Potential Franchisor FAQ

The process of franchising a business is a time consuming project as there are many legal requirements and financial, structural and strategic considerations so ideally it should be handled by professional franchise consultants.  Click here for contact details of franchise consultant members

 

The Franchise Association of South Africa sells a publication called How to franchise your business which deals with every aspect of the entire process of franchising a business – the publication is available as an ebook

From time to time especially during franchise expo’s, lectures are offered on the process of franchising a business so please refer to www.ife.co.za for updates.

Ideally a concept or business idea cannot be franchised as it is imperative to test the product or service in the market place to measure consumer demand and response to the product or service.  There are a myriad of requirements to be considered and addressed in the process of franchising a business for example financial investment requirements and return on investment information, set-up costs, location or site requirements, equipment requirements and specifications, franchisee profile, prices and services, procedures and operational requirements and the list goes on.  If a business owner has an existing successful business with a financial track record and is considering expanding by way of the franchise model it is far more conducive to establishing a successful franchise company than an idea in someone’s mind.

There are many legal requirements for franchisors in South Arica but it depends on which industry the franchise operates in for example:-

  • Register the company with the Companies and Intellectual Property Commission – CIPC
  • Department of Labour – register in accordance with the Compensation for Occupational Injuries and Diseases Act
  • Register with SARS for VAT, PAYE and UIF as well as SDL

 

Comply with the

  • Consumer Protection Act’s Regulations with specific reference to the requirements for franchise agreements and disclosure documents.
  • Trademark law
  • Copyright Act
  • Anti-Smoking laws
  • Labour Law (Industrial Relations Act)
  • Liquor Act
  • Property Law
  • Petroleum Products Act
  • Second-hand Goods Act
  • National Credit Act

 

This list is not exhaustive and it is recommended that a potential franchisor consult with an experienced franchise attorney – Click here for contact details of franchise attorney members

The investment requirements to franchise a business is quite steep – there is a long list of legal requirements for franchisors in South Africa – depending on the sector that the business operates in.  For example, the trademarks of the business and often if applicable, patents have to be registered in the relevant different classes, the franchise agreement and disclosure documents should be drafted by an experienced franchise attorney, the operations or procedural and training manual should be developed by a professional franchise consultant who should also develop the structure of the franchise together with the owner/s.

The franchisor should also have financial resources to advertise and the market the franchise and invest in the ongoing development for the brand especially in the early stages.

 

It is recommended that a potential franchisor consults with the various specialists mentioned here to determine an investment budget before they embark on franchising their business.

Trade Marks

A trade mark is any mark, word(s), sign, device or logo that distinguishes one’s goods and/or services from that of other traders. As time passes, a trade mark can appreciate in value and as a company’s reputation grows, so too does its trade mark value.

 

Trade marks are territorial in nature which makes it possible for a person to adopt a foreign trade mark from another country and use it in South Africa, provided that the trade mark is not well known in South Africa. Trade marks are classified into goods and services and South Africa has a mono-class filing system whereas other countries allow multi-class filings.

 

Before applying to register a trade mark, a pre-filing search of the Trade Marks register is recommended in order to ascertain whether the mark is available and that there are no identical or similar third party marks on the register which would pose a threat to obtaining registration.

 

Whether to conduct a search is a question of management of risk – if one has used the mark for some time and is sure that there are no third parties are using an identical or similar mark, an availability search may not be necessary in the circumstances.

 

The registration process commences by filing an application in the relevant class/es. The Registrar examines the application within eight to twelve months to ascertain whether it complies with the formalities and requirements and the application is then either accepted, accepted subject to certain conditions, or provisionally refused.

 

Once the application has been accepted and assuming there are no conditions to acceptance, the mark will be advertised for opposition purposes in the Patent and Trade Mark Journal whereby third parties generally have three months to object to the registration of the application.

 

Assuming that no third parties wish to oppose the application(s), the trade mark is registered and the registration certificate(s) issued. The registration certificate takes about six months to be issued. Protection is granted from date of application.
During the application period, one can use the ™ symbol next to the mark to show that there is a trade mark application pending. This then changes on registration, to the ® symbol in order to notify the public that it is a registered trade mark.

 

A trade mark’s lifespan can be indefinite, provided that the mark is being used and that it is renewed every 10 years.

