Franchising: the in’s and out’s…

In a generation of instant gratification, where breakfast, lunch and supper can each be prepared in under two minutes – the budding entrepreneur of the twenty first century may find the idea of franchising highly appealing. Besides, who would not want to make an instant return on investment?!

Franchise arrangements envisage a relationship in terms of which a franchisor sells its business model or system to a franchisee at a fee. For illustrative reasons, let us call the franchise ‘Ms Treats Confectionaries’. Post the purchase, the franchisee must operate Ms Treats Confectionaries in accordance with the terms of the franchise agreement between itself and the franchisor. This is a unique transactional relationship in that the franchisee does not operate as an employee or an independent contractor, but as an ‘owner’ of that particular Ms Treats Confectionaries franchise. From the franchisee’s perspective, purchasing Ms Treats Confectionaries and opening shop in a suitable location may be seen to avert certain risks inherent in establishing a business afresh. With an established market footprint, an entrenched brand, and continual support from the franchisor, franchisees are perceived to stand a better chance of survival in a challenging marketplace.

Nevertheless, franchising does have its setbacks. Top among these, are the requirements that operations and systems of the business may be strictly limited to the franchisor’s business model and formula with very little to no room for creativity. However, this is not without justification, as franchising may pose a risk to the franchisor from a reputational and goodwill perspective.

Before 31 March 2011, the franchising industry was self-regulated by the Franchising Association of South Africa, which provides guidelines and a code of ethics to those in the franchising space. However, there were no laws in place that specifically regulated the franchising industry. This created fertile ground for unscrupulous behaviour by franchisors to the detriment of franchisees. Things changed, however, when the Consumer Protection Act 68 of 2008 (the CPA) was enacted and came into force on 31 March 2011. It sets out the laws and regulations that govern franchising relationships. A franchisee is now afforded certain protections in its role as a ‘consumer’ under the CPA; whilst a franchisor has certain duties as a ‘supplier’ under the Act.

The CPA applies to all franchise agreements entered into or renewed after its commencement. Section 7(1) of the CPA requires that, in addition to being in writing and signed by the parties, the franchise agreement must include all the prescribed information and be written in plain and understandable language. Regulation 2 of the CPA Regulations sets out in full detail the type of content that must be included in a franchising agreement. These information requirements include the basic essentials of contracts of this nature, ie. the description of the goods and services that the franchisee is entitled to provide, the parties’ obligations, the duration of the agreement, territorial rights, particulars of training and assistance etc.

The CPA Regulations go further to require that the franchisee be provided with a disclosure document at least 14 days before signing the franchise agreement. At minimum, a disclosure document must include:

  • The total number of individual outlets that are franchised by the franchisor;
  • The growth figures for the previous financial year;
  • Confirmation that there have been no material changes in the franchisor or company’s financial positions and that the company or franchisor should be able to pay its debts; and
  • Written projections.

Importantly, the CPA realises that in the proverbial ‘rat race’, entrepreneurs may make instant decisions and only realise a few days later that the decision was misinformed and unworkable. It has thus made provision for a ten day cooling-off period allowing a franchisee to cancel a franchise agreement within that period without incurring costs or penalties.

Whether you would like to expand your business by establishing franchises (as a franchisor), or whether you wish to accelerate your entrepreneurial trajectory by buying a franchise (as a franchisee) – be sure to keep in mind the impact of the CPA on your business venture and steer clear of potential penalties or fines for non-compliance.

Tshepiso Scott – Managing Director