Franchise confidentiality: what should you sign before due diligence?

Joining a franchise network gives you access to operational know-how that the franchisor is entitled to protect from competitors. For this reason, they may ask you to sign a confidentiality agreement before sharing even a draft contract or detailed business information. The question is not whether confidentiality is acceptable, but whether the restrictions you accept allow you to check properly what you are buying. Confidentiality is a separate obligation: it can still matter even if you ultimately decide not to join.

1. Understand the legal framework for your confidentiality obligations

Hungary has no single, comprehensive franchise act, but specific statutory provisions do govern the relationship. Act V of 2013, the Hungarian Civil Code, expressly recognises franchise agreements as a type of contract. General provisions requiring parties to co-operate and disclose material circumstances also apply during contract negotiations.

Act LIV of 2018 on the Protection of Trade Secrets is also important when protecting confidential operational know-how. Information does not become a legally protected trade secret simply because it is labelled as one: relevant factors include its secrecy, the commercial value arising from that secrecy and the reasonable steps taken to keep it secret. A contract can, however, impose confidentiality obligations on a wider range of information.

Under the Hungarian Franchise Association’s guidelines, requiring a confidentiality undertaking before allowing a prospective franchisee to review the franchise agreement is not, in itself, contrary to its ethical rules. This is professional guidance, not generally binding legislation. The guidelines recommend allowing at least 14 days to study the agreement; this is not the same as a waiting period required by Hungarian law.

Legitimate protection of confidential information and meaningful disclosure are not mutually exclusive. Ask for a process that ensures you actually receive the documents you need to make a decision once you have signed the undertaking.

2. Define what is confidential and how you may use it

Do not look only at how long confidentiality lasts. First, examine what it covers. A definition that treats every sentence spoken at every meeting, and everything you learn later, as confidential without limitation can create an unmanageable situation.

Ideally, the agreement should identify the categories of information covered, such as non-public operating procedures, purchasing terms, financial data and contractual documents. For information disclosed verbally, it should be clear how its confidential status is identified and recorded.

Ask for clear exceptions for information that:

• was already lawfully in your possession;
• became public through no breach of the agreement on your part;
• was received from a third party entitled to disclose it, without breaching a confidentiality obligation;
• was developed by you independently of the confidential material received.

The permitted purpose of use should also be clear. It should include evaluating the franchise opportunity, conducting legal and financial due diligence and, where necessary, arranging finance. This does not mean you may use the franchisor’s processes to build a competing business of your own.

Check separately whether the document contains other commitments. Exclusive negotiations, a ban on contacting competitors or an obligation to join the network are not merely details of confidentiality. You need to assess these as separate commercial decisions, rather than accepting them on the strength of the document’s title.

3. Ensure your advisers can access the information

Due diligence can easily stall if you are the only person allowed to read the documents. Before signing, identify the categories of people who may need access: a lawyer, accountant, financial adviser, prospective business partner or finance provider.

The agreement should specify which of them may receive information without separate permission, who must give their own confidentiality undertaking and the extent to which you are responsible for their conduct. An adviser’s professional duty of confidentiality does not automatically replace contractual permission to share a document with them.

For example, a bank may ask for the full draft franchise agreement while the confidentiality agreement prohibits disclosure to any third party. Resolve this before sending the material. Possible solutions include a pre-approved group of recipients or limited access for a specified purpose.

You should also address disclosures required by a public authority or court. Advance notification should be required only to the extent permitted by law. The confidentiality agreement should not be drafted as though it could override a lawful duty to disclose information.

4. Plan for the possibility that no deal is reached

Confidentiality does not necessarily end when negotiations stop. Check the term of the agreement separately from the continuing obligations attached to particular information. Different types of know-how may justify different protection periods; ask a lawyer to review any unduly broad, indefinite undertaking.

There should also be a workable rule for returning or deleting documents. Consider emails, backups and copies held by advisers. Any exceptions for statutory retention requirements or records reasonably needed for a legal dispute should ensure that retained material remains confidential.

Check the consequences of a breach: whether there is a contractual penalty, what conduct triggers it and how it relates to any claim for damages. Assess the implications of your undertaking not only on the assumption that you will join, but also in case negotiations fail.

Practical takeaway: only sign a confidentiality agreement that allows you and your advisers to assess the offer properly, and makes clear exactly what obligations remain if you decide not to proceed.