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Do Franchises Have a Non-Disclosure Agreement?

March 17, 2022
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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 (NDA) within the franchise agreement or separately from the franchise agreement.

Regular Customers Ordering Food Outside Franchise Restaurant Which Means Franchises Usually Have a 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. It dictates all of the details of purchasing the franchise and everything the franchisor requires from the party purchasing the franchise (franchisee).

The contract 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.

You'll find in that document what the required fees are and when they are due, and the total costs to purchase the franchise.

Some contracts outline any advertising obligations required of both parties, quality control expectations, indemnification (compensation for harm or loss), 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 an NDA.

The NDA could be a part of the franchise agreement if it's something simple. But there's a good chance it will be a separate document if the NDA contains many intricate details and many stakeholders are involved within the business.

Lawyer Holding Pen Reviewing Franchise Agree Document Which Dictates All the Details of Purchasing the Franchise

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 an NDA is and if they should sign it.

Consulting with a lawyer before you sign any contract is wise, but you will likely be required to sign the NDA, 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.

An NDA is common in many business relationships. It states you will not share any information about the company's processes, products, methods of operation, or any trade secrets the company might have. For example, you cannot share things like a secret recipe in the case of a food franchise.

It's a civil contract. So breaking an NDA is not considered to be a crime.

However, it can result in you getting 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 a 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.

For NDAs, the franchisor wants to ensure that you will not disclose any of the "trade secrets" of the company for any reason. Like competing against the company or letting 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 their competitor to mimic a franchise's "secret to success."

An NDA is a serious part of the process when it is required. Breaking the confidentiality 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 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.

Lock and Pen Laying on Non-Disclosure Agreement Document for a Franchise Business

How Long Does a Non-Disclosure Agreement Last?

NDAs are not like a non-compete agreement. Those only last while you are a part of a franchise and for a set time after you leave their business. An NDA is typically permanent.

The franchisor can't stop you from owning a competing business, however. But they can prevent you from sharing secrets about their business indefinitely.

It's likely an NDA will permanently prevent you from ever sharing any company secrets you learn.


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In addition to the blog and events information, we bring you a valuable resource section that helps you locate franchise advisors, franchise brokers, franchise consultants, franchise developers, franchise lawyers, and those specialized in franchise training.

These resources will save you time and can provide you with additional franchise help when you need it.


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Category: Franchise Legal
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