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