Buying a franchise: review the non-disclosure agreement

Before you receive confidential figures or the franchise operations manual, a franchisor may ask you to sign a non-disclosure agreement. This is understandable: business owners share valuable knowledge within the franchise community. Even so, this initial document deserves careful review. An overly broad confidentiality obligation could unnecessarily restrict your due diligence, finance application or freedom to walk away.

1. Establish which information is genuinely confidential

A non-disclosure agreement, also known as an NDA, protects information you receive during initial discussions and due diligence. This might include internal working procedures, purchasing terms, financial data and plans for the franchise that are not yet public. The agreement is separate from your eventual decision on whether to become a franchisee.

Ask for a clear definition of the information being protected. A clause that indiscriminately treats all conversations, documents and your own analyses as confidential could lead to disputes later. For example, must information disclosed verbally subsequently be confirmed as confidential in writing? And how will you know which documents are covered by the agreement?

Check whether the agreement includes the usual exceptions for information that:

• is already public without you having breached the agreement;
• you can demonstrate was already lawfully known to you;
• is lawfully received from another party;
• is developed independently of the materials received.

These are points to negotiate, not exceptions you can simply assume every contract contains. Also agree on the purposes for which you may use the information. These should be broad enough to cover assessing the franchise, preparing a business plan and applying for finance.

2. Make sure your advisers can review the information

Receiving a set of documents is of little value if you cannot discuss it with your accountant, franchise lawyer or prospective lender. Before signing, therefore, check who may have access. An exception covering only ‘employees’ is often insufficient for someone setting up a business.

Ensure the agreement allows appropriate access for independent advisers and finance providers. Discuss whether their professional duty of confidentiality or their own confidentiality obligations are sufficient, or whether they must sign a separate undertaking. A requirement to obtain prior consent for every recipient could delay your plans; clearly defined categories of permitted recipients are often more practical.

Pay attention to your responsibility for others, too. Must you simply ensure they understand that the information is confidential, or are you contractually liable for every breach by every recipient? Ask a lawyer to assess whether that responsibility is manageable.

Take the same care when speaking to existing franchisees. Do not simply share the franchisor’s internal figures. Agree on which information you may use to test assumptions, or ask your questions without forwarding confidential documents. Store materials securely and restrict access to those who genuinely need them.

3. Distinguish confidentiality from the Dutch Franchise Act

The Dutch Franchise Act has been in force in the Netherlands since 1 January 2021 and is incorporated into Book 7, Title 16 of the Dutch Civil Code. Among other things, it sets out disclosure obligations that apply before a franchise agreement is concluded. The franchisor must provide relevant information that enables you to make an informed decision. As a prospective franchisee, you must also take steps, within the bounds of reasonableness and fairness, to avoid forming a mistaken understanding of the situation.

Confidentiality can support this exchange of information, but it must not become a substitute for proper disclosure. Do not therefore accept, without further scrutiny, that important documents will only be discussed verbally or kept out of your adviser’s reach because they are ‘confidential’.

In principle, the legally required information must be provided at least four weeks before the franchise agreement is concluded. Signing an NDA alone does not automatically start this period: what matters is the provision of the required information.

Also watch for clauses in which you would be confirming that you have already received all the information in full or carried out sufficient due diligence. Such declarations should not slip unnoticed into a document you are signing precisely to gain access to information. Ask for them to be removed or worded to reflect the actual position.

4. Agree on what happens if you decide not to proceed

An agreement dealing solely with confidentiality does not oblige you to buy the franchise. Check whether the document nevertheless contains additional obligations, such as exclusivity, a ban on exploring other franchise systems or a fee for ending discussions. Have any such provisions reviewed separately.

Next, consider how long the obligations last. Long-term protection may be justified for genuine trade secrets, while other information can quickly become outdated. If the same period applies to all information, ask why.

Also set out how you will return or delete documents if discussions end. Allow for backups and any record-retention obligations your advisers may have. It may be possible to agree that a limited archival copy can be kept for evidential purposes, provided it remains confidential and is not used for anything else.

Practical conclusion: only sign once it is clear what must remain confidential, who may review the information and how you can walk away without an obligation to buy. This protects the franchise’s know-how while preserving your ability to carry out independent due diligence.