Buying a franchise: check the non-disclosure agreement

A prospective buyer considering joining a franchise network needs confidential information before making a decision. The franchisor or the seller of an existing franchise business may therefore ask for a non-disclosure agreement (NDA) early in the negotiations. This is a legitimate way to protect financial information and trade secrets, for example, but its terms can also make it harder to assess the business. In particular, check whether you can use the material to seek finance and share it with your own advisers.

1. Define what is protected and how the information may be used

The purpose of an NDA is to protect information disclosed during negotiations, not to replace the franchise agreement itself. The document should clearly identify the proposed transaction, the parties involved and the purposes for which the information is being provided.

When you buy an existing franchise business, the seller and the franchisor may be separate parties. An agreement with the seller does not, in itself, give the seller the right to disclose the franchisor’s confidential material. Ask for clarification on what information the seller can provide and what you will receive directly from the franchisor. This helps ensure that key documents are not left unexamined because the parties’ authority to disclose them is unclear.

Specify permitted purposes such as assessing the proposed business acquisition and franchise relationship, arranging finance and preparing for the transaction. Permission merely to ‘review the material’ may leave unnecessary room for interpretation.

Check at least the following points:

• Which documents, oral disclosures and electronic materials are covered by the confidentiality obligation?
• How will confidential information disclosed orally be identified afterwards, if necessary?
• Are public information, information already lawfully in your possession and independently developed information excluded from the obligation?
• What happens if disclosure is required by law or by an order from a public authority?

Information does not always need to be specifically marked as confidential to warrant protection. Nevertheless, the agreement should give you a clear, practical way to identify confidential material.

2. Ensure your advisers and lender can access the information

Due diligence loses much of its value if you can see the figures but cannot show them to your accountant, lawyer or lender. Agree who may receive the material before you start sharing it. Do not assume that an adviser’s own duty of confidentiality is enough to satisfy your contractual obligations as the buyer.

Permitted recipients can be defined by their role: legal and financial advisers, lenders and potential investors. Even so, not everyone needs access to everything. Agree that information will be shared only to the extent necessary to assess the proposal and subject to appropriate confidentiality arrangements.

Also establish whether the seller requires a separate undertaking from each recipient. A lender may not accept the seller’s standard agreement unchanged. If this is only addressed when the loan application is being processed, the entire purchase timetable could be delayed.

Pay attention to liability for other people’s actions. If a clause makes you liable without limit for everything done by every recipient, your liability may extend beyond what you can realistically control. Ask a lawyer to assess its scope and negotiate clear limits.

Agree separately on contact with staff, customers and other franchisees in the network. The seller may reasonably wish to control how news of the proposed sale is shared. However, a blanket ban on contact could prevent important checks. One solution is an agreed interview process in which the seller arranges contact but the buyer can ask their own questions.

3. Distinguish statutory protection from additional contractual obligations

Finland has no franchise-specific legislation, franchise agreement registration system or statutory requirement for a standardised franchise disclosure document. The Finnish Contracts Act and Trade Secrets Act are particularly relevant when assessing confidentiality obligations. The Unfair Business Practices Act also prohibits conduct contrary to good business practice and misleading statements.

Protection under the Trade Secrets Act does not depend solely on a document being labelled confidential. The definition of a trade secret includes factors such as the information being secret, having commercial value because it is secret, and being subject to reasonable protective measures by its holder. An NDA, meanwhile, may also cover information that does not qualify as a trade secret under the Act. This makes the agreement’s wording important.

Confidentiality does not justify giving the buyer misleading information. Nor does it demonstrate that the figures supplied have been verified or that everything material to the decision has been disclosed. Distinguish between your right to use the material and the provider’s responsibility for its content.

Under the Contracts Act, an unreasonable contractual term may, in certain circumstances, be adjusted or set aside. However, relying on this is not a sound negotiating strategy. You should not assume that consumer protection will apply to an acquisition made for business purposes. The franchise sector’s codes of ethics do not replace the law or an agreement reviewed for your particular circumstances.

4. Limit the consequences of a breach and agree what happens after negotiations

Check whether the document includes a non-compete clause, recruitment restrictions, exclusive negotiation rights or an obligation to proceed with the purchase, as well as confidentiality provisions. Such terms go beyond protecting information and should not be accepted unnoticed as part of an NDA.

If a breach triggers a contractual penalty, establish exactly what triggers it. Could a single disclosure be treated as several breaches? Could you have to pay damages in addition to the penalty? Also assess your liability if material is accidentally sent to the wrong recipient.

Agree how long confidentiality obligations will last and how material will be returned or deleted if the proposed transaction does not proceed. Different categories of information may need different periods of protection. At the same time, clarify whether advisers may retain archive copies to meet their own obligations and how backups will be handled. Any retained material can remain subject to confidentiality obligations.

Use a controlled-access storage location to share material and keep a record of recipients. If the acquisition will be made through a company that has yet to be incorporated, also agree how that company will gain access to the information and whether your personal liability will continue.

Practical summary: sign the NDA only once you are satisfied that it allows you to assess the business, seek finance and use advisers without uncertainty over your liability.