 

While common law rights can be acquired through use of a trade mark, the advantages of registration are considerable. Some of the benefits of registering a trade mark include protecting a company’s name, logo and brands, preventing others from using or registering the trade mark, and it provides an easy, quick and cost-effective remedy which prevents third parties from using the same or similar marks. In addition, if needed, the trade mark proprietor is more likely to attract licensees.

 

Patents

A patent is a certificate issued by the state, granting the patentee a monopoly in an invention for a period of twenty years.  Naturally, this legal monopoly could prove to be of cardinal importance in gaining and maintaining a commercial foothold in the market.  One should be cognizant of the fact that patents are limited to the specific territories (i.e. countries or regions) in which they are granted and patent protection must be obtained separately in every country or region in which protection is desired.  A “worldwide patent” simply does not exist.

 

Any invention, which may include an article, apparatus, product, device, process, method or the like, is patentable in general, if it satisfies three basic requirements, namely if it is:

  • novel;
  • involves an inventive step; and
  • useful in trade, industry or agriculture.

It is only the inventor who can apply for a patent, or another person or entity that has acquired from the inventor the right to do so.

 

Obtaining a patent in South Africa is generally a two-fold process, commencing with the filing of a provisional patent application at the South African Patent Office.  The date on which the provisional patent application is filed a the Patent Office is called the “priority date”.  Once the provisional patent application has been filed, the invention can be disclosed to the public.  It is of the utmost importance that the invention is not disclosed to the public before a provisional patent application has been filed as an inventor may destroy the novelty of his/her own invention.  Within twelve months of having filed the provisional patent application same has to be followed up with the filing of a complete patent application in each and every country or region where patent protection is sought.  Alternatively, the provisional patent application may be followed up with a patent application filed through the Patent Cooperation Treaty (“PCT application”).  A PCT application provides an applicant with an additional eighteen months to decide in which countries or regions a complete patent application should be filed.

 

For further information contact Kevin Dam of Kisch IP
KevinD@kisch-ip.com
+27 11 324 3025

 

 Existing Franchisor FAQ

Finding the right location for a business is one of the most crucial decisions and it is a good idea to consult with various business specialists before a lease is signed.  In many cases the establishment costs of a franchised outlet require a large investment and taking various steps to mitigate the risk and safeguard both the reputation of the brand and the franchisee’s investment is highly recommended.

Fernridge Consulting offers demographic data and other relevant information that could assist a franchisor in making the right decisions when considering a potential site – Fenridge consulting
Another company that offers very useful information is Urban Studies
The company has specialised in the retail sector with focus on shopping centre footprints and other relevant data for many years.

Franchisors should cultivate a strong working relationship with landlords to build trust and transparent business dealings.  It is recommended that franchisors should meet regularly with decision makers at all of the large retail property groups and their letting agents.  Having frequent discussions and inviting landlords to pertinent events taking place at brands can only foster trust and goodwill which is crucial to a good relationship with landlords.

 

Dealing with the South African Council of Shopping Centres and attending relevant events could also be helpful in building a contact list and networking opportunities with landlords – here is the appropriate link  https://sacsc.co.za/

There are many opportunities for franchise companies to advertise in order to secure franchisees:-

  • Apply to the Franchise Association of South Africa for accredited membership status as the Association offers free marketing opportunities to members by way of its weekly newsflash that goes out to thousands of recipients, it gives a free full colour quarter page advert in its annual franchise manual which is distributed at expo’s, seminars and to stakeholders, it lists accredited franchise companies on its website and offers free speaking or presentation opportunities to franchisors at its seminars and expo’s.
  • List opportunities available on franchise websites and the websites of franchise publications
  • Exhibit at franchise expo’s and participate in events – go to the following website to monitor exhibition opportunities
  • Have exploratory seminars or events at the franchise company’s offices on a week day evening or a weekend morning to take potential franchisees through the opportunities your franchise has to offer.

Franchisors should meet with decision makers at funders to explain the franchise concept to them and to answer any questions funders may have about the franchise.  Should they get an application for funding from your franchise in future, hopefully the funders know about your brand and can contact you about questions they may have.

 

These contacts should be maintained and regular meetings should be scheduled with the head of franchising at each of the main banks in South Africa as well as development funders like Business Partners, Masisizane Fund, the National Empowerment Fund and sefa.

