Is a Chatime franchisee prohibited from being interested in a Restrained Business, even indirectly through a trust or as a shareholder?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
I agree that I shall not, and I will ensure that any person or entity which I control shall not:
- (a) be concerned or interested in any Restrained Business (directly or indirectly, or through any interposed corporate entity, trust, partnership, or entity as trustee, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant, adviser or in any other capacity);
- (b) advise, assist, consult with or for or in connection with any Restrained Business or any person associated with or in any manner whatsoever connected to or engaged by or in connection with any Restrained Business;
- (c) hold or own (beneficially or non-beneficially) whether directly or indirectly and whether absolutely or contingently or hold options over shares or any other securities or units of any entity engaging in a Restrained Business; and
- (d) procure, employ, seek to employ or engage, or appoint in any capacity (whether as a consultant, director or otherwise), any person who is or has been in the 12 months prior to such action an employee or independent contractor of the Franchisor or any Chatime Store Business
during the Restraint Period in the Restraint Area.
Nothing in this Agreement, including this Section 3, prevents the Covenantor (or any of its affiliates) from:
- (a) owning less than 5%, by value, of securities in a listed corporation; or
- (b) engaging or being concerned or interested in the Franchised Business in accordance with this Agreement.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, franchisees face significant restrictions on involvement with competing businesses, both during the franchise term and for a period afterward. The agreement explicitly states that franchisees, and any entities they control, are prohibited from being concerned or interested in any "Restrained Business." This prohibition extends to direct or indirect involvement, including through corporate entities, trusts, partnerships, or as a trustee, principal, agent, shareholder, or beneficiary.
The definition of "Restrained Business" includes any business that is the same as or substantially similar to the Chatime franchised business, or that is involved in the retail or supply of products or services similar to those offered by Chatime. This broad definition means a franchisee must avoid any competitive ventures, even in a passive or investment role. The restrictions also extend to advising, assisting, or consulting with any Restrained Business or anyone connected to it.
However, there is a notable exception: franchisees are permitted to own less than 5% of the securities in a listed corporation, even if that corporation operates a Restrained Business. This allows for minor, passive investments in publicly traded companies. The agreement defines the "Restraint Period" as two years following the expiration or termination of the franchise agreement, and the "Restraint Area" includes the territory granted to the franchisee, plus a 25-mile radius around any Chatime store. These restrictions are designed to protect Chatime's business interests and prevent unfair competition from former franchisees.