Non-compete clauses in franchises: what to check before buying

Buying a franchise can affect businesses you already own or want to set up. A non-compete clause may restrict the sale of certain products, shareholdings in other companies or activities you pursue alongside the franchise. Before joining a franchise network, check exactly which restrictions will apply during the contract, who they cover and how they fit with your financial and professional circumstances.

1. Identify which activities would be prohibited

It is not enough to look for a section headed ‘non-compete’. Restrictions may also appear among the franchisee’s obligations, shareholders’ declarations or the conditions for approving new activities.

Distinguish non-compete obligations from personal involvement requirements and territorial exclusivity. The first restrict competing activities; the second determine how closely you must be involved in the business; the third governs where the brand may operate or grant particular rights. One clause does not replace the others.

Ask for the contract to provide clear answers to these questions:

• Which products or services are considered to compete with the franchise?
• Does the prohibition cover only an equivalent business, or complementary activities too?
• Does it include online sales, consultancy, employment or shareholdings in companies?
• In which territory does it apply?
• Does it start with the preliminary agreement, the signing of the final contract or the opening of the premises?

Wording such as ‘any related activity’ can lead to disputes. Ask for a definition tied to specific products, services and activities, rather than relying on a sales explanation that does not appear in the agreement.

2. Check the clause against your businesses and investments

Prepare an inventory of your current activities before negotiating. Include companies in which you hold shares, directorships, professional work and projects already under way. Do not assume that a minority shareholding falls outside the prohibition: this will depend on the wording and its legal validity.

For example, someone buying a services franchise might hold shares in another company whose services partly overlap. Even if they do not manage that company, the contract might seek to include the shareholding among the restricted activities.

If the franchisor accepts an existing activity, put the exception in writing. A schedule to the contract can identify the company, the permitted activity and the conditions under which approval remains in place. It is also worth clarifying what happens if that activity grows or changes.

Also check who is bound by the obligation. A franchisee company, its directors and its shareholders are legally distinct persons. If the document requires personal commitments or asks you to guarantee the conduct of third parties, seek a specific legal review. A family relationship alone does not make a relative a party to the contract.

3. Check the legal framework applicable in Spain

Spain has specific franchise legislation: Article 62 of Law 7/1996 on Retail Trade and Royal Decree 201/2010. The latter requires truthful, non-misleading written pre-contractual information to be provided at least twenty working days before the contract or preliminary agreement is signed, or before the prospective franchisee makes any payment to the franchisor.

The information must include the essential elements of the agreement, including the parties’ rights and obligations. Use this period to examine the proposed restrictions with independent advice; do not treat it as a mere administrative waiting period.

Non-compete obligations must also be assessed under competition law. Relevant provisions include Law 15/2007 on Competition, and, where applicable, Article 101 of the Treaty on the Functioning of the European Union and Regulation (EU) 2022/720 on vertical agreements.

This regulation sets out the conditions under which certain agreements can benefit from a block exemption. It contains specific rules on non-compete obligations, including their duration, and qualifications that require the contract to be considered as a whole. Falling outside that exemption does not automatically make a clause void, but its compatibility with competition law must then be assessed individually. Nor is it enough for the franchisor to say that the clause is standard practice within its franchise network.

4. Negotiate limits and an approval procedure

Turn your concerns into specific proposals. You can ask for the prohibited activities to be clearly defined, existing businesses to be expressly recognised and the treatment of investments with no management role to be clarified.

If you need approval to pursue another activity, agree how to apply, what documents to provide, who will decide and the deadline for their response. Do not interpret silence as permission unless there is a clear and legally valid contractual provision to that effect.

Also check the consequences of a breach: penalties, possible termination and claims for damages. Ask your adviser to examine their scope and whether there is a procedure for notifying and remedying a breach where appropriate. Do not assume that paying a penalty removes other liabilities.

Practical conclusion: before signing, draw up a list of your activities and investments and check it against each restriction. Any exceptions and approvals you need should be incorporated into the contract, rather than depend on a verbal promise.