There are a number of pieces of legislation that affect franchising, however you do not need to understand these acts in any depth in order to invest in a franchise.
What you need to know is that to enter into a franchise arrangement it has legal implications.
We also strongly recommend that you consult professional advisors with experience in franchising before you sign any binding agreements or make any payments. A franchise arrangement requires long-term commitment and a substantial investment. The money you spent on professional advice will help you make this a sound investment.
For a list of professionals in law, accountancy and consulting, visit the Franchise Association of South Africa’s (FASA) website – www.fasa.co.za.
We have also enlisted leading franchise legal expert, Maria D’Amico to provide guidance on legal issues.
In our FAQ section, she’s helped entrepreneurs understand:
If it’s legally permissible for a franchisor to reject a franchise application without furnishing reasons for the decision. Read through this section and feel free to also pose her a question.
Before you enter into a relationship with a franchisor, you (franchisee) must do research on all aspects of his/her business. The franchisor will also gather background information on you as the potential franchisee. Once this is complete, both you and the franchisor will be ready to into serious negotiations.
At this stage, the franchisor will ask you to sign a secrecy undertaking. The aim of this agreement is to ensure you don’t disclose confidential information to the competition, for instance financial projections or margins.
Does signing a secrecy undertaking mean you’re obliged to get into business with the franchisor? No. Signing the document shouldn’t bind you in any way. If you want to walk away from the deal, you have a right to do so. Your only obligation when you’ve signed is to respect the confidentiality of the information that’s made available to you.
It’s important to read the secrecy undertaking before you sign it. This will help you make sure it doesn’t limit your right to walk away from the deal if you want to.
A disclosure document is meant to give prospective franchisees detailed information on all aspects of the franchise offer. This helps ensure franchisees know what they’re getting themselves into, so to speak. The document essentially allows franchisees to make an informed decision.
Here are the important details that must be in the disclosure document, a disclosure document must have:
In terms of the FASA Code of Ethics and Business Practices, this information must be updated at least annually. This is especially important if there are changes that happen in the franchisor company.
A franchise agreement outlines the terms and conditions the franchisee and franchisor must adhere to. Before you enter into any binding commitment, you should get professional assistance.That said, here’s an overview of what’s involved when it comes to a franchise agreement, a franchise agreement has to be substantial–A franchise agreement has to deal with:
It also needs to set out what will happen once the arrangement ends.
The important point is the agreement has to be written in a language ordinary human beings without legal background can understand. Legal jargon has no place in a franchise agreement!
A franchise agreement must be balanced – Franchise agreements must reflect a balanced approach. This means they must take the interests of the franchisor and the franchisee into account.
The terms must be clear in the franchise agreement – If, for example, the franchise agreement is for a period of 10 years, this must be clear. If there will be an option to renew, this has to be spelled out as well. If terms aren’t clear, there will be misunderstandings later on. And that’s the last thing you want as the franchisee or franchisor.
The operations manual is often described as the bible of a franchise as it contains everything on how the franchise operates.
A good operations manual aims to address all eventualities. This includes:
In short, the operations manual must provide answers to all questions a franchisee might have. This helps ensure a franchisee doesn’t call head office at every turn.
If a franchise operates from commercial premises, these will usually be rented. It’s common for the franchisor to help with site selection and lease negotiations. But in the end, the lease agreement will usually be between the owner of the premises and the franchisee.
In some cases, franchisors insist there be a clause saying they can take over the lease if the franchise agreement ends.
Other options are that the franchisor takes out the head lease and sublets the premises to the franchisee. Or the franchisor may be the owner of the premises and let it to the franchisee.
The important point is you must know what you commit yourself to. Our recommendation is that before you sign the lease, you have it examined by a competent attorney.
Franchisees who need funding have to enter into one or more funding agreements. In most cases funding agreements are with banks. But in some cases, you may have to source private funding. For example, getting a friend to invest.
Whatever you do, make sure everything you agree on is in writing. It’s advisable to get a lawyer to draft the agreement. In addition, read the agreement to make sure you understand the fine print and ask for clarity.