Buying a franchise: what to check before signing a confidentiality agreement

Before showing you its operations manual, detailed costs or business procedures, a franchisor may ask you to sign a confidentiality agreement. Such an agreement serves a legitimate purpose: it protects the know-how on which the franchise network is built. However, it should not become an obstacle to assessing the investment or a disguised commitment to buy. Here is what to check before accepting the terms for access to confidential information.

1. Understand what the agreement protects and which rules apply

A confidentiality agreement, often called a non-disclosure agreement or NDA, sets out which information you may use, for what purpose and to whom you may disclose it. It may be a separate document or part of your application to buy a franchise. Signing a confidentiality agreement does not, in itself, mean that you have bought a franchise, but check whether the document contains any other obligations.

Croatia has no dedicated law comprehensively governing franchising, nor does it require a specific pre-contractual franchise disclosure document. Negotiations and contracts are governed by the Croatian Civil Obligations Act. Among other things, it covers good faith and fair dealing in negotiations and the protection of confidential information received during negotiations, even if no contract is subsequently concluded.

The Croatian Act on the Protection of Undisclosed Information with Market Value is also important. For information to qualify for trade secret protection under this Act, simply labelling it ‘confidential’ is not enough: it must meet the statutory conditions, including secrecy, commercial value arising from that secrecy, and reasonable measures to keep it secret. A contractual confidentiality obligation may cover a broader range of information, depending on the wording of the agreement and the limits imposed by law.

The European Code of Ethics for Franchising is a self-regulatory standard for the franchise community, not Croatian law. Referring to the code is no substitute for clearly agreed rights and obligations.

2. Define confidential information precisely

Avoid a definition that treats absolutely everything you have ever learnt about the brand as confidential, without limits on time or scope. It is reasonable to protect non-public recipes, working methods, supplier terms, manuals and internal business performance data. However, the document should make it possible to identify what is protected.

Ask for the agreement to specify how confidentiality will be indicated in documents, presentations and emails. For information disclosed orally, you could propose subsequent written confirmation of its confidential content. This reduces the scope for disputes about what was actually protected.

Common exceptions worth setting out expressly include information that:

• you already lawfully knew before receiving it;
• becomes publicly available without any breach of your obligations;
• you lawfully receive from a third party without a duty of confidentiality;
• you develop independently without using the protected materials.

Keep evidence of prior knowledge or an independent source if this could later be disputed. Also agree on the procedure where disclosure is required by law, a court or a competent authority. Any requirement to notify the franchisor in such circumstances should apply only where legally permitted.

3. Allow for meaningful due diligence

An agreement that allows only you to review the information but prohibits sharing it with a lawyer or accountant can make it much harder to reach a responsible decision. Before signing, ask for permission to disclose necessary information to professional advisers and, where appropriate, a bank or potential co-investor.

Define who these people may be, the purpose of their access and their obligations to protect the information. Check whether you are liable without limitation for everything they do, or whether your liability is more precisely defined. Do not assume that an adviser’s professional duty of confidentiality automatically overrides every contractual restriction on sharing information.

For example, an accountant assessing the investment may need non-public information about costs and fees, but not the entire operations manual. Limit access to what is necessary for the specific assessment.

If you are also providing non-public financial information, a site plan or a business plan, consider mutual confidentiality obligations. The General Data Protection Regulation also applies to personal data; a confidentiality agreement does not, by itself, provide a lawful basis for every use of that data.

4. Agree on duration, the consequences of a breach and withdrawal

Distinguish between the negotiation period and the duration of the confidentiality obligation. Trade secrets may need protection for as long as the information retains that status, while an appropriate contractual period should be considered for other materials. Do not automatically accept the same duration for every type of information.

Pay particular attention to contractual penalties, damages and liability for unintentional disclosure. A lawyer should assess the effect of these provisions under Croatian law, especially if the document provides for several consequences arising from the same breach.

Agree on what happens if you withdraw: the return or deletion of materials, the deadline for doing so, and any permitted retention of copies to meet legal obligations or protect your legal interests. Address backup copies too, rather than promising deletion that you cannot technically carry out.

Finally, check whether the document contains a hidden obligation to pay, negotiate exclusively or refrain from other business activities. These go beyond confidentiality and warrant a separate decision.

Practical takeaway: sign only once you know what you must keep confidential, whom you may share the information with and what you must do if you withdraw. A good agreement protects the franchise network’s know-how while leaving room for an independent assessment of the investment.