Legal implications in franchising

While franchising is seen as a safer way to get into business using the know-how of someone who has done the time and made the mistakes, it does come with some conditions in the form of several binding legal contracts and agreements. This is to be expected when one considers that the franchisor is, in effect, sharing his intellectual property and business success secrets with his franchisee partners.

Understanding why you are signing a contract and accepting the contract terms and conditions and you won’t have a problem. Once a contract is signed and sealed by both parties, there is no going back so make sure that you read and understand the contract and get professional legal advice before you sign.

In a typical franchise you will come across several agreements that need to be signed – all related to the franchise you are buying – some signed directly with the franchisor, others linked to financing or leasing.

Secrecy Document

Because a franchise system is often successful due to the intellectual property it has and the unique formulae to success, a franchisor will only disclose detailed information to a prospective franchisee once the negotiations to buy the franchise are at an advanced stage and a certain level of trust has been reached. This comes in the form of a confidentiality document that is signed to ensure that the IP of the franchisor is kept secret and not made public to anyone else.

Disclosure Document

As franchisors do not want to disclose too many details about their business before the contract is signed, a disclosure document has become the norm in franchising around the world and has been adopted in South Africa as law within the Consumer Protection Act. It provides prospective franchisees with comprehensive information about all aspects of the franchise offer to assist them in making an informed decision. This includes background on the franchisor company, its owners, and their background and business experience. Any civil or criminal charges, either in the past, present or pending have to be disclosed and a full list of its franchisees with contact details must be supplied. Key elements of the franchise agreement and full financial details must be supplied as well as financial projections and an auditor’s certificate stating that the franchisor is a going concern and financially sound.

The Franchise Agreement

The franchise agreement is the blueprint of how the business arrangement will work between the two parties and, as long as it has been scrutinised by a lawyer to make sure that there are no irregular conditions, it will prove to be the foundation of a good business partnership. In brief, a typical agreement will cover:

Intellectual and commercial property issues – explaining exactly who owns the IP and how you, as the franchisee, are allowed to use it.
Term – defines how long the franchise contract term will last and give you the various options and terms for renewal.
Operational guidelines – from detailing your rights to trade to what area, if any, your franchise covers.
Financial obligations – from what your initial upfront fee will be to what management service fee you will pay – detailing any other costs and how those costs are determined.
Obligations of both parties – from the franchisor who gives you the business know-how to the obligations expected of the franchisee.
Restrictions – the parameters of what you can and can’t do in the business.
Exit strategy – relating to what happens if you can’t continue in business for some reason – perhaps due to ill health, death or if you want to sell your franchise.

Operations Manual

In signing the franchise agreement, a franchisee, by implication, accepts that he/she will follow to the letter the franchise and detailed guidelines as set out in the operations manual in order to operate a profitable business. Often referred to as the ‘bible’ of the business, it addresses everything from the corporate identity to operating and maintenance procedures, from day-to-day procedures to staff guidelines. Used in conjunction or often as a training manual, the operations manual is at the heart of any franchise business system.