Buying a franchise: examining non-compete clauses

Joining a franchise network means sharing methods and protecting know-how. But could that commitment prevent you from continuing in your line of business after you leave? Before buying a franchise in France, examine the non-compete and non-affiliation clauses: they can affect your professional future and the value of your business.

1. Identify every restriction, not just its heading

A non-compete clause prohibits certain competing activities. A non-affiliation clause generally restricts joining a competing network. Their effects depend on their wording, however, not on the label chosen by the franchisor.

Distinguish between obligations that apply during the contract and those that survive its termination or expiry. A restriction that applies while you operate the franchise is not assessed in exactly the same way as a ban that applies after you leave. Look for confidentiality clauses too: protecting secret know-how does not necessarily mean prohibiting all activity in the same line of business.

Ask for the full draft agreement, its appendices and any separate undertakings intended for the company director or shareholders. For each restriction, note:

• who is bound: the operating company, the director or the shareholders;
• which activities are prohibited, including shareholdings in other businesses;
• the locations covered and the duration of the restriction;
• the triggering events: expiry, termination or sale;
• the penalties and any options for obtaining a written release.

Wording that covers any activity that is ‘directly or indirectly competing’ needs precise clarification. Ask for a description of the activities actually covered rather than relying on verbal assurances.

2. Understand the French legal framework

In France, franchising is governed by general contract law and competition law, alongside specific pre-contractual disclosure rules. Article L. 330-3 of the French Commercial Code, introduced by the legislation known as the Doubin Law, requires, where its conditions are met, a pre-contractual disclosure document and draft agreement to be supplied at least twenty days before signing or making any advance payment. Article R. 330-1 specifies the information to be provided.

This period should be used, among other things, to examine contractual restrictions. It does not mean that every clause presented to a prospective franchisee is legally valid.

For contracts falling within the scope of Article L. 341-1 of the French Commercial Code, notably those relating to the operation of a retail shop within a network, Article L. 341-2 governs restrictions after the contract ends. Clauses restricting the freedom to carry on a business are, in principle, deemed unwritten and therefore unenforceable, unless the party relying on them demonstrates that all four of the following conditions are met:

• they concern goods or services that compete with those covered by the contract;
• they are limited to the land and premises from which the business operated;
• they are essential to protect substantial, specific and secret know-how transferred under the contract;
• they last no longer than one year after expiry or termination.

A one-year duration alone is therefore not enough to make a clause valid. Nor should this framework automatically be assumed to cover every service franchise. Ask a lawyer to check its scope and any other relevant French or European rules.

3. Test the consequences for your plans

Turn each clause into a practical scenario. At the end of the contract, could you keep your premises and offer different products or services? Join another franchise network? Sell your business to an entrepreneur who wants to trade under a different brand?

Ask your legal adviser to distinguish between what appears to be permitted, prohibited or uncertain. Do not assume that switching to a different company or having a relative run the business would lawfully get around the undertaking.

Then work with your accountant to calculate the consequences of a break in trading or a change of business activity: ongoing costs, conversion work, replacement equipment and any potential loss in resale value. The aim is not to plan for failure, but to avoid having the value tied up in your business depend on a single possible outcome.

Also ask former franchisees about the practical arrangements for their departure, without asking them to disclose confidential information. Their experiences can shed light on how things work in practice, but they are no substitute for an analysis of your own contract.

4. Negotiate before committing

If a restriction goes beyond what your plans can accommodate, request a written amendment: a more precise definition of the activities covered, a narrower scope, a shorter duration or a mechanism for lifting the restriction in certain circumstances. Check that the agreement and any accompanying personal undertakings are consistent.

Do not automatically apply employment contract rules: a commercial clause does not necessarily entitle you to financial compensation comparable to that available to an employee.

Finally, do not sign in the hope that a court will later invalidate the clause. Even a clause whose validity can be challenged may lead to costly litigation and delay your move into another business activity.

Key takeaway: before signing, ask for a written answer to this question: ‘What will I actually be allowed to do after I leave?’ Then check that this freedom matches your business plans.