Competing With A Franchise, Before You Even Sign Up
By Cliff Ennico
www.creators.com
#147;I am thinking about buying a franchise in a particular industry. There are three franchises currently operating in this industry, and I would like to buy one of their existing franchises rather than start one up myself from scratch. I have contacted all three franchises and asked them to send me their Uniform Franchise Offering Circulars (UFOCs). Two of the three have asked me to sign a nondisclosure agreement (NDA) before they will send me anything, but the third franchise wants me to sign a noncompete agreement saying I won#146;t work anywhere in this industry for two years after they give me #145;confidential information#146; about their operations. Can they legally do that? If I sign the noncompete with this third franchise, am I prohibited from buying a franchise from one of the other two?#148;
One of the biggest fears any franchise has is that someone will show an interest in the franchise, #147;kick the tires#148; for several months, learn everything there is to know about running the business (most franchises deal with very basic retail and service business models, which are fairly easy to learn), then blow them off and set up in business on their own.
Technically, a UFOC is not #147;confidential information#148; in any meaningful sense, because it is publicly available and on file with the Federal Trade Commission (www.ftc.gov). You can get a copy of any franchise#146;s UFOC from franchise oriented websites such as
www.ufocs.com
,
www.ufochelp.com
,
www.frandata.com
and
www.franchisehelp.com
, and in many cases from the franchise#146;s own website. If you can#146;t find it anywhere else, you can contact the franchise and they#146;ll send it to you #150; free.
Once you have the UFOC, though, you have a list of all of the franchise#146;s present and former franchisees, and can call and visit them to find out whether they#146;ve had a good experience with the franchise or not. That#146;s where the franchise#146;s concern about confidential information kicks in, because the franchise can#146;t control what their franchisees tell you. Some franchisees are more #147;loose lipped#148; and candid than others when talking about the franchise and their relationship with it. Franchises are terrified you will gain access to detailed information about their operations and #147;trade secrets#148; that isn#146;t available in the UFOC #150; that#146;s why you are almost always asked to sign a nondisclosure agreement when you talk to a franchise.
But a noncompete? As the Wizard of Oz would say, that#146;s a #147;horse of a different color#148;.
Unlike a nondisclosure agreement, which requires you to keep information you learn about a franchise secret, a noncompete agreement bars you from buying a competing franchise, or even working in the same industry.
I#146;m pretty sure that in most states this practice #150; asking you to sign a noncompete agreement as a condition to talking to you about the franchise #150; would be viewed as an #147;unfair trade practice#148; whose sole purpose is to prevent you from choosing among competing franchises. The good news is that if you violate the noncompete and the franchise sues you, you probably will win. The bad news is that you will have to spend years of your life, and thousands of dollars in legal fees, to win that court case. And you will probably be under a court #147;injunction#148; not to work for a competing company until the court makes up its mind whether the noncompete is an #147;unfair trade practice#148; or not. That could take years.
I suspect what may have happened here is that you #147;tipped your hand#148; to the third franchise that you were looking to buy one of their existing franchise outlets, rather than start one up on your own in a new territory. Franchises are all about growth, and expanding into new territories. While franchises are happy to work with someone who wants to buy out an existing franchisee #150; it helps the franchise dispose of an unhappy franchisee in a very positive, #147;win win#148; way #150; it doesn#146;t add any new revenue to the franchise#146;s bottom line (other than a relatively small, one time #147;transfer fee#148; to pay for your franchise training). A franchise isn#146;t going to risk divulging its #147;trade secrets#148; to someone who isn#146;t helping them grow.
In order to buy an existing franchise, you will have to ask their existing franchisee lots of detailed questions about the franchise#146;s operations, earnings, and so forth #150; precisely the sort of information the franchise doesn#146;t want #147;floating around the industry#148;. So I understand why they asked you to sign a noncompete agreement #150; although they should have talked to their lawyers before doing so.
The bottom line: don#146;t sign any noncompetes with a franchise before you commit to the franchise and sign their legally binding Franchise Agreement. If you do, you will be #147;giving them a sword#148; to use against you should you decide to buy a franchise from one of their competitors. I would focus my attention on the other two franchises, and, when talking to Franchise A#146;s franchisees, keep your mouth shut about what Franchise B#146;s franchisees may or may not be doing.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2008 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
