Buying a franchise: how to assess a non-compete clause

Joining a franchise network may involve more than a commitment to developing one brand. The agreement could also restrict your other business activities, investments or work with other companies. Do not treat a non-compete clause as a routine legal formality. Before buying a franchise, you need to understand which activities it prohibits, who it binds and whether its scope is proportionate to what it is intended to protect.

1. Start by separating know-how protection from restrictions on doing business

A franchisor has a legitimate interest in protecting the know-how it shares and the franchise network’s common identity. That does not mean every restriction on other income-generating activities is necessary or legally permissible. In particular, distinguish between confidentiality obligations, restrictions on using confidential processes and the non-compete obligation itself. Each addresses a different situation.

Confidentiality obligations, for example, prevent the disclosure of non-public recipes or business processes. A non-compete clause may prohibit you from running a similar business at all, even if you do not use any confidential information in it. If the agreement conflates these obligations, ask for them to be defined separately.

The Czech Republic has no specific franchise legislation. A franchise agreement is usually an agreement of a type not specifically defined by statute, governed by Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Section 2975 of the Code is also relevant to non-compete clauses, addressing their scope and disproportionate restrictions. Act No. 143/2001 Coll., on the Protection of Competition, also applies, as may EU competition law, depending on the circumstances.

Czech law does not require a special registration procedure for franchise agreements or a mandatory franchise disclosure document. General pre-contractual duties to provide information do apply, however. The European Code of Ethics for Franchising is a self-regulatory code, not Czech legislation; you need to check whether it is binding in your particular relationship.

2. Work out how the contractual restriction applies in practice

Ask for a precise explanation of what “competing activity” means. Overly broad wording could cover not only a direct competitor to the brand, but also a complementary service or a venture you already run. Assess the actual wording of the agreement, rather than relying solely on verbal assurances from a sales representative.

Use the following questions as a checklist:

• Activity: Which products and services are prohibited? Is the restriction based on what the business actually offers, or on a broadly worded description of its business activities?
• Territory: Does the restriction cover the area around the outlet, the whole Czech Republic or other countries too?
• Duration: Does the restriction apply during the relationship, after it ends or both?
• Involvement: Does it prohibit only running your own business, or also employment, consultancy and ownership interests?
• People and entities: Does it bind your company, you personally, or require you to ensure that others behave in a particular way?

Check online sales separately. A territorial restriction that makes sense for a physical outlet may be unclear when applied to an online shop. Ask whether the deciding factor is where the business is based, where the customer is located or where the offer is targeted.

For example, someone considering a coffee shop franchise may already own a bakery. They need to establish whether they can continue selling coffee, supply baked goods to other cafés or open their own collection point. The answer should be recorded in the agreement or a schedule to it.

3. Do not assume that signing a clause makes it legally permissible

A non-compete clause is not automatically acceptable simply because every member of the network uses it. A lawyer needs to assess its wording, commercial context and proportionality. A key question is whether the restriction goes beyond what is needed to protect the franchisor.

Under EU competition law, Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements is particularly relevant. It distinguishes between non-compete obligations during the agreement and those applying after it ends. Obligations of indefinite duration or lasting more than five years generally warrant closer scrutiny; the rules include exceptions and specific conditions. Exceeding that period therefore does not, in itself, make a clause automatically invalid.

For post-contractual non-compete obligations, the block exemption sets narrow conditions. Among other things, the restriction must be indispensable to protecting the know-how transferred, limited to the premises and land from which the franchisee operated, and last no longer than one year. Failure to meet the exemption’s conditions does not in itself make the restriction unlawful, but it does require an individual assessment under competition law. Longer-term protection of confidential know-how is a separate issue from a prohibition on doing business.

4. Negotiate exceptions before signing

List your current business activities, shareholdings and specific planned ventures. Give the franchisor a factual description of them and ask for express exceptions in the agreement. A general statement that “your existing activities are not a problem” may not cover their later expansion.

You could negotiate permission to keep an existing outlet, make specified supplies to other businesses or hold passive investments without influence over the management of a competing company. If another activity requires the franchisor’s consent, the agreement should set out the application process, the deadline for a response and the grounds on which consent may be refused. Do not treat silence as consent unless this has been agreed.

Practical takeaway: Before signing, obtain written confirmation of what you can do alongside the franchise. A precisely defined restriction and specific exceptions are safer than relying on the hope that nobody will enforce a broadly worded clause later.