The legalities of franchising

Thinking of signing a franchise agreement? Make sure you have these legally required documents. 

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The legal relationship  

Franchising is a legal relationship between a franchisor (the developer of a business format or brand) and the franchisee (who obtains the rights to use the franchise's know-how, brand and business format). The franchise agreement describes the rights and obligations of the franchisor and franchisee. Most franchise agreements are valid for five years, with an option to renew the agreement for another five years if the franchisee meets the required conditions as described by the franchise agreement.  

The franchisor remains the owner of the brand and all intellectual property, including operations manuals and all systems used by the franchise. At the end of the first five-year agreement, the franchisee may choose to renew or sell the franchise. When renewing, the franchisor may insist on the franchisee revamping the outlet; this is especially relevant for all retail and food franchises.  


Laws and regulations applicable to franchising  

While there is no specific franchise law, two sets of legislation apply to franchises, the Competition Act and the Consumer Protection Act (CPA). The CPA has particular regulations that apply to franchising. One of the main requirements of the CPA is that a franchisee may choose to cancel the franchise agreement without penalties within ten days of signing the agreement. This is known as a Cooling Off period. The CPA also has specific requirements for the Disclosure Document.  

The Competition Act is relevant to all businesses, which includes franchises. It aims to prevent competition that is unfair or biased.  


Legally required documents  

The following documents are required by the CPA and should be provided to a potential franchisee at least 14 days before signing the franchise agreement:  

The franchise agreement – The franchise agreement must comply with the CPA and state the CPA's clause about the ten-day Cooling Off period on its front page. The contract should also contain minimum information as stipulated by the CPA, including the full details of the franchisor's directors and disclosing whether the franchisor receives any rebates and how these rebates are applied.  

The disclosure document – This should contain CPA required information as a minimum, including the following:  

  • The number of outlets franchised by the franchisor
  • Growth in the turnover and net profit of the franchisor and growth in the number of franchised outlets in the previous financial year
  • A statement stating that the franchisor can meet its liabilities
  • Financial projections for the franchise and assumptions for these projections
  • A list of all franchisees with their contact details
  • An organogram depicting support provided to franchisees
  • An auditor's statement stating that: 
    • The franchisor's business is a going concern
    • The franchisor can meet its liabilities
    • The franchisor can meet its financial commitments when they fall due
    • A statement on the most recent audited financial statements of the franchisor and that they were drawn up using generally accepted accounting standards, in accordance with all applicable laws and fairly reflect the financial status of the franchisor  

How to review these legal documents  

The potential franchisee has 14 days to review these documents before signing the agreement. The franchise agreement must be read in detail. If the franchisee is uncertain of the meaning of specific clauses, it's recommended to get legal advice.  

Make sure that the disclosure document contains all the information noted above. It's a good idea to contact existing franchisees and ask them about the initial and ongoing support the franchisor provides.  


Where to find help  

Buying a franchise is a significant investment and life decision. If you are uncertain about anything, seek help from professionals. The Franchise Association of South Africa has a list of attorneys and consultants that are members of the association. Another option is to attend training on the evaluation of a franchise opportunity.  

Disclaimer: This article does not constitute legal advice. For legal advice, contact an attorney specialising in franchising.