Non-compete clauses in your first franchise agreement

If you are turning an existing business into a franchise, you will want to prevent a departing franchisee from immediately using the knowledge you have shared to set up a competing business. But you cannot prohibit every future activity. Within franchising, protecting the franchise concept must go hand in hand with allowing independent entrepreneurship. This guide helps you prepare a targeted post-termination non-compete clause before having your first franchise agreement drafted.

1. Understand the legal limits

The Netherlands has specific franchise legislation. The Dutch Franchise Act has been in force since 1 January 2021 and forms part of Book 7 of the Dutch Civil Code. Article 7:920 sets conditions for clauses that restrict how a franchisee may work after the agreement ends.

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

• The clause is set out in writing.
• It relates solely to goods or services that compete with those covered by the franchise agreement.
• The restriction is indispensable to protect the know-how transferred by the franchisor.
• The clause lasts no longer than one year after the franchise agreement ends.
• Its geographical scope is no wider than the territory in which the franchisee operated the franchise under the agreement.

These conditions apply together. Simply specifying a one-year term does not make a broadly worded ban valid. Nor does narrowing the territory make up for the absence of transferred know-how that warrants protection. For franchisees established in the Netherlands, these statutory protections cannot be departed from to their detriment.

2. Start with the knowledge that needs protecting

Rather than drafting a prohibition first, identify the specific interest you need to protect. What knowledge will you actually transfer from your existing business? Examples might include a non-public production method, a fully developed service process or a combination of practical procedures that sets your franchise concept apart.

Know-how has a specific meaning under the franchise rules: practical information derived from experience and testing that is secret, substantial and identified. General business experience or information that anyone can easily find does not automatically qualify.

Prepare a short inventory for legal review:

• What knowledge does the franchisee receive during training and while operating the business?
• Where is that knowledge clearly documented?
• Why is it important to operating the franchise concept?
• What specific risk would arise if it were used to compete immediately after departure?
• Why would less restrictive provisions not be sufficient?

This is not an instruction to write another manual. The aim is to substantiate why the non-compete clause is necessary. Simply wanting to keep a local competitor out is not enough.

3. Define the activities, territory and duration separately

Avoid wording such as ‘all similar business activities’. Specify which competing goods or services the clause covers. A franchise focused on a particular treatment or product category cannot automatically prohibit all work in a much broader field.

Next, base the geographical scope on the territory in which the franchisee actually operates under the agreement. Do not automatically choose the whole of the Netherlands because you hope to expand there later. Your future growth plans do not determine the maximum geographical scope legally permitted for this franchisee’s non-compete clause.

Also check that the territory is described consistently across different documents. An agreement defining a limited operating territory and an appendix showing a much larger area on a map create uncertainty. Online services or sales outside a branch’s territory require particular legal attention when defining the geographical scope; do not assume that online sales automatically justify a nationwide ban.

Finally, assess the duration. One year is a maximum, not a mandatory standard. Keep an internal record of why the chosen period is necessary and consider whether a shorter restriction would provide sufficient protection.

4. Have the clause reviewed before candidates sign

Ask a lawyer specialising in franchising to assess the provision in the context of the agreement as a whole. General contract law and, depending on the arrangements and circumstances, competition law may also be relevant. A contractual penalty clause does not make an invalid non-compete restriction valid.

Discuss the clause with the prospective franchisee during the contracting process. It belongs in the draft agreement you provide in advance, not in a separate addendum that only appears at signing. The statutory disclosure requirements and standstill period still apply.

Test the wording against specific departure scenarios. What happens if someone takes a job elsewhere? Opens a non-competing business? Or continues the same activity outside their former operating territory? A workable clause should provide clear answers without prohibiting more than is necessary and legally permitted.

Practical takeaway: first establish which transferred know-how needs protection and why. Then define the restricted activities, territory and duration, and have the complete provision reviewed before presenting it to your first franchisee.