Franchising law, franchise agreements and tips for franchisors

Why should a franchisor use the services of a franchise attorney?

Franchising law is quite a specialised area and not all attorneys understand franchising. There are commercial attorneys who deal with contracts. Franchise agreements is a contract but it’s the next level of a contract and it’s specialised.

It is specialised because we have an Act called the Consumer Protection Act and an attorney who deals in franchising would need to understand franchising law and intimately know the conditions of the CPA. So when your attorney prepares a franchise agreement, it has to conform to the CPA. The CPA has regulations that sets out the information that needs to be inserted in a franchise agreement. I’m of the opinion that if a franchise agreement does not conform to the CPA regulations, the franchisee can actually get out of the agreement. Your franchise agreement is your legal document that sets out all the obligations for both parties. This means there are no hidden costs. It’s also important that there is a disclosure document that sets out all the information relating to the franchisor and their brand. It’s very important that the franchisee takes their documents to a franchise attorney to check it out and also appoints an auditor, who also understands franchising, to check out their agreement to see if the projections are realistic.

Can you please explain the time periods that apply to the cooling off period

There are 2 documents. These documents, the disclosure document and the Franchise agreement must be signed and given to the prospective franchisee to consider for 10 working days. During this period, if the franchisee decides, for any reason, that they do not wish to proceed with the agreement, they have a legal right to cancel the agreement and any monies paid must be returned. The prospective franchisee must inform the Franchisor in writing that they wish to terminate the agreement. During this ‘cooling off’ period, it is very important that during this ‘cooling off’ period, that the franchisor does not give them any of their training documents and don’t impart any of your intellectual property, or ops manual, to the prospective franchisee as these can be used by them should they cancel and wish to set up their own business. You as a franchisor cannot then rely on any of those clauses, particularly to restraint of trade to make sure that your ex-franchisee doesn’t operate. After the 10 working days, or 14 normal days, they are bound to follow through with the contract.

What can a franchisor do to minimise any franchisee breaches? Any other tips?

It’s important for the franchisor to have open and regular communication. Especially in the beginning when the franchisee is not sure of the system. There needs to be guidance and an open policy. Send field advisors to do operational audits on the business and then give them guidance where they are not conforming with your business system. Also important for your franchisee know what their obligations are. As well as ongoing training especially when the franchisor introduces a new product or enhances their product.

From a franchisor point of view you need to evaluate your franchisee. Some are under pressure to bring in the money or meet budgets.

What’s more important is to get the right calibre of franchisee who suits your business. Spend time evaluating your franchisee. If necessary have them evaluated through training metrics so that you’ve got the right calibre because your franchisee must contribute towards your brand. If your franchisee does something wrong, it affects your whole brand. Do not fall into the trap of just signing people up without checking whether that person fits in with the culture and personality of the brand. That’s why it’s also important to have webinars like this so that prospective franchisees can get a feeling of who you are and you don’t waste time. Be open with sharing information so that people can get a sense of who you are and what you’re about so you can decide whether you want to work with that person.

It’s important to develop a relationship with your franchisees. You must want your franchisee to succeed. Whilst the franchise agreement contains all the information pertinent to their contract, if a franchisor provides any projections, warrantees or any other representations to the franchisee, that is not part of the franchise agreement, then the law, the CPA deems this as part of the agreement even if it has not been included in the original documentation.

Documents need to be consistent and the same terminology is used consistently throughout your agreement. Make your agreement easy to understand. Avoid legal jargon. In South Africa we are fortunate to have a law for this so agreements are very easy to understand in comparison to the UK or the USA. This is also a benefit of being a FASA member because they check that all the documents are compliant and make sure that everything is in place so you, as a franchisor and a franchisee are protected. What I’ve heard from FASA members, is that the application process has been so much easier and the lengths that FASA goes to, to ensure that everything is in place for everyone’s benefit and protection.

What has been the benefit of being a FASA member from your point of view?

For me, it’s the network and being part of the franchising industry. As franchising law has been the core of my business. It’s being in the forefront. When the CPA was being drafted, it took a couple of years and several drafts before it was enacted and it took a number of discussions and we, as members and part of the FASA community, were aware of what was happening. There is also now mediation and both franchisors and franchisees can use the services of a mediator at FASA. There are also webinars, like this webinar. You as a franchisee or franchisor can look at the subject matter and if it’s of interest to your business, can acquire this information.

Also, for you to become a FASA member, they check to see whether your disclosure document and franchise agreement is compliant with the CPA. There is a small fee for it but it’s a small fee compared to going to pay an outsource attorney to check that the agreement is compliant. It’s also a small price to pay because if I was investing in a franchise business, I would be doing my due diligence and want to know and have that peace of mind that I’m protected by a bigger body, like FASA, that something might go wrong. You might think that this is a great relationship and we are going to get on well but then a few years down the line, something goes wrong and at least it gives both of you that peace of mind, that should something go wrong, there’s a place to turn to. This for me would be a big decider of whether I’m going to invest in your business or not.

About Maria D’Amico

Maria D’Amico, director from D’Amico Incorporated Attorneys. Maria holds an LLB in law and has been practising as an attorney for 31 years in her own law firm. Maria is an expert in commercial law, litigation and franchising. She is also a qualified solicitor in the UK, completed her Canadian legal conversion exams as a civil and commercial mediator, having obtained her certificate from the ADR (Alternate Dispute Resolution) group in London. Maria also served as legal advisor to the Business Women’s Association and has been a FASA member for over 26 years. She has been involved with FASA for many years, evaluating Franchise agreements to determine whether they are compliant with the CPA and is presently the Chairman of the FASA membership committee.

For more information about the legal side of franchising you can contact Maria D’Amico

D`Amico Incorporated