Buying a franchise: check non-compete clauses in the agreement

People buying a franchise often already have professional commitments, stakes in other companies or business ideas of their own. A non-compete clause can significantly restrict these activities, even if the new business appears commercially independent of them. Within a franchise network, protecting know-how and shared concepts is understandable. What matters, however, is which activities the agreement actually prohibits and how much freedom you retain during the relationship.

1. Distinguish non-compete clauses from restrictions on outside activities

A non-compete clause is intended to prevent you from competing with the franchise network by offering rival products or services. A restriction on outside activities may go further: it can also cover activities unrelated to the franchise offering. The two types of clause should therefore be reviewed separately.

Do not just search the draft agreement for the word ‘competition’. Restrictions may also appear under headings such as ‘duty of loyalty’, ‘conflicts of interest’, ‘shareholdings’ or ‘other business activities’. Check any appendices incorporated into the agreement too.

For each provision, clarify four questions:

• Which products and services are covered? Only those that compete directly, or a broadly defined business sector?
• Which activities are covered? Running your own business, consultancy, employment, acting as an intermediary or holding a stake in another company?
• Where does the restriction apply? Within your location’s catchment area, throughout Germany, or also to digital offerings with no regional boundaries?
• Who is bound by it? You personally, the company operating your franchise, or additional people under separate agreements?

A contractual clause does not directly bind family members simply because it mentions them. However, it may impose obligations on you concerning their activities. Such wording deserves particular legal scrutiny.

2. Understand the limits under German and EU law

Germany has no dedicated franchise legislation and no government franchise register. Franchise agreements combine elements of several types of contract. Restrictions on competition are governed in particular by the German Civil Code (BGB), the Act against Restraints of Competition (GWB) and, where applicable, EU competition law.

Pre-drafted clauses may be subject to review under the rules on standard terms and conditions in sections 305–310 BGB. Even in business-to-business dealings, unclear terms or provisions that cause an unreasonable disadvantage may be invalid, although the assessment differs from that for consumer contracts. The principle of good faith under section 242 BGB also plays a role.

From a competition law perspective, particular attention should be paid to section 1 GWB and, where trade between EU Member States may be affected, Article 101 of the Treaty on the Functioning of the European Union (TFEU). The EU Vertical Block Exemption Regulation, Regulation (EU) 2022/720, can exempt certain agreements from the prohibition on anti-competitive agreements if its requirements are met. These generally include market share thresholds of 30 per cent each for the supplier and the buyer, alongside other conditions.

The frequently misunderstood five-year limit is important: non-compete obligations of indefinite duration or lasting more than five years are generally excluded from this block exemption. That does not automatically make them invalid, however. Exceptions and an individual legal assessment may be relevant. Renewal provisions also require closer scrutiny.

In franchise agreements, restrictions necessary to protect transferred know-how or preserve the network’s common identity may also be assessed differently under competition law. Have an adviser examine not just the duration, but also the purpose, scope and actual necessity of the specific clause.

3. Disclose existing activities before signing

Draw up an inventory of your professional and business activities. Include dormant companies, consultancy engagements, online offerings and stakes in other companies. Distinguish between holdings that allow you to exercise active influence and purely passive investments.

For example, suppose you want to open a fitness franchise and already offer online exercise classes as a self-employed instructor. The fact that these classes take place outside the gym does not automatically mean they fall outside the non-compete clause. The target audience, the content of the service and the contractual definition of competition may all be decisive.

Describe these activities precisely: what you offer, your customer group, sales channels, scale and your role. Ask in writing whether you may continue them. Material information about your professional circumstances must be truthful during contract negotiations; which information you must disclose without being asked depends on the circumstances.

Do not rely on statements such as ‘others do it too’. A tolerated practice does not give you a secure individual exemption. Nor is verbal consent a substitute for a properly agreed contractual provision.

4. Agree clear exemptions and consent procedures

If you want to retain an existing activity, negotiate an express exemption in the agreement or in a supplementary agreement clearly linked to it. Describe the permitted activity precisely enough to avoid later disputes over its limits.

For future ventures, a clear consent procedure is helpful. Wherever possible, agree:

• what information an application must contain;
• the deadline for a decision;
• the objective grounds on which consent may be refused;
• whether consent, once granted, can be withdrawn and under what conditions.

Do not treat silence as consent unless this has been expressly agreed. Also clarify what happens if you later expand your offering, or the franchise expands its own. Otherwise, an activity that initially caused no conflict could unexpectedly become a source of dispute.

Finally, assess the financial impact: which existing income streams would you have to give up? Which shareholdings would you need to dispose of? These consequences should form part of your purchasing decision, even though they do not involve paying a franchise fee.

Practical takeaway: disclose your existing activities, obtain expert advice on the scope and enforceability of the non-compete clause, and secure any necessary exemptions in writing before signing.