Buying a franchise: check the non-compete clause

When buying a franchise, your main focus is likely to be the business you want to build. But another question also deserves attention: what work will you be allowed to do afterwards? A non-compete clause can limit your options for starting another business. Protecting valuable know-how is understandable in franchising, but not every restriction is permitted. Before signing, check which activities the contract prohibits, where the restrictions apply and how long they last.

1. Distinguish between restrictions during and after the relationship

A franchise agreement may contain several restrictions on competition. During the relationship, for example, you may not be allowed to run a similar business without permission. A separate clause may apply after the franchise agreement ends. These two situations need to be assessed separately.

Do not just look for a heading labelled ‘non-compete clause’. Restrictions may also appear under outside business activities, business relationships, confidentiality or post-termination obligations. Ask for the complete draft agreement, including its schedules and any documents it refers to.

Then draw up a table with three columns: the prohibited activity, the period during which the restriction applies, and the individuals or businesses bound by it. Check, for example, whether the contract names only your franchise business or also imposes obligations on you personally as a signatory.

A ban on using confidential know-how relating to the franchise system is also different from a ban on competing activities. A confidentiality obligation does not automatically mean you can no longer practise your trade or profession. If the two obligations are combined in an unclear way, ask for an explanation before signing.

2. Check the five statutory conditions

The Netherlands has specific franchise legislation: the Dutch Franchise Act, incorporated into Book 7, Title 16 of the Dutch Civil Code since 1 January 2021. Article 7:920(2) sets conditions for clauses that restrict the work you may do after the agreement ends.

Such a restriction is valid only if all the following conditions are met:

• Agreed in writing: the clause must have been agreed in writing.
• Competing goods or services: it may relate only to goods or services that compete with those covered by the franchise agreement.
• Necessary to protect know-how: the restriction must be indispensable to protecting the know-how the franchisor has transferred to you.
• No more than one year: the restriction must not last longer than one year after the franchise agreement ends.
• Limited geographical scope: it must not cover an area wider than the territory in which you operated the franchise under the agreement.

A one-year duration therefore does not automatically make a clause valid. The other conditions must also be met. These statutory protections cannot be departed from to the detriment of franchisees established in the Netherlands.

Know-how means more than general business experience. It refers to practical knowledge that is, among other things, secret, substantial and identified. Ask the franchisor which specific know-how transferred to you needs protection and why this particular restriction is indispensable to protecting it.

3. Apply the wording to your own future plans

Legal wording only becomes meaningful when you apply it to a realistic situation. Suppose you want to offer similar services independently after the relationship ends. Could you do so outside your former territory? And what would the wording mean if you wanted to take a job with another provider?

Put a few specific scenarios to the franchisor:

• You start a business with a partly different product range.
• You work outside your former operating territory.
• You become an employee of a business offering similar services.
• You already own another business that you want to continue running alongside the franchise.

For each scenario, ask for a written answer referring to the relevant contract provision. A verbal assurance that the franchise ‘never makes an issue of that’ does not provide sufficient clarity.

Pay particular attention to broad terms such as ‘directly or indirectly involved’ or ‘similar activities’. Have their meaning set out in writing. Online work can also raise questions about the territory in which you are active. Ask how the geographical restriction would apply in these circumstances, rather than assuming that a nationwide ban is automatically justified.

4. Get clarity before committing

Ask a solicitor or other legal adviser specialising in franchising to assess the clause against your specific activities and the know-how that will actually be transferred. The Dutch Franchise Act imposes pre-contractual disclosure obligations; the draft agreement and its schedules form part of the information you must receive in advance. Use these documents to carry out focused due diligence.

If necessary, ask for a more precise definition of competing activities, a clearly defined territory or an express exception for existing work or business activities. Make sure any agreed changes are included in the final contract documents, not just in separate meeting notes.

Do not assume that you can simply ignore an overly broad clause later. A dispute could delay your plans and lead to legal costs, even if you have strong arguments.

Practical conclusion: sign only when you can explain which activities will be prohibited after the agreement ends, where and for how long the restrictions will apply, and which know-how they protect. If any of these points remains unclear, have the clause clarified and legally reviewed first.