Potential Franchisees FAQ

The different franchisor formats

 

Single-unit franchise
The franchise is granted to and owned and operated by a franchisee.

 

Multi-unit franchise
An individual or company acquires the right to establish and operate a specified number of franchised units

 

Social franchise
A social franchise operates exactly like a standard business format franchise. The only difference is that the target market will not be able to pay market-related prices for the product or service the franchise offers.

 

Micro franchise
A micro franchise is a slimmed-down version of a standard business format franchise. The franchise meets the needs of micro entrepreneurs. Business units will typically be small and operate in impoverished areas.

 

Product franchise
Product franchises are the forerunner of business format franchises. The format was and to some extent continues to be used by companies who need to establish a national footprint quickly but reluctant to make the investment in infrastructure the establishment of branches would entail.

 

There are a number of different business opportunities like

 

Distributorship
The manufacturers, importer or wholesaler establishes a network of distributors who supply goods to end-users.

 

Agency agreement
An agent agrees to represent a principal, usually a manufactures that may be based in another country, and negotiates on the principal’s behalf.

 

Dealership
This concept is popular with equipment manufacturers and the motor vehicle industry but is not limited to these sectors. Dealers finance their own business infrastructure including stock. They receive some branding and technical training but usually not a business system.

Voluntary buying chain
This is a loose grouping of established retailers who operate in the same industry sector. Benefits usually include bulk buying, joint marketing and so on.

 

Taken from How to Evaluate a franchise written by Kurt Illetschko

Familiar with the franchise model

Before you commit yourself, you need to understand how franchising works.

 

Patient and persistent

As a franchisee you need to committee for the long haul. Franchise agreements generally extend over periods of 5 to 10 years with an option to renew.

 

Willing to apply the system

As a franchisee you own the franchised outlet, but you are not free to operate the business as you see fit. Franchisees need to strictly adhere to the franchisor’s business model.

 

Financially sound

Under-capitalisation especially shortage of working capital is the most common reason for business failure.

 

Prepared to embrace change

Franchise networks tend to be highly innovative. Franchisees need to be receptive to new ideas and able to adapt to new ideas quickly.

 

Willing to listen

You need to listen to and accept advice and constructive criticism from the franchisor’s support team.

 

Focussed

The franchise company will expect you as the franchisee, to focus on the business and maximise its potential so in many instances you may notice in the franchise application form from franchisors the question of ‘owner-operator’ is being asked.

 

A team player

Franchisees need to accept that the interests of the brand and the network are paramount and must be willing to work as a team and participate in team or group activities.

 

Energetic and in good health

Franchisees work long hours and it is imperative for a franchisee to be healthy in order to give the business all the attention and energy necessary to thrive.

 

Excerpt from How to Evaluate a Franchise, written by Kurt Illetschko

Visit the Franchise Directory link on the Franchise Association of South Africa’s website – there is a list of accredited franchise companies as well as some pertinent information about the franchise. The franchisor’s contact details are also supplied.

 

Visit Franchise Expo’s – locally and internationally

Franchisors exhibiting at expo’s usually have opportunities available but remember to ensure that the company you are dealing with is an accredited member of the Franchise Association of South Africa or of the relevant association of the franchise’s country of origin.

 

Franchise magazines and websites

There are several website listing franchise opportunities as well as franchise publications where franchisors advertise opportunities available.

 

Personal referrals or word of mouth

Franchisees sometimes are very satisfied with the franchise brand they invested in and may discuss their success in an open forum or with friends and family. This could be a reliable referral and worth investigating.

According to the Franchise Association of South Africa’s Code of Ethics applicable to member franchisors the following excerpt:-

 

8.13
Where a Franchisor Member receives any moneys from any prospective franchisee in contemplation of the conclusion of a Franchise Agreement, as referred to in paragraph 8.12, and, whether at the instance of the Franchisor Member or the prospective franchisee, negotiations in connection with such contemplated agreement are terminated without an agreement being concluded:

 

8.13.1
The Franchisor Member shall refund the amount it has received forthwith, and not later than 30 (thirty) days after having received a written request from the prospective franchisee;

 

8.13.2
The Franchisor Member may not retain any part of the amount it has received, save to cover reasonable out-of pocket expenses that it has incurred in contemplation of the conclusion of a Franchise Agreement. The Franchisor Member shall provide the prospective franchisee on demand with documentary proof of all such expenses.

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What are my motives?

Do some careful soul searching and self-evaluation – Ask yourself after you have obtained all the relevant information about the franchise your are interested in whether you still should invest in the business

 

Where does my passion lie?

Ask yourself if the business sector you would like to invest in is something that you would enjoy for many years to come.

