Radius and Non-Compete Clauses on a Franchise Transfer in Ontario

When you buy an existing franchised location, you're not just buying the business — you're stepping into a set of restrictive covenants the previous owner agreed to. Radius clauses, which protect territory, and non-compete clauses, which restrict competing businesses, are standard features of most franchise agreements, and a buyer needs to understand whether — and how — those restrictions apply to them.

This article looks at what these clauses typically do, whether a new buyer is bound the same way the original franchisee was, and how franchise-level restrictions differ from the kind of non-compete an employee might sign.

What Radius and Non-Compete Clauses Typically Cover

• Radius clauses restrict the franchisor — and sometimes the franchisee — from opening or operating a competing outlet within a defined distance of the franchisee's location, protecting the franchisee's territory from internal competition by the same brand.
• Non-compete clauses in a franchise agreement typically restrict the franchisee from operating a competing business, often both during the term of the agreement and for a period after it ends, and sometimes extend to the individuals who control the franchisee corporation.

Both types of clauses are contractual terms set by the franchisor, not something buyer and seller negotiate between themselves.

Does a Buyer Inherit the Original Franchisee's Restrictions?

Generally, yes — but the mechanism matters. When a franchise is transferred, the incoming buyer typically either:

1. Assumes the existing franchise agreement, including its radius and non-compete provisions as originally written, or
2. Signs a new-form franchise agreement with the franchisor, which may restate the same restrictions, modify them, or occasionally introduce new ones.

Either way, the buyer should expect to be bound by radius and non-compete terms substantially similar to what the seller had — franchisors generally don't relax these protections just because ownership is changing, since the underlying purpose of protecting the brand and the territory system doesn't change with a sale.

How This Differs From an Employee Non-Compete

Since October 25, 2021, Ontario's Employment Standards Act, 2000 has generally prohibited employers from entering non-compete agreements with employees, subject to narrow exceptions — a seller who becomes an employee of the purchaser as part of a business sale, and defined executive roles. It's worth being clear about how this fits, or doesn't, with franchise-level restrictions:

A franchisee is typically operating an independent business under a licence, not working as an employee of the franchisor — so the ESA's employee non-compete restrictions generally don't apply to the franchisor-franchisee relationship itself the way they would to an employer-employee relationship. Whether a specific individual involved in a transfer also has some separate employment relationship worth checking is a fact-specific question your lawyer should confirm, not something to assume either way.

What to Check Before Buying

• [ ] Read the radius clause and confirm the protected distance and how it's measured.
• [ ] Read the non-compete clause and confirm its duration and geographic scope, both during and after the agreement.
• [ ] Confirm whether the restrictions bind only the corporate franchisee, or also the individuals who control it.
• [ ] Ask whether you'll assume the existing agreement or sign a new one — the terms may not be identical.
• [ ] Check whether the seller, if staying involved through a transition period, is separately bound by any restriction that could affect your operations.
• [ ] Confirm how these restrictions interact with any other business interests you currently hold or plan to pursue.

Frequently asked questions