Buying a franchise: assessing non-compete clauses

Before joining a franchise network, check whether the agreement restricts the businesses you can operate during the relationship and after it ends. A non-compete clause may affect an existing business activity, a future investment or your ability to continue working in the same sector. Simply asking whether there is such a clause is not enough: you need to understand exactly who is bound by it, what it covers and how long it lasts.

1. Identify the activities and people covered

A non-compete clause usually seeks to protect the know-how transferred and prevent the franchisee from operating a competing business while benefiting from the network’s system. However, its wording may go well beyond opening a similar outlet.

Look for references to shareholdings, the provision of services, consultancy, management or investment in competing businesses. A ban on ‘direct or indirect’ involvement deserves particular attention: it may raise questions about a minority stake in a company or activities carried out through another company.

Before signing, list your specific circumstances:

• Businesses you already own or manage, however small.
• Shareholdings and management roles in other companies.
• Professional services you intend to continue providing.
• Future projects that could overlap with the network’s offering.

Ask for permitted activities to be identified in writing, ideally in an annex to the agreement. A sales assurance that ‘this will not be a problem’ does not remove contractual ambiguity.

Also check who is taking on the obligation: only the franchisee company, or also shareholders and managers signing in a personal capacity? Simply mentioning family members in the agreement does not automatically make it binding on them. The enforceability of each obligation depends on how it is legally structured and requires individual assessment.

2. Understand the legal framework in Portugal

Portugal has no specific franchise law or dedicated compulsory register for franchisors or franchisees. The general contract rules in the Portuguese Civil Code apply, including freedom of contract and duties of good faith during negotiations and performance, set out in Articles 227 and 762.

There is also no franchise-specific pre-contractual disclosure document with legally prescribed content. This does not remove the general duties to provide information and act fairly: any restriction material to the investment decision should be clarified before signing.

Non-compete clauses are also subject to Portuguese and EU competition law, where applicable. Relevant legislation includes Law No. 19/2012, which establishes Portugal’s competition framework, and Regulation (EU) 2022/720 on the block exemption for certain vertical agreements.

A restriction is not automatically valid simply because it is written into the agreement. Its assessment depends on factors including its duration and scope, the market and the need to protect the know-how transferred. Equally, a clause that does not qualify for the block exemption is not automatically unlawful on that basis alone: it may require individual assessment.

The European Code of Ethics for Franchising is a self-regulatory reference for the sector, not Portuguese law or a substitute for that legal assessment.

3. Distinguish restrictions during the agreement from obligations after it ends

Read these two periods as separate commitments. For the term of the agreement, look for an objective definition of a competing business. A ban covering any commercial activity is very different from a restriction limited to products or services that compete with those offered by the franchise outlet.

For the period after the agreement ends, ask:

• How long does the obligation last?
• Which premises or geographical area does it cover?
• Which products and services does it cover?
• What confidential know-how is it intended to protect?
• Does it apply in the same way regardless of why the agreement ends?

Under the EU block exemption framework, post-term non-compete obligations are subject to particularly narrow conditions, all of which must be met. These include being indispensable to protecting the know-how transferred, being limited to the premises and land from which the buyer operated, and lasting no more than one year after the agreement ends.

This does not mean that any clause lasting one year is acceptable. The other conditions and the specific circumstances still matter. Nor should you confuse a ban on competing with an obligation not to disclose confidential know-how: they have different purposes and limits.

4. Negotiate based on the practical impact

Ask your lawyer to explain what the clause means in practical situations: could you work for another company, continue an existing activity or open a different business at the same premises?

Assess the financial impact of those answers. A restriction may reduce your options if the outlet becomes unviable, even if it involves no additional payment to the franchisor.

Propose clearer definitions, express exclusions for existing activities and a written procedure for requesting permission. Where consent is available, confirm who has authority to give it and how it will be documented.

Practical takeaway: before signing, obtain written clarification of the people, activities, duration and locations covered. Only accept a non-compete obligation once you understand its legal validity and its practical effect on your career and business options.