Franchise agreements are among the most complex contracts that business leaders may ever sign. There are usually pages of unique clauses covering everything from marketing investments and training to the end of the franchise agreement.
Investors and entrepreneurs hoping to capitalize on brand loyalty and demand on local markets may negotiate arrangements with existing companies. Franchise business opportunities can convert capital to a source of revenue in a matter of months in some cases.
Franchise owners may eventually decide to go into business for themselves or to pursue other business opportunities. They may not realize that their prior agreement with a franchisor could have a profound impact on their future business choices. Reviewing the terms of a franchise agreement with a skilled legal team could be crucial for the protection of franchisees who want to pursue new opportunities.
Contracts may limit the right to compete
Generally speaking, people who run one business can choose to invest in or start another related business. The only limitations imposed on those activities are antitrust statutes and contracts.
Frequently, franchise agreements include restrictive covenants, often buried deep within the paperwork. The party opening a new franchise must accept certain limitations on their future economic activity in exchange for the opportunity to run a franchise and access to a brand’s trade secrets.
Noncompete agreements are common. Franchisors often require that franchisees commit to not open a competing business or take a job with a direct competitor for years after the end of a franchise agreement.
It is also relatively common for franchise contracts to include nonsolicitation agreements. Franchisees closing their franchises or selling them to others usually cannot solicit those who patronize the franchise organization or the employees working for the company. Nonsolicitation agreements could also theoretically prevent a franchisee from negotiating new contracts with vendors who provide unique goods and raw materials for the franchise.
Nondisclosure agreements may prevent them from sharing or duplicating recipes or proprietary manufacturing processes. If a franchisee attempts to start a new business that competes with a franchisor, they could theoretically face litigation brought by the franchisor.
Attempts to uphold restrictive covenants can lead to lengthy litigation and frustrating business limitations. Reviewing a franchise contract with a knowledgeable legal team before making any major plans for the future can help those running franchises avoid investing time or money into failed startups and prevent frustrating contract litigation.