Criteria for funding applications, vary from banks to development funders but generally funders rate the following factors:-

  • Who is the potential franchisee – does he/she have business acumen, are they suited to the franchise, are they healthy individuals, do they have the required surety for the loan, do they have an adequate deposit, can they afford the business and sustain it until it delivers a profit, how well is the business plan developed including the projected financial information
  • Issues regarding the franchisor – has the franchisor been accredited by the Franchise Association of South Africa, how many outlets did the franchise company close or relocate, what were the reasons for the closures or relocations, does the franchisor offer a special support program for distressed franchised outlets, does the franchisor employ suitably qualified support personnel, what is the financial track record of the franchise, in which business category does it operate, how long has the franchise been in operation, projected return on investment, investment requirements, list of assets/equipment required and how it would be deployed in the business.

 

The above information is merely a guide and not an exhaustive list of criteria funders would apply in the funding application. Criteria would vary from funder to funder and bank to bank.

  1. In terms of Section 7 of the Consumer Protection Act (“CPA”), read with Regulation 23(y) of the Regulations to the CPA, a franchisor is obliged to include in a franchise agreement, “full particulars of the financial obligations of the franchisee in terms of the franchise agreement or otherwise related to the franchise business”.
  2. The purpose of these provisions is to ensure that these the franchisee is fully informed as to the financial commitment he will be making, before committing himself to buying an existing franchise business, or establishing a new one. The franchisor is therefore under a duty to ensure that the incoming franchisee is fully informed in regard to the financial implications of acquiring or establishing a business.
  3. Amongst the information that the franchisor is required to include in the franchise agreement are:3.1 the funds required to establish the franchised business including  purchase or lease of property, site conversion costs, décor and signage, equipment, furniture, hiring and training of staff, opening stock, legal and financial charges, as may be applicable;3.2 the initial working capital, where possible, and the basis on which it is calculated;3.3 the total investment required;3.4 the total amount that the franchisee must contribute towards the necessary funding before borrowing.
  4.  If an existing franchisee wishes to sell his business, the franchisor would be obliged to include the above information in the franchise agreement that is to be signed by the purchaser (the incoming franchisee). If the franchisor is of the view that the amount the purchaser will be paying for the business will affect its sustained viability, the franchisor should advise the incoming franchisee of that fact.  This may be because the new franchisee has financed the purchase and as a result of having to cover the finance charges out of the turnover of the business, the business will probably not realise  a profit, either in the foreseeable future or ever.
  5. Many, if not most, franchise agreements contain a clause that requires an existing franchisee to obtain the consent of the franchisor to the sale of a business and, where the franchisor has reason to believe that the business will be unviable if the new franchisee (the purchaser) pays the amount demanded by the existing franchisee (the seller), the franchisee would be within its rights to refuse to grant consent to the sale.
  6. The main question for the franchisor to consider in deciding whether to refuse consent is whether the purchase price is so excessive and whether, having regard to how it will be financed, it will (objectively assessed) affect the viability of the business. Where the agreed purchase price is simply higher than the franchisor’s evaluation, but will not affect the viability of the business, the franchisor needs to be more cautious. If it actively discourages the purchaser from concluding the deal, the existing franchisor (the seller) may have a claim for the lost opportunity to realise his investment. In those circumstances the franchisor should not refuse consent, but should advise both parties that it is of the view that the agreed price exceeds the fair value of the business (in the franchisor’s opinion) and have them acknowledge it in writing. The franchisor could also request an indemnity from both parties against any claims that they may have as a result of the purchase price exceeding the fair value of the business.
  7. Of course, the franchisor could obtain an acknowledgement and indemnity even where it is of the view that the viability of the business will be compromised, but it will clearly not be in the franchisor’s own interests to allow a new franchisee to take over, only inevitably to fail. This would result in a loss, not only to the incoming franchisee, but also to the franchisor, both financial and in the form of goodwill. The franchisor would be better advised simply to refuse consent, if the franchise agreement allows it to do so.

 

For further information in this regard, please contact Ian Jacobsberg at Tabacks

ij@tabacks.com

+27 11 358 7700.

