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22 August 2022

Franchise agreements: not as straight forward as you might think

Many people think that setting up a franchise is a simple process. It seems easy enough, right? Take a business that works, open a new branch of your business at a different location, and Bob’s your uncle!

Wrong.

Franchises are incredibly onerous and should not be undertaken lightly. What you’re essentially putting out into the world is that your business is successful, and that you believe it can be a success for others as well. But think about your typical day to day as an entrepreneur managing your business, all the things you do, the extra miles that you run for your customers, and the late nights that you put in trying to have it all. Are you sure that the person opening a branch of your company is going to put in the care and effort that you do?

Here are 5 things to be aware of before you enter into the process of starting up a franchise:

Start setting up early!

As stated above, running a franchise is a difficult thing to do. It is advisable to start the process of getting your franchise set up, from a legal perspective, several months before you intend to engage with your first prospective franchisee. That way, you’ll have the time to carefully consider any aspects of your business and if/how you want to inculcate them into the culture of your franchise.

Be aware of the requirements

Franchises are well regulated in terms of section 7 of the Consumer Protection Act 68 of 2008 (as amended), as read with Regulations 2 and 3 of the Consumer Protection Act Regulations[1]. You would be remiss if you did not familiarise yourself with the details of these Regulations. They comprehensively regulate the terms that may and may not be included in a Franchise Agreement, how your franchise may be structured, and the types of franchise fees that you can charge your franchisees.

Most importantly, the Regulations create the requirement of a Franchise Disclosure Document. Briefly, this is a document that you must submit to any prospective franchisees at least 14 (fourteen) days prior to the signing of a franchise agreement. The Disclosure Document, which must contain certain standard pieces of information listed in the regulations, allows prospective franchisees to assess the performance of your franchise and investigate whether they would be able to make it into a success.

Understand each aspect of your business deeply

The inherent value of a franchise is that it is a recognised brand or service that your franchisees will make available to their customers. This is what makes it attractive to potential franchisees. The only way that you can crystallise your business such that someone can “copy” it (with your blessing, obviously), is to make sure that you have a deep, abiding understanding of all the aspects of your business. Internal structuring, accounting considerations, tax compliance, training, staffing requirements, start-up costs, etc. These are all things that you need to be intimately familiar with before you start the process of opening a franchise.

Have appropriate standards of quality

As mentioned above, when entrusting a branch of your business to a franchisee, you need to be sure that the services they provide, or the product that they produce, is uniform with that of your main branch. The best way to do this is to regulate this contractually by making it an obligation to adhere to the standards of quality that you set. Of course, these standards of quality need to not only be clearly set out and available, but the franchisees may require training to properly adhere to them.

Create policies and procedures

Related to the previous point is the necessity of creating applicable, robust policies and procedures. These must be accompanied by a clause in the franchise agreement requiring the franchisees to accept and implement any policies and procedures validly issued by you as the franchisor. These policies can cover a broad range of topics and are the best way to address common or troubling behaviour that you might see at any of the franchisee branches. Examples of such policies may be things like dress codes, leave policies, customer service obligations, work-from-home policies, etc.

Get in touch with Legalese should you wish to know more about embarking on the exciting process of setting up a franchise. Our lawyers are in a position to guide you through all the requirements, and can even assist in the process of setting up policies and procedures for you to implement when the time comes.

[1] Published under Government Notice R293 in Government Gazette 34180 of 1 April 2011.

– Kyle Freitag