What are the Pro’s and Con’s of Franchising?

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The Pro’s of Franchising

Buying into a proven turn-key operation

The advantage of buying a turn-key business with an established brand and tried and tested operational procedures is probably the most important advantage to investing in a franchise.

Reduction of risk

Whilst it is not an absolute given, the very fact that only 20% of franchises fail compared to the standard norm of 80% of independent businesses, it is safe to say that buying into a franchise system is less risky as you are buying into an established concept with proven operating standards.

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How do I Access Finance?

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“What often causes businesses to fail is not their profitability but their cash flow.”

After what has undoubtedly been the most debilitating recession since the Great Depression of the 20’s, businesses are finally clawing their way out of the recession and into profitability again. If there is one lesson that has been learnt it’s that cash flow and the strict management of finances is at the core of every successful business. With access to finance restricted, it becomes even more important to make sure that every business has a ‘living’ business plan that will guide you through the maze of challenges and that stricter financial controls are put in place.

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Where do I Start?

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Changing a career path is a momentous step and deciding to invest in a franchise business needs to be taken seriously. Jumping into self-employment with the first franchise that takes your fancy is not a wise move. Spending time investigating the franchise sector, what’s on offer and how the various companies are structured is crucial to making the right decision.

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Termination of Franchise Agreement Best Practices

Franchise Agreement – FASA Practice Note – Section 197 of the Labour Relations Act

The termination of a franchise agreement by the franchisor does not in itself constitute a transfer of a business as a going concern, even if the franchisor thereafter appoints another franchisee in the same area, and serving the same customers, as the previous franchisee.  Therefore, the new franchisee is not obliged to take over the rights and obligations of the previous franchisee towards its employees, as is required in terms of section 197 of the Labour Relations Act on the transfer of a business as a going concern.

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Competition Commission

  • Various industry players in the franchising sector have argued that the Act should not be made applicable to franchise agreements because of the nature of franchising as a business model.
  • Some of the arguments are that franchising should be seen as a specialist field with different elements and should be distinguished from ‘normal’ business entities. It is also argued that since franchising has generally a low rate of failure, it should be left alone unregulated so that it can continue to grow.
  • The Commission recognizes the contribution of franchising to job creation and the fact that it is one of the best vehicles and an effective way to opening up markets for small and medium-sized enterprises (hereinafter “SMEs”) and the historically disadvantaged persons to participate in the mainstream economy of the country.
  • Whilst franchising is a successful, common and often efficient method of distribution or manufacture of goods and services in the country, it is important to realize that at the same time it may be problematic from a competition law perspective.
  • This notice thus highlights the various aspects of franchising that may be affected by the Act. However, this should not be interpreted to exhaust all instances or activities in franchising arrangements that could be affected by the Act. For easy understanding and clarity, decided cases and approaches adopted in other international jurisdictions have been considered.

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