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What operating restrictions must a franchisee agree to?
The exact restrictions imposed on a franchisee will, to some extent, depend on the industry in which the franchise operates, but there are certain generic restrictions that are usually contained in each franchise agreement, although the specific details may differ between franchise concepts. These generic operating restrictions include:
1. An obligation that the operating manual must be followed. The operating manual sets out in detail how the franchise should be operated, the products/ services that should be sold, etc. It can be very onerous, but its objective is to ensure uniformity across the franchise network.
2. Compliance with non-compete provisions. These restrict the franchisee from engaging in any other business that competes with the franchise business without the franchisor’s consent.
3. A franchisee may also be restricted from setting up a business similar or identical to the franchise business after the franchise agreement has come to an end. This is usually for a period not exceeding 12 months and the scope of the restriction will depend on the nature of the franchise business. Given the nature of many of the operating restrictions, it is important that a franchisee reads the franchise agreement and operating manual carefully and, where necessary, obtains professional advice on the significance of each clause, particularly the operating restrictions, before signing the franchise agreement.
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