Buying a franchise: review the non-compete clause before signing

A franchise agreement can affect which other businesses you may own, work for or start – even after the relationship has ended. Franchising brings independent business owners together, and the business concept and know-how need protection. But that protection must be weighed against your ability to earn a living and develop your business. The non-compete provisions therefore deserve a separate review before you sign.

1. Map out what the restrictions actually cover

Start by finding all provisions relating to competition, not just the clause bearing that heading. Restrictions may also appear in sections on loyalty, the owner's obligations, confidentiality and appendices. Ask for every document referred to in the agreement.

Then translate the wording into practical situations. A ban on ‘directly or indirectly participating in a competing business’ may raise questions about anything from employment to part-ownership of another company. Do not assume that a passive investment or a small side project is automatically exempt.

Create a simple checklist with four columns:

• Activity: What is prohibited – ownership, employment, consultancy or selling on your own account?
• Business: Which products, services and customer needs count as competing?
• Area: Does the restriction apply to a particular address, a town or a wider geographical area?
• Person: Who is bound – the operating company, you personally or several co-owners?

In particular, check whether you are expected to sign a personal undertaking in addition to the company's franchise agreement. The fact that the company is the contracting party does not necessarily mean that your personal freedom to act is unaffected.

2. Distinguish between the contract term and the period afterwards

Treat non-compete restrictions during the franchise relationship and those applying after the agreement ends as two separate issues. They may have different purposes, scopes and legal requirements.

For the contract term, you need to know whether your existing commitments are permitted. Disclose any relevant side businesses, board positions and shareholdings before entering into the agreement. Where necessary, ask for an explicit written exemption with a clear description of the business concerned. A general assurance that ‘that is usually fine’ is a weak basis for making a decision.

For the period after the relationship ends, check when the restriction starts, how long it lasts and where it applies. Also ask whether the same rule is intended to apply regardless of why the agreement ends – for example, if the franchisor has itself breached its obligations.

Test the wording against a specific future scenario: you leave the franchise network and want to take a job with a business offering partly similar services. If the agreement does not provide an understandable answer, its scope needs to be clarified before you sign.

3. Understand the legal protections in Sweden

Sweden has a specific Act (2006:484) on Franchisors' Disclosure Obligations. It requires the franchisor to provide clear, understandable information in writing in good time before the agreement is concluded. Among other things, that information must cover non-compete restrictions applying during the contract term or after the agreement has ended.

This is a disclosure obligation, not an endorsement of the substance of the clause. Being shown the clause does not mean that every restriction is automatically valid. Equally, you should not assume that inadequate disclosure automatically releases you from the agreement.

Alongside the disclosure legislation, general contract law and competition law are relevant. Section 38 of the Swedish Contracts Act limits the binding effect of non-compete undertakings that go beyond what is reasonable. Section 36 of the Contracts Act, concerning unreasonable contract terms, may also be relevant. The Swedish Competition Act and EU competition rules may also affect the assessment.

There is therefore no simple rule of thumb under which a particular agreed duration is always permissible. The restriction's purpose, scope and context need to be assessed together. Have a lawyer with experience in franchising and competition law review the exact wording, particularly if the restriction continues after the relationship ends.

4. Negotiate clear limits and record the outcome

A useful negotiation starts with the question: what does the franchisor actually need to protect? Protecting trade secrets and transferred know-how is not the same as imposing a general ban on working with similar services. Confidentiality and non-compete provisions should therefore be examined separately.

Ask for vague or unnecessarily broad wording to be replaced with clearer limits. Discuss, for example, which business activities are covered, the geographical scope and exemptions for commitments you have already disclosed. If written approval is required for a side business, the process for obtaining a decision should also be clear.

Review what happens if a breach is alleged. Are there contractual penalties, claims for damages or a right to terminate the agreement? Check how any penalty is calculated and whether several contractual remedies can apply at the same time. Ask your lawyer to assess these consequences alongside the restriction itself.

Finally, make sure that agreed exemptions are included in the agreement or a signed appendix. Check which document takes precedence if their provisions conflict.

Practical conclusion: Do not sign until you can explain which jobs and business interests the non-compete provisions restrict, who is bound, where they apply and for how long. Unclear answers must become clear contract terms – not verbal assurances.