What is the consequence if a Fat Shack franchisee violates the covenant not to compete?

According to Fat Shack's 2025 Franchise Disclosure Document, if a franchisee violates the non-compete agreements outlined in Sections 21.1 or 21.2, they will be required to pay Fat Shack a fee. This fee is equivalent to Fat Shack's then-current Initial Franchise Fee for each Competitive Business opened in violation of the covenants. In addition to the initial fee, the franchisee must also pay 6% of the violating business's Gross Sales until the noncompetition period expires.

This financial penalty is in addition to any other legal remedies or damages that Fat Shack may pursue. The non-compete agreement is designed to protect Fat Shack's market presence and proprietary information. The initial franchise fee can vary but is typically a substantial amount, and 6% of gross sales can also be a significant ongoing expense, making the consequences of violating the non-compete agreement potentially very costly for the franchisee.

This type of penalty is common in franchising to protect the brand and prevent franchisees from using the franchisor's knowledge to directly compete, especially after the franchise agreement ends. Prospective franchisees should carefully consider the terms of the non-compete agreement and ensure they understand the restrictions and potential financial implications of violating it.