Franchise non-compete clauses: what to check before you buy

Buying a franchise can limit not only how you run the outlet, but also your involvement in other businesses. Non-compete clauses deserve attention before you choose a brand, particularly if you already run a business or intend to maintain another source of income. Protecting a franchise network’s know-how and standards is important; understanding the scope of that protection is equally essential to making an informed decision.

1. Understand what the law requires franchisors to disclose

In Brazil, Law No. 13,966/2019, known as the Franchise Law, governs business franchising. Article 2 requires the franchise disclosure document, known locally as the Circular de Oferta de Franquia (COF), to provide information about restrictions on competition.

Item XXI covers rules limiting competition between the franchisor and franchisees, and among franchisees themselves, during the term of the agreement. These rules must specify the geographical scope, the duration of the restriction and the penalties for non-compliance.

Item XIV requires disclosure of the franchisee’s position after the agreement ends regarding the establishment of a competing business and the use of know-how, confidential information and secrets accessed through the franchise.

The duty to disclose does not mean that every restriction is automatically valid. That assessment depends on the wording, purpose and specific circumstances. The law does not set a universal non-compete period that applies across all franchise networks.

Ask your lawyer to review the COF alongside the standard agreement and its annexes. Do not accept a claim that the clause is ‘standard market practice’ as a sufficient answer.

2. Define what counts as competition

The main risk often lies in broad expressions such as ‘similar activities’, ‘direct or indirect involvement’ or ‘related businesses’. Without a clear definition, an activity you regard as complementary could be treated by the franchisor as competition.

Turn the clause into specific questions:

• Which products, services and business models are covered?
• Does the restriction apply only to running another business, or also to holding an ownership stake without a management role?
• Does it include working for another business as an employee, consultant or service provider?
• How does it address e-commerce, remote services and sales outside the town or city where the outlet is based?
• Does the wording refer to associated companies, family members or businesses in which you already hold a stake?

If family members or third parties are mentioned, ask for a specific assessment of who actually takes on obligations and which actions on your part could constitute a breach. Do not assume that people who do not sign the agreement are automatically bound by it.

Confidentiality and non-competition are separate obligations. Protecting a confidential manual is different from being barred from working in a particular field. Identify each duty separately, including its duration and the consequences of a breach.

3. Compare the restriction with your financial circumstances

Before proceeding, draw up an inventory of your activities: businesses, ownership stakes, consultancy work, employment and projects in development. Include any businesses you intend to keep running while the franchise is not yet generating sufficient income.

For each activity, note any potential conflict with the clause and request written clarification from the franchisor. If you are authorised to retain an existing business, ask for that exception to be incorporated into the contractual documents, with enough detail to avoid conflicting interpretations.

Also assess the geographical scope and duration. A nationwide ban deserves particular attention if your professional work depends on serving clients across different Brazilian states. For digital activities, ask how the location of competition is determined: by the business address, the customer’s location or the area served.

Calculate the impact of any income you would have to give up. This loss is not a franchise fee, but it forms part of the economic cost of your decision. Check whether the consequences of a breach include a contractual penalty, a demand to cease the activity and possible damages, and ask your lawyer to examine how these consequences interact.

4. Resolve ambiguities before committing

Prepare a short list setting out the current wording, your query and the amendment requested. Prioritise definitions of competing activities, the people covered, territory, duration, exceptions and the consequences of non-compliance.

Compare the responses with the final version of the agreement. Verbal permission does not remove the risk posed by contractual wording that contradicts it. If there is a material change, your lawyer should assess whether the documentation needs updating and what this means for entering into the agreement.

The COF must be provided at least ten days before the agreement or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. This is a minimum advance disclosure period, not a deadline for completing your assessment.

In practice: proceed only when you can explain, in plain language, which activities you may continue, which will be prohibited and for how long. If the restriction jeopardises your income or professional plans, renegotiate before signing.