Franchising means the licensing of a franchisor’s business model to a franchisee. The franchisor appoints franchisees to expand its business by means of separate and individual franchise outlets. The franchisor’s success will depend on the success of the franchisees as well. The franchisee will also have great incentive because he or she has a direct stake in the business. Most countries have laws that regulate franchising. Businesses for which franchising work best usually have a good track record, detailed processes and procedures, a unique or unusual concept, relative inexpensive operation. Franchising offers franchisees the advantage of starting up quickly with a successful business system, including unique branding, and immediate access to the tooling and infrastructure. Most franchises involve substantial investment and require all the attention of a businessman.
Each party to a franchise has several interests to protect. A franchise agreement is a legal document between a franchisor and a franchisee that ensures that both parties’ interests are protected. Specific statutory requirements pertaining to franchise agreements have been introduced in terms of the Consumer Protection Act and compliance thereof is compulsory.
The franchisee must carefully negotiate the license. The fees and training period must be fully disclosed and there should not be any hidden costs. The franchise start-up costs and working capital must be explained before the franchise license is granted. Franchise agreements must explain amongst others all particulars and criteria in respect of the business model, as well as which aspects will form part of the business system. A franchisee should understand its rights and obligations as specified in the franchise agreement. It is recommended that a franchise attorney assist the franchisee during negotiations.
The franchisor must also carefully negotiate the license. The franchise agreement should disclose the all aspects of running the business, from administration, placing orders and customer service. The franchisor will have certain obligations regarding the protection of the franchise trade mark and infringement on the rights of any of it’s franchises. It is recommended that a franchise attorney also assist the franchisor during negotiations.
International Comparative Legal Guide to:
The ICLG series has been published.
Read Esmari Jonker’s contribution to the International Comparative Legal Guide series: Franchise 2018.