If an unmarried couple was interested in a franchise, and in this situation one person was going to pay cash for the business and own it, fully, while the other would become familiar with the business and manage day to day operations, while the owner continued with their regular profession, could they sell this business after a couple of years and launch a similar concept of their own, this time the business being owned by the person who was the manager of the franchise venture, not the owner, without being affected by any possible non compete agreement the owner of the franchise concept may have had to sign upon becoming a franchisee? What if they were to get married at some point in all of this? Thank you for any insight.
This question is in good faith and we are just wondering what the laws are regarding a situation like this. The scenario is completely hypothetical at this point. Interested in learning how to run a business in a particular field before launching own concept, a concept that we have already developed but would like the advantage of learning in a more controlled environment.
The answer partially depends on the laws in your state, but generally that is a very risky strategy, for three reasons. First, non-compete language in franchise contracts is typically very expansive, so that the restricted person would be breaching his or her contract by having ANY involvement in, or assisting with, a competitive business. Second, courts that have looked at this issue have in most instances held that the signatory to the non-compete cannot attempt to avoid the non-compete's application by trying to compete through a closely-related person. Third, and outside of the non-compete, the business owner under the circumstances you describe could be determined to have "unfairly competed" with the franchisor by using trade secrets and confidential information / methods that were obtained or learned from the former franchisor. Most states have adopted the Uniform Trade Secrets Act, and the type of activity you have described above could very well violate the UTSA.
But again, the answer to your question could change based on state law (for example, the answer could be different if you live in California). I would recommend consulting an experienced franchise attorney to help you determine your options.
I only add a common practice among franchisors is to have the manager and other employees of the franchisee sign non-disclosure (and in some cases non-compete) agreements in favor of the franchisor. Believe me, they've carefully considered this scenario, applicable law and plan accordingly.
Kevin B. Murphy, B.S., M.B.A., J.D.
Franchise Attorney & Franchise Expert
Director of Operations - Mr. Franchise
FRANCHISE FOUNDATIONS APC
4 found this helpful
3 lawyers agree
Most franchise agreements require that not only the franchisee enter into a non-compete, but all related parties, including general management of the franchisee. This is likely the case in your situation. Therefore, it is likely that the non-owner would be precluded by the non-compete as well as the owner. However, without reviewing your franchise agreement and the accompanying non-compete, it would be impossible to advise you definitively.
This response does not create an attorney-client relationship and is not intended to provide legal advice for your specific situation.
My colleagues have answered much of this for you, in terms of the content of a typical non-compete. You cannot get around the restrictions imposed by such a provision by operating through a family member, friend or other individual you know.
But there are other issues you need to be aware of. For example, the typical term of a franchise is 10 years. A significant number offer 5-year terms instead of 10, but most are still 10. So even if the non-compete clause was not an issue, you still would be locked into the franchise agreement long-term, and could not just walk away from it to start a venture of your own after only a couple of years without paying some financial price imposed by the franchise agreement.
Also, virtually every franchise imposes obligations not to use confidential trade secret information you acquire from the franchise in an unrelated venture you might undertake in the future.
In short, once you sign a franchise agreement, you are committed for an extended time period, usually 10 years. You are prohibited from taking information that is confidential and proprietary and known only to those in the franchise system and trying to use it in a similar, competing venture. And finally, in addition to these 2 other obstacles, you likely will be subject to a non-compete that is very broad and prevents you from trying to get around it.
1 found this helpful
1 lawyer agrees
In general the non-competition agreements in franchise agreements (if not prohibited by state law, like California), do not apply in a transfer situation unless very specifically stated. Generally they apply "upon termination" or "non-renewal" of the franchise agreement, so this is very language specific. But keep in mind even if you are able to sell a franchised concept and start a competing business without issues from your franchisor, the fact is, your buyer will require some sort of non-compete, which is pretty standard and generally part of what the purchase price is paid for. TO deal with this, negotiate your parameters in the buy-sell agreement.This shouldn't be an issue with the Buyer if you start your competing business far enough away, or in some other manner where you do not "steel" the existing clients from the buyer. Feel free to contact me directly for more info email@example.com
The foregoing is for informational purposes only and may not be relied on as attorney-client advice.
Intellectual Property Law Attorney
Start by considering basic contract law, where both parties to a contract understand and agree to the planned transaction (in this case a franchise agreement). If you told the Franchisor what you were planning to do, would they sign the agreement and train you in the details of their business? The answer here is a clear no! Your question makes it sound like you are trying to "hide the ball" and trick the Franchisor into something that they would not otherwise agree to. There may be more to your story than you have shared, and you may bring a great deal of value to a franchisor. If you do bring value, and you give value to the franchisor, then it makes sense to discuss how you can work WITH the franchisor not against them to achieve your goals.
I recommend working with an attorney to review your goals and any proposed transactions before you sign a franchise agreement.