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Q: If I become a franchisee, am I allowed to have another job or own another business?

A question commonly asked of lawyers by people who are considering whether to become franchisees is “will the franchisee be allowed to have another job or own another business in addition to owning a franchise?” The general answer to that question in most cases is going to be “no”; however, on a case-by-case basis, the answer may vary depending on what the franchise agreement in question requires.

Restrictive covenants and other contractual provisions restraining a franchisee’s rights

A person who is considering becoming a franchisee would be well-advised to review the proposed franchise agreement and identify which legal rights and obligations are intended to apply to the parties both during the term of the franchise agreement and following the expiration or termination of the franchise agreement.

Those two distinct periods are the subject of contractual provisions that courts and lawyers typically refer to as “restrictive covenants.” A common restrictive covenant is a “non-competition provision,” by which the franchisor seeks to prohibit the franchisee from engaging in a competing business.

There are other kinds of contractual provisions that may or may not accurately be characterized as restrictive covenants but that nonetheless plainly restrict a franchisee’s rights to work outside of the franchised business during the term of the franchise agreement.

Below are a few examples of restrictive covenants and other contractual provisions commonly found in franchise agreements that restrain a franchisee’s rights to work outside of the franchised business.

A franchisee’s obligations during the term of the franchise agreement

Franchise agreements usually contain at least the following two provisions, both of which aim to restrict the franchisee from working outside of the franchised business:

  • Non-competition provisions: These provisions typically purport to prohibit the franchisee (and if the franchisee is a corporation, its owners) from operating a business that competes in any way with the franchised business. Non-competition provisions are usually drafted to prohibit a range of competitive conduct; for instance, franchisees are usually prohibited not only from “carrying on” a competitive business, but also from “being engaged in,” “having an interest in,” or “giving advice to” a competitive business.
  • Full time and attention: These provisions are not typically thought of as restrictive covenants, but they have the same effect. They usually require of the franchisee (and if the franchisee is a corporation, its owners) to devote its (or their) full time and attention to the establishment, development, and operation of the franchised business.

These obligations significantly limit the franchisee’s (and its owners’) freedom to pursue other employment or business opportunities during the term of the franchise agreement.

It’s not unusual for franchisors to permit franchisees to appoint supervisors or managers; where this is permitted, it may be possible for the franchisee or its owners to be employed or engaged elsewhere at the same time (so long as that employment or engagement does not compete with the franchised business).

A franchisee’s obligations after the franchise agreement expires or is terminated

Franchise agreements often contain non-competition provisions that prohibit the franchisee and its owners from competing with the franchised business after the franchise agreement has expired or is terminated.

Such “post-term” non-competition provisions typically prohibit competition only for a limited period of time following the expiration or termination of the franchise agreement and only within a defined territory. Again, these provisions are usually drafted in a way that is intended to capture a range of prohibited conduct.

Key considerations for franchisees

Prospective franchisees should review the franchisor’s proposed franchise agreement with their lawyers, with a view to identifying any contractual provisions that may restrict the franchisees’ (and their owners’) ability to earn income from sources other than the franchised businesses.

From a business perspective, the prospective franchisee should ensure that it can support itself financially, notwithstanding any restrictions being imposed on it by the franchisor. This is a particular concern during the early period of operations, when the business may well not yet be profitable.

From a legal perspective, prospective franchisees should also appreciate that restrictive covenants, and particularly non-competition provisions, are widely litigated. Courts generally view such provisions as being unreasonable and therefore unenforceable; if a franchisee challenges a non-competition provision, the franchisor will need to defend it as being reasonable. If a restrictive covenant is found to be ambiguous, or if the scope of prohibited conduct is found to be too severe, then the court is not likely to enforce it.

Although it is unlikely that a franchise agreement will allow for its franchisees to work in a separate or competing business, prospective franchisees should thoroughly review their franchise agreements to ensure they stay in proper legal standing.

Idan Erez


Hoffer Adler LLP

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