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Do Franchises Have a Non-Disclosure Agreement?

All USA Franchises February 20, 2020
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Are you looking to become a franchise owner in the upcoming year? Buying a franchise is a great way to become a business owner for many reasons. One of the biggest reasons is the brand recognition. When you buy a franchise that is well known across the country, you're buying a franchise that already has a built-in customer base. That means it's easier to get started in business because you aren't trying to build something new from the ground up, which could take anywhere from one to three years. In some cases, new businesses never even get off the ground. With a franchise, everything is in place. Besides the built-in customer base and brand recognition, there are products and services that have already been tested and proven, business practices, and processes that work. For this reason, some franchises will ask you to sign a non-disclosure agreement as a part of the franchise agreement, or even separate from the franchise agreement.

Franchises With Built-In Customer Base

What is a Franchise Agreement?

You may be asking yourself what a franchise agreement is. A franchise agreement is an agreement between the franchisor and the franchisee that dictates all of the details of purchasing the franchise. The franchise agreement states everything the franchisor requires from the party purchasing the franchise (franchisee). It also covers what the franchisee can expect from the franchisor in terms of training, rights to use the franchisor's intellectual property, how the franchisee should conduct business under the umbrella of the franchise, etc. Required fees, grant of franchise, total costs the purchase of the franchise will entail, any advertising obligations required of both parties, quality control expectations, indemnification, and what is expected of the franchisee if they should decide to terminate the franchise agreement are also a part of a franchise agreement. As stated above, some franchisors will require franchise owners to sign a non-disclosure agreement. The non-disclosure agreement could be a part of the franchise agreement, but there's a good chance it will be a separate document, depending upon whether or not the non-disclosure agreement is simple or more complex.

Franchise Agreement

What Is a Non-Disclosure Agreement?

The term "non-disclosure agreement" sounds serious and should definitely be taken seriously. Many potential franchise owners wonder what a non-disclosure agreement is and if they should sign it. As always, consulting with a lawyer before you sign any agreement is wise, but it goes without saying that you will likely be required to sign the non-disclosure agreement or you won't be allowed to purchase the franchise. While you do need to abide by the agreement, there's nothing to worry about. A non-disclosure agreement (NDA) is common in a lot of business relationships and basically states you will not share any information about the company's processes, products, methods of operation, or any trade secrets the company might have (such as a secret recipe in the case of a food franchise). An NDA is a civil contract, so breaking one is not considered to be a crime, but it can result in your being sued and having to pay often-costly damages to the company should you lose the lawsuit. It's never worth the risk.

A non-disclosure agreement is similar to the non-compete agreement in that it is designed to protect the franchise. A non-compete agreement basically states that you, as a franchisee, will not use what you learn from the franchise you're purchasing to compete against the franchise. In the non-disclosure agreement, the franchise wants to ensure that you will not disclose any of the "trade secrets" of the company for any reason, whether to compete against the company or to let the public know how the franchise operates. There are many reasons a franchise might not want their trade secrets to get out. One reason is that the release of those trade secrets could result in another company copying trade secrets, giving the competing company secret information it needs to closely mimic a franchise's "secret to success." A non-disclosure agreement is a serious part of the process when it is required. Breaking the non-disclosure agreement can, and normally will, result in your right to be a part of the franchise any longer. It could even result in legal action against the party breaking the non-disclosure agreement. Depending upon a court's estimation of the damages incurred by the franchise, the franchisee could be ordered to pay damages in addition to losing their right to own and operate the franchise.

Franchise Non-Disclosure Agreement

How Long Does a Non-Disclosure Agreement Last?

Unlike a non-compete agreement, which often only lasts while you are a part of a franchise and for a set period of time after you leave a franchise, the non-disclosure agreement is normally permanent. That's because a franchise can't prevent you from owning a competing business indefinitely, but they can prevent you from sharing secrets about their business indefinitely. Sharing a company's trade secrets can be prevented for an indefinite period of time. It's likely the non-disclosure agreement will permanently prevent you from ever sharing any company secrets you learn.


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Category: Franchise Legal
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