Trade Secrets in Franchising: Protecting Know-how Before Expansion

When you turn an existing business into a franchise, you pass on more than a name and the look of an outlet. You share experience: how to prepare a product, organise work or avoid costly mistakes. For a franchise network to thrive, that know-how must be accessible enough to support day-to-day operations, yet protected against unauthorised use. Before presenting your concept for the first time, distinguish between what you show publicly, what you disclose to a prospective franchisee and what you provide only once an agreement has been signed.

1. Identify what genuinely qualifies as a trade secret

Not every piece of internal information is a trade secret. In Croatia, the relevant legislation is the Act on the Protection of Undisclosed Information with Market Value. To qualify for legal protection, information must be secret, have commercial value because it is secret, and be subject to reasonable measures taken by its lawful holder to keep it secret.

This means that simply marking something ‘confidential’ is not enough. If you freely send a detailed recipe to anyone who requests a proposal, it will be difficult to demonstrate that you have genuinely protected it. Likewise, a process that a customer can easily observe during a visit to an outlet is not automatically secret.

Make a list of the know-how that gives a future franchisee a practical advantage. Examples include:

• recipes, proportions and specialist preparation methods;
• internal calculations and costing models;
• undisclosed terms agreed with suppliers;
• diagnostic, organisational or troubleshooting procedures;
• development plans that have not yet been made public.

For each item, record who owns the information, where it is stored, who needs it and the consequences of unauthorised disclosure. Also check whether you are entitled to share it: documents supplied by a supplier or external contractor may contain someone else’s confidential information.

The practical outcome of this step is a register of confidential know-how, rather than a blanket statement that everything in the business is secret.

2. Disclose know-how in stages, without concealing risks

Prospective franchisees must understand what they are buying and the obligations they are taking on. Protecting trade secrets is no justification for withholding essential information about the investment, fees, restrictions or underlying assumptions of the business model.

In public presentations, describe the benefits of the system without necessarily revealing every technical detail. For example, you can explain that standardised preparation makes work easier to organise without publishing the exact proportions of ingredients.

For serious discussions, use the following sequence:

1. Initial discussion: an overview of the concept, the requirements of the franchise relationship and an outline of what the franchisee will receive.
2. Detailed assessment: relevant business information, supported by a confidentiality agreement and controlled access to documents.
3. Signing and operational preparation: transfer of operational know-how according to agreed timescales and access permissions.

The confidentiality agreement should allow prospective franchisees to consult a solicitor and an accountant, subject to appropriate confidentiality obligations. It should also provide exceptions for publicly available data, lawfully obtained information and disclosures required by law or a competent authority.

Keep a record of what you have shared, with whom and when. If a prospective franchisee withdraws, revoke their access and arrange for documents to be returned or deleted, with justified exceptions for statutory retention requirements and establishing legal rights.

3. Align the agreement with Croatia’s legal framework

Croatia has no dedicated law comprehensively governing franchising, nor a specific statutory regime requiring a franchise disclosure document and a standard period for reviewing it. This does not mean that negotiations and the exchange of know-how are unregulated.

The Civil Obligations Act is relevant to negotiations, contractual obligations and liability for breaches. It also contains rules on confidential information supplied during negotiations. Specific protection for trade secrets is provided by the legislation mentioned above, while restrictions within a franchise relationship should be checked against the Competition Act and applicable European Union rules.

Clearly define in the agreement the permitted purpose for which the know-how may be used. For example, the recipient may use it to operate the franchise outlet covered by the agreement, but may not pass it on to unrelated businesses. Set out rules for access by employees and external contractors, incident response and obligations after the relationship ends.

Tailor the duration of confidentiality obligations to the nature of the information: a genuine trade secret may need protection for as long as it meets the legal criteria. Do not confuse confidentiality with a non-compete obligation. A restriction on trading after the agreement ends is a separate legal issue and does not become permissible simply because it is labelled as protection of know-how.

4. Demonstrate protection through day-to-day practice

A contractual clause offers limited help if everyone shares the same login and documents are forwarded without control. Reasonable protective measures should reflect the value of the information and the way the outlet operates.

Give users individual access and restrict it according to their roles. An employee should receive the instructions needed to do their job, but not necessarily the franchisor’s full costing details. Mark sensitive documents, track their versions and make it possible to revoke access promptly when an employee leaves or their responsibilities change.

Before sharing know-how for the first time, check whether you can answer three questions: who has access, to which version, and under which confidentiality obligation? If the answer depends on one person’s memory, the system is not yet ready.

Practical takeaway: before expanding, draw up a register of secret know-how, a disclosure schedule and access rules. Then work with a solicitor to align your agreements with these arrangements: consistent practice protects a trade secret, not a signature alone.