Does the Gold Star franchise agreement restrict a franchisee from operating a 'Similar Business' through a limited liability company?
Gold_Star Franchise · 2025 FDDAnswer from 2025 FDD Document
d future partners, shareholders, or members acknowledge that the Products and the System are unique and distinctive and have been developed by the COMPANY at great effort, time and expense, and that FRANCHISEE will have regular and continuing access to valuable and confidential information, training and trade secrets regarding the Proprietary Products, the System and the Business and that FRANCHISEE would not have had such access except as a result of entering into this Agreement. In consideration of the foregoing, FRANCHISEE agrees that:
- 11.1.1 During the term of this Agreement or any renewal or extension thereof, FRANCHISEE shall not, in any capacity whatsoever, either directly or indirectly, for itself, himself or herself, or through, on behalf of or in conjunction with any other person, partnership, limited liability company, corporation or organization, own, operate, maintain, engage in, participate in (as director, officer, manager, employee, consultant, representative, agent or otherwise) or have any interest whatsoever in any "Similar Business". As used herein, "Similar Business" means the production, preparation or sale of any food items similar to the Products or any other business similar to the Restaurants, the Business or the System or that offers or grants franchises or licenses to others to operate such a business.
- 11.1.2 During the term of this Agreement and all extensions of renewal thereof and for three (3) years thereafter, FRANCHISEE shall not let or permit any part of any premises owned or controlled by FRANCHISEE in the Protected Territory to be used for a business, all or any part of which consists of a Similar Business.
- 11.1.3 Upon expiration or termination of this Agreement for any reason, or if FRANCHISEE assigns or transfers its interest in any Restricted Assets in any manner, then for a period of three (3) years thereafter, FRANCHISEE shall not, in any capacity whatsoever, either directly or indirectly, for itself, himself or herself, or through, on behalf of or in conjunction with any other person, partnership, limited liability company, corporation or organization, own, operate, maintain, engage in, participate in (as director, officer, manager, employee, consultant, representative, agent or otherwise) have any interest whatsoever in any Similar Business at a location within a radius of ten (10) miles of the Retail Location or any other Restaurant site then existing or approved for development.
- 11.1.4 During the term of this Agreement and all extensions or renewals thereof and for three (3) years thereafter, FRANCHISEE shall not, directly or indirectly: (a) divert or attempt to divert any of the COMPANY's business or any of the COMPANY's customers to any Similar Business; (b) induce COMPANY employees to leave their employment with the COMPANY; or (c) do or perform any other act injurious or prejudicial to the COMPANY's goodwill associated with its Marks and System.
Source: Item 23 — Receipts (FDD pages 53–163)
What This Means (2025 FDD)
According to the 2025 Gold Star Franchise Disclosure Document, the franchise agreement places restrictions on a franchisee's ability to operate a similar business, regardless of whether it is done directly or indirectly through a limited liability company or other entity. During the term of the agreement, franchisees are prohibited from owning, operating, or participating in any capacity in a 'Similar Business,' which includes businesses involved in the production, preparation, or sale of food items similar to Gold Star's products or any business similar to the Gold Star restaurants. This restriction applies to the franchisee directly, as well as through any partnership, limited liability company, corporation, or organization.
This restriction extends beyond the term of the franchise agreement. For a period of three years after the agreement expires or is terminated, the franchisee is prohibited from engaging in a Similar Business within a 10-mile radius of the Retail Location or any other existing or approved Gold Star restaurant site. This post-term restriction also applies whether the franchisee acts directly or indirectly through another entity like a limited liability company.
Gold Star also requires that certain related parties, such as managers, officers, directors, and holders of significant beneficial interests (5% or more) in the franchisee (or any entity controlling the franchisee), execute similar covenants. These covenants prevent these individuals from engaging in similar businesses, ensuring that the restrictions are not circumvented through related parties. The franchise agreement specifies that failure to obtain these executed covenants from related parties constitutes a default under the agreement.