What Changed Under Virginia Franchise Law (SB240)
Virginia has enacted a significant amendment to its Retail Franchising Act through Senate Bill 240. This legislation introduces material changes to the legal framework governing franchise relationships in the Commonwealth, particularly with respect to post termination competition restrictions and governing law.
The law was signed in April 2026 and becomes effective July 1, 2026. It applies to franchise agreements offered or entered into on or after that date and requires immediate attention from franchisors operating in or expanding into Virginia. For many brands, this is part of a broader evaluation of how to franchise your business in a way that remains compliant across multiple jurisdictions.
Franchisors should revise their agreements, disclosures, and system protections. Many of the challenges arise from predictable missteps in how systems are structured, as outlined in our analysis of common mistakes franchisors are making under SB240.
Does Virginia Ban Franchise Noncompete Agreements
Yes, under SB240, Virginia prohibits franchisors from including provisions in franchise agreements that restrict a franchisee from engaging in a competing business after termination or expiration of the agreement.
This applies to post termination and post expiration restrictions and is not limited by geography, duration, or scope. Traditional noncompete provisions that have long been standard in franchise agreements are no longer permitted for agreements subject to the statute.
The law also restricts the use of noncompete provisions in settlement agreements, further limiting the ability to impose post termination competition restrictions outside of the franchise agreement itself.
What Does Virginia's SB240 Prohibit in Franchise Agreements
Virginia Now Prohibits Post Termination Noncompete Clauses
SB240 makes it unlawful for a franchisor to offer or enter into a franchise agreement that restricts the right of a franchisee to engage in the business of offering, selling, or distributing goods or services at retail after termination or expiration of the agreement.
This prohibition is intentionally broad in scope. It applies regardless of the reason for termination, including breach by the franchisee, and is not limited by geography, duration, or scope of the restriction. As a result, traditional post termination noncompete provisions that have long been standard in franchise agreements are no longer enforceable in Virginia for covered agreements.
The statutory language focuses on the “right to engage in the business,” which suggests that even narrowly tailored restrictions that would otherwise be considered reasonable in other jurisdictions are likely prohibited. Franchisors should assume that any attempt to restrict post termination competition will be subject to challenge.
Virginia Also Prohibits Noncompetes in Settlement Agreements
The statute further provides that a franchisor may not include a restriction on a franchisee’s right to conduct business as part of the settlement of a dispute, unless such settlement is approved by a court of competent jurisdiction.
This provision extends beyond the franchise agreement itself and eliminates a mechanism historically used to address post termination competition concerns. Settlement agreements can no longer be used to impose ongoing competitive restrictions without court approval.
Virginia Law Now Governs Franchise Agreements in the State
SB240 requires that any franchise agreement covered by the statute be governed by the laws of the Commonwealth of Virginia.
This overrides choice of law provisions that designate another jurisdiction. If the franchise relationship contemplates or requires a place of business in Virginia, Virginia law will apply regardless of how the agreement is drafted.
This limits the ability to rely on a single governing law provision across a multi state franchise system. Virginia must be treated as a separate legal framework, requiring state specific evaluation of key provisions, including enforcement, remedies, and post termination obligations.
Compliance extends beyond adding a Virginia addendum and requires confirming that the agreement functions as intended under Virginia law.
Does the Law Apply to Existing Franchise Agreements
The statute includes a grandfathering provision preserving contracts entered into, extended, or modified on or before July 1, 2026.
- Agreements in effect prior to July 1, 2026 are not impaired by the new restrictions
- Agreements entered into on or after that date must comply
- Renewals or amendments may trigger application of the new law depending on structure and timing
How SB240 Changes Franchise System Protection
The prohibition on post termination competition restrictions represents a fundamental shift in how franchise systems are protected.
Franchisors have traditionally relied on trademark control, operational standards, confidentiality obligations, and post termination restrictive covenants to maintain system integrity. The removal of post termination restrictions requires a reassessment of how franchise systems are structured and enforced.
Former franchisees may be able to operate competing businesses immediately upon termination or expiration, including within the same market. This shifts the focus toward system design. The strength of the franchise system depends on control of proprietary information during the relationship, enforcement of brand standards, and the structure of operational dependencies.
How SB240 Affects New and Existing Franchisees
The legislation is framed as protective of franchisees but introduces risk for those currently operating within a system. A terminated or non renewing franchisee may reenter the market and compete directly with existing franchisees. This affects territory expectations, system cohesion, and brand consistency.
A terminated franchisee may reopen a similar business in the same trade area, targeting the same customer base and leveraging knowledge of pricing, operations, and local market dynamics. This creates direct competition with compliant franchisees and may impact revenue, brand perception, and long term unit economics.