In general, the marketing fund is simply a sum of money accumulated by the franchisor from marketing contributions paid by franchisees in terms of their franchise agreements, often augmented by contributions by the franchisor itself. In terms of the regulations under the CPA, these funds (or at least those collected from franchisees) must be deposited into a separate bank account and used only for marketing purposes. If the franchisor contributes to the fund, that fact must, in terms of the regulations, be disclosed to the franchisees. However, the bank account, and therefore the funds in it, whether contributed by franchisees or the franchisor belong to the franchisor. If the franchisor chooses to contribute to the marketing fund, it would simply be allocating some of its own funds for that purpose. In practice, this would be given effect to by the franchisor’s transferring those funds from another of its own bank accounts to the marketing fund account, which is also its own account. This cannot be described as a “loan” as only one party (the franchisor) is involved and funds are simply being transferred “from one pocket to another”. If the franchisor subsequently transfers the amount of its original contribution from the marketing fund account to the account from which it was initially transferred, it would not be entitled to add an additional amount in respect of “interest” as the initial contribution was, for reasons set out above, not a loan. What the franchisor is in effect doing is taking funds from the franchisees’ contributions and using them for a purpose other than marketing the brand. This would seem to be in contravention of the regulations.

 

It is possible that in some cases the marketing fund account is held by an independent, separately administered company, and the franchisee’s contributions are paid to that company. In such it would be theoretically possible for the franchisor to lend money to that company and to charge interest on it. However, this might be problematic in terms of the regulations, which require that the franchisor and/or franchisor associated businesses may not enjoy any direct or indirect benefit from the marketing fund that is not afforded to independent franchisees. Therefore, if the franchisor agrees with the entity that holds the marketing fund account that all of its contributions, whenever made, will bear interest, while the franchisees’ contributions do not, that would appear to be a contravention of the regulation.

 

There is a specific situation in which an exception may be made where, at any given time, there is insufficient money in the marketing fund account (taking into account both the franchisees’ and the franchisor’s contributions) to finance a particular campaign or initiative. In those circumstances, in order for the campaign or initiative to go ahead, and in the absence of other sources of funding, it might be necessary for the marketing fund account to be overdrawn.In such a case, the bank at which the marketing fund account is held will inevitably levy interest on the overdrawn amount. If the franchisor in those circumstances contributes the funds that would have had to be borrowed from the bank, and, when the credit balance of the marketing fund allows, recovers interest on the excess amount that it has paid, at a rate not more than the rate at which the bank would have levied it, that would not be in contravention of the regulation. This is because the franchisor is simply recovering an expense that it has covered, for which an interest-bearing loan would have been necessary, and the fund itself is not reduced by any amount more than it would have been had the interest in question been levied by the bank.

 

For further information in this regard, please contact Ian Jacobsberg at Tabacks
ij@tabacks.com
+27 11 358 7700.

The Regulations to the CPA provide that “the franchise agreement must contain clauses informing the franchisee … [that] any contribution to [an advertising, marketing or similar fund] will be deposited into a separate bank account and only used for purposes of the fund”. Thus, on a strict reading, the Regulations do not say directly that the franchisees’ contributions must be paid into a separate bank account; they only say that the franchisor must include in the franchise agreement an undertaking to do so.

Of course, if the franchisor does include this undertaking, as required by the CPA, and the money is not paid into a separate account, the franchisor will be in breach of the agreement. This might entitle a franchisee who becomes aware of the breach to cancel the agreement. If the franchisor does not include the undertaking, the agreement will not comply with the CPA and a franchisee might be able to argue that the agreement is invalid on that basis.

While the franchisor’s intention may be to assist its franchisees, it is doubtful that it could avoid the strict legal requirements for that reason. Regarding the second concern (“make the life of franchisees easier in paying everything into one bank account, although they are invoiced separately Is this practice in contravention of the CPA’s Regulations?”), the Regulations do not say that the franchisees must pay the contributions into a separate account, but only that the contributions must be paid into a separate account; if the franchisees’ convenience is the primary concern, the franchisor may receive all the franchisees’ payments into one account but then transfer the marketing contributions into another dedicated account. It is not clear whether this will have an effect on the bank charges; this will depend on how and on what types of transactions the charges are levied.

As a matter of practical reality, franchisees may not object to the marketing fund contribution being retained in the same account as their other payments if they are given full and transparent insight into the marketing fund and its accounts, as required by the Regulations, but it would not strictly be legally compliant.

For further information in this regard, please contact Ian Jacobsberg at Tabacks
ij@tabacks.com
+27 11 358 7700

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