8 June 2023
Maria D’Amico –Consultant Attorney
Franchise law is a specialised area and not all attorneys understandfranchising. Whilst there are commercial attorneys that deal with contracts generally,a franchise is also a contract, but it must comply with the law and is uniquein franchising.
Franchise law is specialised because we have an Act called the ConsumerProtection Act (CPA) and an attorney who deals in franchising wouldneed to understand how the provisions of the CPA are applicable to thefranchise agreement and disclosure document (the franchise documents). Whenan attorney prepares a franchise agreement, it has to comply with the CPA. Inaddition, the CPA has regulations that set out the information that needs to beinserted in a franchise agreement.
I am of the opinion that if a franchise agreement does not comply with theCPA, the franchisee may resile from the franchise agreement i.e., elect toterminate the franchise agreement. Your franchise agreement is a legal documentthat contains all the obligations of the franchisee and the franchisor, whichmust also reflect the costs that a franchisee is to incur in establishing thefranchised business. In other words, there must be no hidden costs.
In addition to the franchise agreement, there must also be a disclosuredocument that contains all the pertinent information relating to the franchisorand their brand, as required in the CPA. It is advisable that the prospective franchiseehas the franchise documents perused by a franchise attorney to ensure that theyare CPA compliant. A prospective franchisee may also wish to appoint an accountant,who understands franchising, to have the financial projections which are containedin the disclosure document reviewed, to determine if these projections arerealistic to the franchised operation.
WHAT CAN A FRANCHISOR DO TO MINIMISE ANY FRANCHISEE BREACHES? ANY OTHERTIPS?
The franchisor should conduct a detailed evaluation of their prospectivefranchisee before concluding any franchise agreement. If necessary, thefranchisor can have the prospective franchisee evaluated through trainingmetrics so that the franchisor chooses the right calibre franchisee as thatfranchisee contributes towards the franchisor’s brand. If the franchisee doessomething wrong, and depending on the severity of the wrongdoing, it may affectthe franchisor’s brand. The franchisor must not fall into the trap of justsigning franchise agreements with willing prospective franchisees without evaluatingwhether that person fits in with the culture, personality and ethos of the franchisor’sbrand.
The franchisor needs to have open and regular communication with their franchisees,especially in the beginning when the franchisee is adapting to the franchisor’sbusiness system. There needs to be guidance and initial training. Thefranchisor should send field advisors to the franchisees on a regular basis todo operational audits on the franchised business and then give the franchiseefeedback on such audits.
Whilst the initial training is imperative, the franchisor must nevercompromise on the ongoing training, especially when the franchisor introduces anew product or service or enhances their product or service offerings.
It is important for the franchisor to develop a good and working businessrelationship with their franchisees. The franchisor must want their franchiseeto succeed as this enhances the franchisee and the brand as a group.
The franchisor is alerted to the fact that if they provide a franchisee withany projections, warrantees, or any other representations, that are not part ofthe franchise agreement, then there is a provision in the CPA that deems thisas part of the franchise agreement.
The franchise documents need to be consistent, and the same terminology oughtto be used consistently throughout the franchise documents. The franchisorshould make the franchise documents easy to understand. Avoid legal jargon. TheCPA provides that agreements should be in understandable language. In SouthAfrica we are fortunate to have a law demanding this, so South African agreementsought to be easier to understand in comparison to those in the UK or the USA.
A franchisor may become a member of the Franchise Association of SouthAfrica (FASA) and the benefit is that a franchisor who becomes a member will(as a requirement) have their franchise documents evaluated to ensure CPAcompliancy.
For more information about the legal side of franchising you can contactMaria D’Amico
Tel: 011 784 8984
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