 

Is a franchise the right choice

Franchising is a successful business model but if you are not prepared to follow the franchisor’s rules your life will be hell.

 

Which opportunity is the right one?

Speak to existing franchisees of the franchise you are interested in – if they are happy with their investment and would like to buy another franchise from the franchisor then you may be on the right track.

 

What is it like to be a franchisee?

Some franchisors allow potential franchisees to work in a company owned outlet for a few weekends – find out if you can arrange a shift in an outlet of the brand you are interested in and learn all about life behind the till/counter

 

Can I support the investment?

Make sure you have enough money to fund the establishment of the business and its operation until cash flow is adequate – a shortage of funds have sunk many franchise business dreams.

 

Taken from
How to Evaluate a franchise written by Kurt Illetschko

Successful franchisees come from all walks of life, they can be young or mature, male or female. Some have an excellent education, others left school early and still make the grade. There is one character trait all successful franchisees have in common. They combine a burning desire to operate a business of their own with the willingness to accept the franchisor’s blueprint to the letter and to operate their businesses according to network-wide standards

Use professional advisers in the form of auditors and franchise lawyers to check the financials and legal documents.

Success comes when franchisors and franchisees work together towards the common goal of achieving success for themselves and their brand through a concerted and well-documented business strategy.

Membership of FASA is open to:

  • Practicing franchisors with a proven trading and franchise record.
  • Developing or new franchisors in the process of developing a franchise business.
  • Professional Service Providers – these include law firms, banks, financial institutions, insurance companies, franchise consultants, brand & marketing companies and IT companies.
  • Suppliers to the franchise industry
  • Franchisees – whether their franchisors are FASA members or not.
  • Product suppliers who supply the broader franchise market.

If you are faced with a business proposition that sounds like a get-rich-quick scheme but is presented as a franchise, beware!  If it sounds too good to be true, it probably is!  Before committing yourself, demand detailed answers to the following questions:

 

  • Does the product or service have a respected name and an established trademark?
  • Is an upfront fee payable, as well as ongoing fees?
  • Is the initial training adequate?
  • Does the franchisor provide ongoing support?
  • Is an element of control exercised by the franchisor clearly in evidence?
  • Will I make my money primarily by selling the product/services?

If any one of these components is missing, the offer may well be a sound business opportunity, but it is not a business format franchise.  A business format franchise should encompass all the above points.

Whilst there are no guarantees in business and this applies to any business – franchised or not – franchising, with just a 10% failure rate compared to a 90% failure rate in independent businesses, is a much safer option.

  • Most of the commercial banks have franchise divisions equipped to assist with funding.
  • Many franchisors have funding initiatives in place to assist franchisees.
  • Financial institutions and venture capitalists also provide alternate funding options.
  • Government agencies have established public/private partnerships to assist pdi franchisees.

There is only one question you should be asking…. are you a member of FASA?

With franchising now covered by the Consumer Protection Act (CPA), being a member of FASA is becoming more relevant as FASA is committed to:

  • Upholding ethical standards of practice through its Code of Ethics.
  • Providing information to the public about franchising and franchise opportunities.
  • Protecting the public and potential franchisees against unscrupulous operators.
  • Promoting the franchise business system and its contribution to the country’s economy through entrepreneurship, skills development and job creation.
  • Keeping current with international franchise developments.

Existing Franchisees FAQ

franchisor responsibilitiesFor further information contact Ian Jacobsberg at Hogan Lovells (South Africa) Inc.

ian.jacobsberg@hoganlovells.com

+27 11 523 6091.

Franchisees do not have a right to an exclusive territory but as this is an area of dissatisfaction in franchise networks, issues relating to territorial exclusivity should be spelt out in the franchise disclosure document. From a legal perspective, franchisees need to understand that although franchisees and their franchisor are part of the same network, they are in law regarded as separate businesses that are supposed to compete against each other. So the granting of exclusive territories to franchisees by franchisors is actually regarded as anti-competitive conduct. Such conduct can have serious consequences for franchisors under South African competition law. This is an area of the law where franchisee expectations comes into conflict with competition law. Sometimes franchisors can convince the Competition Commission to allow them to grant exclusive territories to their franchisees on the basis that that this will actually be good for competition because franchisees will be more committed to their businesses if they have an exclusive territory. But an exclusive territory is not something which franchisees can demand. The Competition Commission will evaluate the matter on a case-by-case basis. The disclosure document which franchisors are required under the Consumer Protection Act to provide to their franchisees must disclose any territorial rights which are given to franchisees but no information needs to be supplied if the franchisor does not intend to give franchisees exclusive territories. If there is no clause in the franchise disclosure document that gives a franchisee an exclusive territory, franchisors cannot be prevented from appointing other franchisees or even from competing with their franchisees themselves. This is a constant source of complaint from franchisees and franchisees tend to be of the view that franchisors who do this are not acting in good faith. Franchisee complaints in this regard will not succeed because to grant exclusive territories is anti-competitive, so franchisors can argue that they are well within the law by not granting such rights. In short therefore, it really is up to franchisors to decide whether to grant such rights or not. In order to avoid conflict I suggest that franchisors who do not wish to grant exclusive territories explain this very clearly in their disclosure documents and that franchisors make use of the following clause (similar to the one used in America):

  • You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.