Franchisors should evaluate how these dynamics are addressed in contractual structure and disclosure. Many of these issues trace back to common franchise mistakes founders make when the system is initially structured without accounting for long term competitive risk.
What Franchisors Should Do Now
Revise Franchise Agreements
Franchisors should promptly revise their franchise agreements to remove prohibited provisions and incorporate Virginia specific compliance language. This includes updating state addenda and ensuring that all provisions align with the statutory requirements.
This process is not limited to removing prohibited language. Franchisors should also evaluate how other provisions interact with the absence of noncompete protections, including termination rights, post termination obligations, and enforcement mechanisms. Virginia specific addenda should be carefully drafted to ensure compliance while maintaining as much structural protection as the statute permits.
Strengthen Confidentiality and System Controls
With post termination competition restrictions no longer available, greater emphasis must be placed on other protective mechanisms, including:
- Confidentiality and trade secret protections
- Control over operations manuals and proprietary systems
- Enforcement of trademark and brand standards
Franchisors should evaluate how proprietary information is defined, accessed, and protected throughout the lifecycle of the franchise relationship. Training materials, operations manuals, and system data should be controlled and monitored to limit competitive risk after termination.
Update Franchise Disclosure Document
The changes introduced by SB240 affect disclosure obligations under the Franchise Disclosure Document.
Franchisors should consider:
- Revising Item 12 disclosures regarding territory and competition
- Adding clear risk factor language addressing potential competition from former franchisees
- Updating state specific disclosures to reflect the absence of post termination restrictions
Reevaluate Financial Protections
In the absence of noncompete provisions, franchisors may need to reevaluate:
- Liquidated damages provisions
- Termination related financial obligations
- Other contractual mechanisms that address early exit or breach
These provisions may serve as a deterrent in the absence of noncompete protections. They must be structured to ensure enforceability and avoid being characterized as punitive. This also ties directly into a broader understanding of how much it costs to franchise your business, particularly when factoring in legal structuring and risk mitigation.
Review Supply Chain and Operational Access
Franchisors should assess whether former franchisees retain access to:
- Supply chains and vendors
- Technology systems
- Operational infrastructure
Controls should be implemented, where legally permissible, to limit post termination access to proprietary or system dependent resources. Vendor relationships and system access should be evaluated to determine whether they can be restricted following termination.
Key Takeaways for Franchisors
SB240 represents a significant evolution in franchise regulation in Virginia. The elimination of post termination competition restrictions and the requirement that Virginia law governs covered agreements alter long standing assumptions underlying franchise system design.
Franchisors must revise agreements, enhance disclosures, and strengthen operational controls. Adaptation requires a broader reassessment of how franchise systems are structured, supported, and protected. This also impacts planning timelines and expectations, including how long it takes to franchise your business when factoring in state specific compliance and agreement restructuring.
How to Prepare for Virginia Franchise Law Changes
Franchisors operating in Virginia or considering expansion into the state should evaluate their agreements and disclosures.
Guidance on implementation should be obtained from experienced franchise counsel. Educational programs addressing franchise law and strategy may also assist in evaluating system changes.
Our team is working with franchisors to navigate these updates and align their systems with the new requirements. Connect with us or join an upcoming FranCamp session to better understand what this means for your franchise system and how to move forward.
SB240 introduces meaningful changes that require careful review of your franchise agreements and disclosures. If your system includes Virginia, now is the time to evaluate how these changes affect your structure and protections. Contact our team for more information at (800) 976-4904 or click the button below.
Frequently Asked Questions About Virginia's New Franchise Law
Yes. Under SB240, franchisors may not include provisions in franchise agreements that restrict a franchisee from engaging in a competing business after termination or expiration of the agreement. This represents a significant departure from traditional franchise agreement structures, where post termination noncompete clauses have historically been standard.
The law became effective on July 1, 2026. Franchise agreements offered or entered into on or after that date must comply with the new requirements.
No. SB240 includes a grandfathering provision that preserves agreements entered into, extended, or modified on or before July 1, 2026. However, renewals or amendments may trigger application of the new law depending on how they are structured.
No. The statute prohibits restrictions on a franchisee’s right to conduct business as part of a settlement of a dispute, unless the settlement is approved by a court of competent jurisdiction. This eliminates a common approach previously used to address post termination competition.
Yes. SB240 requires that franchise agreements covered by the statute be governed by Virginia law. This overrides contractual choice of law provisions for franchises operating within the Commonwealth.
In most cases, yes. Because post termination restrictions are no longer permitted, a former franchisee may be able to operate a competing business immediately after the agreement ends, subject to other enforceable obligations such as confidentiality and trademark restrictions.
