Buying a franchise: scrutinising the non-compete clause

Joining a franchise network means protecting shared know-how. But that protection can also limit your freedom to run a business, particularly after you leave. Before buying a franchise in France, assess the non-compete clause as a financial commitment: will you be able to continue in your line of business, keep your premises or join another brand when the agreement ends?

1. Identify every restriction, whatever its heading

A non-compete clause prohibits certain competing activities. During the agreement, it may prevent you from running a rival business at the same time. After the agreement expires or is terminated, it may restrict your ability to continue a similar activity, even without using the brand you have left.

A non-affiliation clause is aimed more specifically at joining a competing network. It may allow you to trade under an independent brand while prohibiting you from joining another franchise network. However, its heading alone does not determine how it is treated in law: its actual effects matter.

Look for these restrictions in the agreement, its appendices and any personal undertakings required of the company director. For each one, note:

• who is covered: the franchisee company, its director or shareholders who have signed the undertaking;
• the prohibited activities and any exceptions;
• the geographical area or premises covered;
• the duration and when it starts;
• the penalties provided for.

Wording such as “any activity that competes directly or indirectly” needs written clarification. Ask, for example, whether a financial stake in another business or a complementary activity falls within the prohibition.

2. Understand the applicable French rules

France has no single statutory framework governing every aspect of a franchise agreement. General contract law, commercial law and competition law apply, alongside certain specific rules.

Pre-contractual disclosure is governed in particular by Articles L. 330-3 and R. 330-1 of the French Commercial Code, under the framework known as the “Doubin Law”. Where the statutory conditions are met, the pre-contractual disclosure document and draft agreement must be supplied at least twenty days before signing or making any advance payment. Use this period to have the proposed restrictions reviewed.

For certain network agreements involving the operation of a retail shop, Article L. 341-2 of the French Commercial Code governs restrictions that apply after the agreement ends. Within the scope defined by Article L. 341-1, a clause restricting the operator’s freedom to carry on a business is treated as if it had not been written unless it meets all four of the following conditions:

• it concerns goods or services that compete with those covered by the agreement;
• it is limited to the land and premises from which the business operated during the agreement;
• it is indispensable to protecting substantial, specific and secret know-how transferred under the agreement;
• it lasts no longer than one year after expiry or termination.

A one-year duration alone therefore does not make a clause valid. The other conditions must also be met. This framework should not be applied indiscriminately to every franchise, particularly service businesses: ask a lawyer to check whether it applies and which other rules are relevant.

3. Calculate the practical cost of the restriction

An apparently short restriction can have significant consequences if your commercial lease continues after the franchise agreement ends. You could have to pay for premises without being able to carry on your intended activity there under your own brand.

Develop three scenarios: leaving when the agreement expires, early termination and continuing independently. For each, identify what would remain permitted, which costs would continue and what changes would be needed. Ask your accountant to estimate the cost of a trading interruption or a switch to a different business activity, without assuming that you could immediately achieve the same turnover.

Also examine any contractual penalty clause, potential claims for damages and the risk of legal action to stop you trading. A potentially unenforceable clause is not, in practical terms, a licence to ignore it: a dispute can be costly even before its validity has been decided.

4. Secure clear limits before signing

Ask for a concrete definition of the prohibited activities rather than a general reference to any form of competition. Have any permitted pre-existing activities specified, along with the consequences of changing your business activity during the agreement.

For the period after the agreement ends, insist on a clearly identifiable scope and an unambiguous start date. If the restriction can be waived, specify who can grant the waiver, in what form and within what timeframe. Do not rely on verbal assurances that the clause is “never enforced”.

Every amendment must be included in the signed documents. Legitimate protection of know-how can remain in place without justifying every conceivable restriction on your future business activities.

Key takeaway: before committing, have a summary drawn up setting out what will be prohibited, where, for how long and for whom. Then have its legal compliance checked and assess its cost under your planned exit scenario.