Non-compete clauses in franchising: what to assess before buying

Buying a franchise can restrict not only the business you are about to open, but also your other professional and business activities. The non-compete clause deserves close attention before you make any commitment: it may affect existing investments and your plans for after the agreement ends. Protecting shared know-how matters in franchising, but prospective franchisees need to understand exactly which restrictions they are accepting.

What Brazil’s Franchise Law requires franchisors to disclose

In Brazil, business-format franchising is governed by Law No. 13,966/2019. Article 2 requires the Franchise Disclosure Document (known by its Portuguese abbreviation, COF) to provide information relevant to assessing non-compete restrictions at two different stages.

Item XV addresses the franchisee’s position after the agreement ends, including their position regarding the know-how received and the establishment of a competing business. Item XXI requires information on rules restricting competition between the franchisor and franchisees, and among franchisees themselves, during the agreement, with details of their geographical scope, duration and penalties.

The law does not set a single duration or geographical radius that automatically makes every clause valid. Each assessment also involves the general rules of Brazil’s Civil Code, such as good faith and limits on the exercise of rights. Finding the restriction in the COF is therefore not the end of the review: you also need to examine its wording in the agreement.

The COF must be provided at least ten days before you sign the agreement or a preliminary agreement, or pay any fee to the franchisor or a person or company connected with it. Use this minimum period to review the restrictions with a lawyer; it is not a deadline for making your decision.

Define what will count as competition

Phrases such as “similar activity”, “related business” or “direct or indirect involvement” can create significant uncertainty. Before accepting the clause, ask for a clear definition of the prohibited activity and examples of the situations it covers.

Consider someone who already runs a cosmetics shop and wants to buy a beauty services franchise. A blanket ban on operating in the “beauty market” could affect their existing business, even though the two operations offer different things.

Structure your review around four questions:

• Activity: which products, services and business models are covered?
• Type of involvement: does the restriction cover management, consultancy, employment or a shareholding with no operational involvement?
• People: which obligations apply to the franchisee company, its shareholders and other signatories?
• Exceptions: will existing businesses and investments be expressly exempted?

Do not assume that mentioning family members in the agreement automatically makes an obligation enforceable against them. Ask your lawyer to identify who actually undertakes each commitment and what liabilities may fall on the franchisee.

If the franchisor accepts an existing activity, record that permission in the appropriate contractual document. Verbal agreement from a sales representative does not offer the same protection as a clearly documented exception.

Assess duration, territory and the impact on your livelihood

Separate restrictions that apply while the franchise is operating from those intended to apply after the agreement ends. They may have different purposes and consequences, and should not be assessed as though they were a single obligation.

For the post-contract period, check when the restriction starts and which events trigger it. Does the wording treat expiry, non-renewal and other ways of ending the agreement in the same way? Is there any ambiguity about the start date?

Next, examine the territory. A reference to the “area in which the brand operates” may create uncertainty if the network continues to expand. Ask for clearly identifiable boundaries and clarify how the restriction will apply to online sales, remote services and customers in other towns and cities.

Also consider your own circumstances: if the franchise ends, which activities will still be available to you to earn a living? List your professional experience, other businesses and future projects. A clause can have a substantial impact even without triggering a financial penalty, simply by preventing you from using your main professional skills.

The aim is not to remove all protection for the franchisor, but to check that the obligation has clear limits and is compatible with the commitment you can make.

Check the consequences and negotiate before signing

Read the clause alongside the provisions on contractual penalties, confidentiality and dispute resolution. Find out how any penalty is calculated, whether the agreement allows repeated penalties, and whether it provides for requiring you to stop the competing activity.

Distinguish confidentiality from non-competition. Protecting confidential information does not, in itself, amount to a ban on all work in the same sector. If the agreement combines these obligations, ask for clarification and more precise wording.

Prepare a list of proposed changes: the definition of the activity, exceptions for existing businesses, geographical limits, duration and the consequences of a breach. Check that all agreed points appear in the final version, without contradicting any schedules or annexes.

In summary: before buying, map out the activities you will be allowed to carry out during and after the franchise relationship. If that picture is unclear, clarify and negotiate the clause before committing to the obligation.