Buying a franchise: define the limits of confidentiality obligations

Anyone considering joining a franchise network needs information about its concept, finances and operating practices. The franchisor, meanwhile, wants to protect its know-how before sharing documents. A confidentiality agreement is a natural way to do this, but it should not prevent a prospective buyer from assessing the opportunity with professional advisers. Before signing, establish what the agreement protects, who you may share information with and which obligations will remain if you decide not to join the network.

1. Distinguish trade secrets from other confidential information

Finland has no specific franchising legislation or prescribed statutory procedure for pre-contractual disclosure in franchising. The relationship is governed by the contract and general legislation, including the Contracts Act, the Trade Secrets Act and the Unfair Business Practices Act. Nevertheless, information provided before a contract is signed must be sufficient and accurate, and must not be misleading.

Protection under the Trade Secrets Act does not arise simply because a document is marked ‘secret’. The information must meet the statutory requirements: among other things, it must be secret, have commercial value because it is secret, and be subject to reasonable steps by its holder to protect it. A franchisor’s detailed production method or non-public pricing calculations may meet these requirements.

However, a confidentiality agreement can also protect information that does not qualify as a trade secret under the Act. You therefore need to examine its definition of confidential information separately. Ask for it to specify, at a minimum, the categories of material protected, the permitted purpose of use and how confidential information disclosed orally will be identified.

Agree on exceptions too. It is reasonable to exclude information that is public, was demonstrably already in your possession, is lawfully obtained elsewhere or is independently developed without using the protected material. Where necessary, retain evidence of when and where you obtained the information.

Do not accept an ambiguous clause that effectively turns all your own experience into the franchisor’s property. It is important to distinguish general professional skills from the network’s protected know-how.

2. Make sure you can involve lenders and advisers

Your due diligence will be incomplete if you cannot show the material to a solicitor, accountant or bank. Permission to use information solely ‘for your own assessment’ does not necessarily settle whether you may disclose it to these parties. Ask for an explicit right to share necessary information with those helping you assess the purchase and arrange finance.

The agreement should address questions such as:

• Which advisers and lenders may receive the material?
• Are their professional duties of confidentiality sufficient, or is a separate undertaking required?
• May prospective business partners take part in the assessment?
• How is responsibility for these individuals’ conduct determined?
• Does sharing information require notification or the franchisor’s prior approval?

If approval is required, agree on a practical procedure and a response deadline. Otherwise, a loan application could be held up waiting for permission even while other negotiations move quickly. Always limit disclosure to what the recipient needs for their role.

For example, a bank may need financial projections and contractual terms, but not necessarily the entire operations manual. A solicitor, by contrast, needs the instructions and appendices that set out the buyer’s legal obligations. Separating the material by purpose helps both to protect the franchisor and to enable proper due diligence.

Also ensure that the confidentiality clause does not attempt to prevent disclosures required by law or the provision of information to a competent authority. Any requirement to notify the franchisor must be limited to circumstances in which notification is legally permitted.

3. Check restrictions on use and how long obligations last

Confidentiality and restrictions on using information are different things. An agreement may prohibit both disclosure of the material and its use for anything other than assessing whether to join the network. Such a restriction protects the concept, but its implications must also be clear to the buyer.

Pay particular attention to whether the confidentiality agreement contains other obligations. For example, it may prohibit contact with certain people or restrict particular business activities. These are not merely confidentiality provisions, and you should not accept them unwittingly as part of what is presented as a standard form.

Clarify how the agreement signed during negotiations relates to any subsequent franchise agreement. Will the later agreement replace the earlier confidentiality agreement, or will both remain in force? You should not be left with conflicting instructions on the use and retention of the same material.

There is no single duration suitable for every type of information. Genuine trade secrets may need long-term protection, whereas planning material that quickly becomes outdated may justify a different contractual term. Specify when the period begins and which obligations continue after negotiations end. Expiry of the contractual term does not, in itself, remove any protection available under the Trade Secrets Act.

4. Agree how material will be handled if you decide not to proceed

If you do not buy the franchise, the franchisor may require you to return or delete the material. Agree in advance whether this requirement also covers emails, notes, calculations and copies held by professional advisers. The requirement must be workable in practice.

Backups and statutory retention duties should be addressed separately. If necessary, negotiate a limited right to retain a securely stored archive copy to defend your rights or demonstrate compliance with obligations. Retaining information does not give you permission to use it in business.

Keep a simple record of the material from the assessment stage onwards: what you received, when you received it, who you shared it with and where it is stored. Restrict access to named individuals and avoid circulating material in unnecessary email or message threads. This will make any subsequent return or deletion manageable.

Practical takeaway: only accept a confidentiality agreement once you are satisfied that it allows you to assess the purchase, arrange finance and, if necessary, withdraw from negotiations. Clearly defined limits protect the franchise network’s know-how without forcing the buyer to make a decision in the dark.