021, the Dutch Franchise Act has required franchise agreements to include provisions on how goodwill is determined. Although this provision does not apply in Belgium, it illustrates a broader European trend in which the franchisee’s economic contribution is receiving increasing legal recognition.
Tailored contractual provisions remain essential
As Belgian law does not provide for automatic goodwill compensation, a clear contractual provision is essential.
A well-drafted franchise agreement may, amongst other things, specify:
- how goodwill will be determined;
- whether an independent expert will value the goodwill;
- in which cases compensation is due;
- how that compensation is calculated.
Such an arrangement prevents disputes at the end of the partnership and creates legal certainty for both parties.
Conclusion
Belgian law currently does not recognise a statutory right to goodwill compensation upon the termination of a franchise agreement. However, this does not mean that goodwill is legally insignificant. On the contrary: economic reality, the European Code of Ethics, the guidelines of the Belgian Franchise Federation and legislative developments abroad demonstrate that there is a growing focus on the fair distribution of accumulated business value.
It is therefore advisable for both franchisors and franchisees to make clear arrangements regarding the allocation and any compensation for goodwill at the time the agreement is concluded. A well-thought-out contractual arrangement not only prevents disputes but also contributes to a sustainable and balanced franchise relationship.
