Buying a franchise: review the confidentiality agreement before accessing information

Before giving you access to financial projections, working methods and internal documents, the franchisor may ask you to sign a confidentiality agreement. This can be a reasonable way to protect know-how within the franchise network, but the agreement must not make your assessment impossible. Check both what information is protected and what you are committing to, even if you never buy the franchise.

Separate confidentiality from a commitment to buy

A separate confidentiality agreement may be proposed early in your discussions. Its purpose should be clear: to let you assess the concept without sensitive information being disclosed or used for other purposes. Even so, read the whole document. Its title does not determine the obligations you are taking on.

Check that the agreement does not also require you to make a payment, proceed with the purchase or refrain from exploring other concepts. These conditions go beyond confidentiality and need to be assessed separately. Also ask what happens if either party ends the discussions.

Establish who is to sign the agreement. Is it you personally, an existing company or a company that has not yet been incorporated? Do not assume that a personal undertaking will automatically transfer to your future business. If anything is unclear, have a lawyer clarify who bears responsibility before you sign.

Keep the signed version together with its appendices. When the franchise agreement is subsequently presented, it should be clear whether it replaces the earlier confidentiality agreement or whether both remain in force.

Define the information covered and allow for professional advice

Wording such as ‘all information about the concept’ can be difficult to apply. Ask for a clear definition of what is covered, such as internal manuals, unpublished financial projections and specific working methods. Also clarify whether information given verbally is covered and, if so, how you will be able to identify it afterwards.

Ask for the agreement to address explicitly information that is already public, that you already lawfully held or that you develop independently without using the protected material. Otherwise, there may be unnecessary uncertainty about what knowledge you can use after your assessment.

You need access to advice to make an informed purchase decision. Check whether you can share material with:

• a lawyer reviewing the contract terms;
• an accountant or auditor assessing the financial projections;
• a bank or another prospective finance provider;
• any prospective co-buyer involved in the assessment.

This does not mean the information can be shared freely. The agreement may restrict disclosure to people who need the information and require them to maintain confidentiality too. Clarify whether the franchisor must approve each recipient and what responsibility you bear for their actions.

Practical test: Can your bank receive the supporting information it needs to make a lending decision without you breaching the agreement? If the answer is unclear, obtain written permission before sending the material.

Understand the law and your contractual liability

Sweden has specific legislation on pre-contractual disclosure: the Act on Franchisors’ Duty to Provide Information (2006:484). The franchisor must provide clear, understandable written information about the implications of the agreement and other relevant matters well before the franchise agreement is entered into. Confidentiality does not replace that duty and should not prevent you from properly assessing the material.

The Act does not, however, provide a standard confidentiality agreement. General contract law, including the Swedish Contracts Act, is relevant to the commitments the parties make. The Swedish Trade Secrets Act (2018:558) may also apply to information that qualifies for protection. Not everything described as secret automatically constitutes a trade secret under the law, while a confidentiality agreement may cover a wider range of information than the legislation protects.

Pay particular attention to any contractual penalty clause, which sets a predetermined amount payable for a breach. What triggers the penalty? Could several incidents lead to several claims? Can damages be claimed on top of it? Also consider whether liability extends to mistakes and what happens if an adviser discloses information. Have a lawyer assess unclear or far-reaching wording before you accept it.

Plan for the assessment to end

Confidentiality obligations may continue after purchase discussions end. Check how long they last and whether different types of information are treated differently. Long-term protection for sensitive working methods needs to be assessed differently from an indefinite obligation covering every piece of information mentioned in a meeting.

Also agree how material is to be returned or deleted. Ask what applies to your own notes, backups and documents that advisers must retain under applicable rules. Request a clear exception allowing you to keep the records needed to establish what information and terms you actually received before making your decision.

Practical conclusion: Do not sign until you know what is protected, which advisers can access the material and what liability remains if you decide not to proceed. A clear confidentiality agreement should enable a thorough assessment, not replace it.