Franchise Operations

Franchises and Noncompete Clauses

Do the franchise businesses you’re thinking about buying into include non-compete clauses in their contracts?

A non-compete clause places legal limits on the kind of work those who sign it can do. For example, an auto service franchise might require franchisees to agree that they cannot open another auto service business within six months of the end of their franchise agreement. Or a home health care franchise might require the employees of their franchisees to agree not to hire other employees away from the franchise for a year after they leave the company for any reason.

A current court case involves a non-compete clause saying that employees of a Jimmy John’s franchise can’t take a job with any company having two characteristics: it does business within three miles of the franchise and the selling of sandwiches comprises 10% or more of its business.

The reason for franchises to want a non-compete agreement are much the same as the reasons that most companies have non-compete agreements. They don’t want to train their competitors. Imagine if your competitors knew all your systems and special tricks, all your recipes –and all your weaknesses. It would give them an unfair advantage. For a franchise, a former franchisee doesn’t just have the knowledge to compete strongly with another franchisee; they have the special sauce franchisees pay for, without having to pay for it any more.

So we can imagine a key employee of a cleaning franchise who works diligently for several years and now knows all the routines of the franchise service. She has paid a lot of attention to the marketing, hiring, and operations of the franchise and she has seen any problems or limitations that have come up.

Now she quits her job and sets out on her own. She doesn’t have the name recognition, but she may have relationships she has worked to develop over the years — and she doesn’t pay franchise fees. Since she doesn’t have to follow all the rules of the franchise, she may be able to cut some corners in areas that she has noticed aren’t as important to customers in the region where she works. Perhaps she can even persuade a few of the best workers, or former workers, to join her. She may not go after current clients, but she might contact former clients to build up her business.

The franchisee and the franchisor alike may be unhappy about this situation. If the employee signed a noncompete clause, they would want to enforce it.

On the other hand, imagine a franchisee who has worked diligently with the franchise for the term of the franchise business and has learned a lot. He knows how the franchise does things, but he also has some ideas of his own. When his franchise agreement is up, he wants to start his own business and court a different group of consumers… but a noncompete clause prevents him from doing so. We can see his side of the question, too.

Clearly, these agreements cut both ways, and it is hard to predict which side you might be on in the future. A noncompete clause probably shouldn’t make you hesitate to invest in a franchise, but you should certainly make sure that you fully understand the conditions.


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