Buying a franchise: check the non-compete clause

Before buying a franchise, check which business activities the agreement would prevent you from undertaking. A non-compete clause can affect your existing business, additional investments and plans after the franchise relationship ends. Protecting know-how within a franchise network is understandable, but the restriction must be clear enough for you to assess its commercial implications and have it legally reviewed before signing.

1. Establish exactly what the agreement prohibits

Do not look only for a heading labelled ‘non-compete clause’. Restrictions may also appear in provisions covering the owner’s obligations, protection of trade secrets, consent to other activities or schedules to the agreement. Read any declarations you must sign personally, even if your company will be the franchisee.

Use all the documents to draw up an overview addressing four questions:

• Who is bound? Only the contracting company, or also the owner or director under a separate undertaking?
• What is prohibited? Running a competing outlet, working for a competitor, providing consultancy services or even holding an ownership stake?
• Where does the restriction apply? At particular premises, within the contractual territory or more widely?
• How long does it last? During the franchise relationship, after it ends or both?

The vague expression ‘similar activity’ is particularly problematic. Ask for a description of the competing goods or services. Selling the same type of products is not necessarily the same as doing any business with the same customer group. Without a clear definition, it will be difficult to know which future decisions require consent.

2. Compare the restriction with your actual plans

Before signing, give the franchisor written details of your existing activities, ownership stakes and projects already planned that might fall within the restriction. Do not rely on a verbal assurance that ‘this will not be a problem for you’.

If you already operate a related business, propose an express exception in the agreement. It should describe the company, its activities and the permitted scope of operations in sufficient detail. A general statement that the franchisor is aware of your business does not amount to clear consent for it to continue.

Test practical scenarios too. Could you buy a minority stake in another company during the agreement? Could you provide a different service at your premises after it ends? What would the restriction mean if the franchise outlet closed earlier than you had planned?

For each scenario, note the potential costs: unused premises, ongoing rent, refitting or a period without income. These are not necessarily payments due under the agreement, but they are important financial consequences of accepting the restriction.

3. Understand the Slovenian and European legal framework

Slovenia has no dedicated franchising act, compulsory franchise register or specific statutory disclosure document. The contractual relationship is governed by the general rules of the Slovenian Obligations Code (OZ). Restrictions on competition are governed by the Prevention of Restriction of Competition Act (ZPOmK-2) and, where the conditions for its application are met, European Union competition law.

An important measure is Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements, often called the VBER. It sets out the conditions under which certain vertical agreements are exempt from the prohibition on restrictive agreements. It is not blanket permission for any non-compete clause.

For a non-compete obligation after the agreement ends, the Regulation provides a narrow exemption: it must relate to competing goods or services, be limited to the premises and land from which the buyer operated during the agreement, be indispensable to protect transferred know-how and last no more than one year after termination.

One year is therefore not an automatically permitted duration for every restriction. The other conditions must also be met, and the applicability of the Regulation must be checked. If a provision does not qualify for the block exemption, that does not in itself make it automatically void; an individual legal assessment is needed. Nor should you equate a non-compete obligation with a duty to protect trade secrets, which has a different purpose and legal basis.

4. Agree exceptions, a consent procedure and the consequences of breach

Do not ask your lawyer to review only the duration of the restriction. They should also assess its necessity, proportionality, connection with the know-how transferred and the consequences of any breach. Contractual penalties, damages claims and the possibility of termination are all important.

If the agreement allows other activities with the franchisor’s consent, propose a clear procedure: whom to send the request to, what information to include, how quickly the franchisor must respond and what criteria it will use to decide. Do not treat silence as consent unless that outcome has been clearly agreed.

Also ask whether the post-termination restriction is the same regardless of why the agreement ends. You can negotiate a narrower scope or a waiver in certain circumstances, but such an exception does not arise automatically. Include the final arrangement in the signed agreement or an appropriate schedule, rather than leaving it solely in email correspondence.

Practical takeaway: before signing, you should be able to state precisely what you cannot do, where and for how long. If the agreement does not make this clear, ask for clarification, a narrower definition and a legal review.