If franchisees are given this information up-front they can make an informed decision about whether to purchase the franchise and if they are dissatisfied with the extent of territorial protection granted, they should decline to purchase the franchise. This will help minimise friction in the future.

 

Contact Tanya Woker
WOKER@ukzn.ac.za

If your franchise agreement specifically contains a clause dealing with the purchase of items and/or products, your franchisor is entitled to designate various items and/or products that you will be obliged to purchase from your franchisor and/or its nominated supplier. The purpose of this obligation is to ensure that your franchisor maintains consistency and effective quality control within its franchise system, which is ultimately essential for the successful operation of your franchised business and the franchise system as a whole.

 

However, in terms of Regulation 2(2)(c) of the Consumer Protection Act Regulations, in the event that you are you are obliged to purchase items and/or products from nominated suppliers, your franchise agreement must contain a clause advising that your franchisor is not entitled to any undisclosed direct or indirect benefit or compensation from suppliers to its franchisees or the franchise system, unless same has been disclosed in writing with an explanation of how it will be applied.

 

Contact Alex Protulis – Christodoulou & Maverikis Inc

alex@cm-attorneys.com

+27 11 325 4201

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.

 

In PE Pack 4100 CC versus Sanders and others, the Labour Appeal Court held that, because the core assets used by the previous franchisee in the conduct of its business (the franchisor’s intellectual property and business system) never belonged to the previous franchisee, there was no transfer of those assets to the new franchisee, and section 197 did not apply.

 

The principle enunciated in this judgement must, however, be applied with caution and could only apply in cases where there is no agreement between the new and old franchisees, and where both transact solely with the franchisor. Alternatively, where the new franchisee, for example, acquires those assets of the old franchisee that do not belong to the franchisor (such as the equipment and customer contracts), section 197 may  apply  and in such case the new franchisee would be obliged in law to take over the old franchisor’s obligations towards its employees.

 

Despite the Sanders judgement having been handed down by the Labour Appeal Court, the debate regarding the application of section 197 to franchise agreements may not yet be over.  It is likely that in time the question will again arise and it will hopefully then receive the attention of the Constitutional Court and be conclusively determined.

 

In the interim, when negotiating the ‘transfer’ of a franchise agreement, the effects of section 197 must accordingly still be considered.

 

For further information contact Ian Jacobsberg at Hogan Lovells (South Africa) Inc.

ian.jacobsberg@hoganlovells.com

+27 11 523 6091.

According to the Franchise Association of South Afrrica’s Code of Ethics the following:-

 

9.1.2
The Franchisor Member must provide to each franchisee of that Franchisor Member that is required to contribute to a Marketing Fund:

 

9.1.2.1

Not later than 6 months after the end of each financial year of the Franchisor Member, a copy of a financial statement which reflects the receipts and expenses of the Marketing Fund on an annual basis: and

 

9.1.2.2

In respect of each period of 3 consecutive calendar months, financial management accounts relating to the Marketing Fund;

It may well be possible to terminate an existing franchise agreement on the basis of, for example:-

  • The breach or termination provisions of the franchise agreement, if a party is in breach thereof; or
  • On the basis of non-compliance with the provisions of the Consumer Protection Act.”

We would suggest that an existing franchise agreement only be terminated using an attorney skilled in franchise law, so as to not run the risk of repudiating or unlawfully terminating the franchise agreement and, in the process, making yourself vulnerable to various claims and damages or placing yourself in a poorer position, than would otherwise have been the case. If there is any breach or non-compliance of the franchise agreement, it is suggested that the “guilty party” competently be placed in breach or non-compliance, and if that party then fails to, within a reasonable time, rectify the non-compliance or breach, then you may be in a position to terminate the franchise agreement.

 

Contact Eugene Honey for further advice:

Eugene.Honey@adams.africa
+27 11 895 1000

The industry norm is that incoming or new franchisees who buy an existing franchise outlet are charged 50% of the going rate (joining fees) at the time of the change of hands.