Hong Kong Franchise Non-Compete Guide: Know What Business You Can Do After Leaving

When buying a franchise, you need to consider more than whether the brand can bring in business. Ask yourself: once the relationship ends, will you still be able to use your experience to earn a living? A franchise network needs to protect its confidential information and goodwill, but an overly broad non-compete clause could also catch work or investments that do not compete directly with the brand. Assess this risk before paying, rather than waiting until you leave.

1. Understand the law: signing does not guarantee enforceability

Hong Kong has no legislation specifically governing the offer and sale of franchises, nor any mandatory pre-sale disclosure or registration regime specifically for franchises. General business registration and applicable licensing requirements must still be met, however. The absence of franchise-specific legislation does not mean that agreements fall outside the law.

Non-compete restrictions primarily engage the common law doctrine of restraint of trade. A brand cannot assume that any restriction will be enforceable simply because it does not want a franchisee to become a competitor. Courts will consider whether the brand has a legitimate interest to protect, such as confidential information or customer connections, and whether the restriction goes beyond what is reasonably necessary, while also taking the public interest into account. Duration, geographical scope, the range of business activities covered and the circumstances of the relationship may all affect the assessment.

The Competition Ordinance (Cap. 619) may also apply. Its First Conduct Rule prohibits agreements and certain other conduct that have the object or effect of preventing, restricting or distorting competition in Hong Kong. Whether a non-compete clause breaches the rules requires an assessment of its terms, market conditions and any applicable exclusions or exemptions. Non-compete restrictions are not automatically unlawful, but nor are they lawful simply because both parties have agreed to them.

Enforceability under common law and compliance with competition law are two separate questions that need to be examined independently. Do not sign on the assumption that an excessively harsh clause will inevitably be invalid. Even if you ultimately defend a claim successfully, you may still face an injunction application, legal costs and delays to your new business while the dispute is ongoing.

2. Break the restrictions into four parts and check each one

Ask the franchisor for the full agreement and all relevant schedules, then summarise the non-compete provisions in a one-page checklist. Pay particular attention to whether definitions elsewhere in the agreement significantly widen what appears to be a short restriction.

• Who is restricted: Does the clause bind only the company signing the agreement, or must directors, shareholders or guarantors give separate undertakings? Does the agreement require you to ensure that associated companies do not compete? Do not assume that operating through another company will avoid liability.
• Restricted activities: Does the clause prohibit only the operation of a directly competing outlet, or does it also cover employment, consultancy work, lending and passive shareholdings? Wording such as “direct or indirect involvement in a similar business” needs particularly clear definition.
• Geographical scope: Does the restriction cover the area around the original outlet, the whole of Hong Kong or every location where the brand operates? If the restricted area is measured from the brand’s outlets, ask whether new outlets could expand it in future.
• Duration and starting point: Does the restriction apply during the agreement, or continue after expiry, non-renewal or early termination? Is the starting date clear? Are there provisions that purport to extend the restriction following a breach?

Do not judge a clause solely on whether “one year” or “nearby” sounds reasonable. The same duration, combined with different geographical limits and definitions of restricted activities, can have very different consequences for your future work. Hong Kong has no universally safe duration for non-compete clauses in franchise agreements.

3. Negotiate exceptions using real scenarios, rather than simply asking for deletion

Before negotiating, list the activities you want to preserve. For example, you may have operated a bakery before taking on a drinks franchise and intend to keep the bakery after leaving. Or you may want to work for a food and beverage business that does not compete directly with the brand. Asking the franchisor to confirm specific businesses, products and roles is more likely to produce clear wording than a general request to be allowed to “do other business”.

Consider seeking the following arrangements:

• List existing businesses and permitted ongoing activities in a schedule, rather than relying on verbal approval.
• Narrow the definition of “competing business” to products or services that genuinely overlap, rather than the entire food and beverage or retail sector.
• Set out an exception, with clear conditions, for passive investments that involve no management role.
• Establish a written waiver application process, specifying the information required, the response deadline and who has authority to approve requests. Make clear whether silence counts as consent.

You can also ask a lawyer whether the brand’s legitimate needs could be met through narrower confidentiality clauses, provisions preventing you from holding yourself out as part of the brand, or restrictions on soliciting specified customers, rather than a blanket ban on related work. These alternatives also need to be reasonably defined; changing the label does not automatically make a restriction enforceable.

It is also worth agreeing in advance whether post-termination non-compete restrictions will still apply if the brand commits a serious breach or chooses not to renew. Do not assume that these circumstances automatically release you from the restrictions.

4. Factor post-exit restrictions into your buying decision

Non-compete restrictions are not just a legal issue: they also affect the practical value of a franchise to you. If your experience, income and capital are concentrated in similar businesses, being unable to return immediately to related work after leaving may mean you need additional savings for living costs, time to change careers or funds to start a different business.

When comparing brands, include the ability to keep using your expertise after leaving as an assessment criterion. Ask a lawyer to review the provisions against your existing businesses, investments and future plans, rather than simply asking whether the agreement is “standard”. Any exceptions agreed by the franchisor should be confirmed in writing by someone authorised to represent the brand and incorporated into the formal agreement or a legally effective supplemental agreement.

After signing, retain the final version and records of approvals. Before preparing to launch another business, check any restrictions that have not yet expired. Stopping use of the brand name does not mean that all non-compete, confidentiality or non-solicitation obligations have ended.

Practical takeaway: Before paying, make a checklist covering “who is restricted, what is restricted, where and for how long”, then test each point against your actual exit plans. Buying a franchise is not just about the opportunity to open an outlet; it is also about understanding which options you will retain when the relationship ends.