How to protect yourself when buying a franchise

How to protect yourself when buying a franchise is especially important now, with many people who were retrenched during the pandemic considering using their pay-outs to and fulfil their dreams of owning a business.

This is also why the Consumer Protection Act (CPA) covers buying a franchise, with the aim of the act not focusing on protecting businesses rights, but consumer rights, because it is usually consumers who buy a franchise.

Before buying a franchise, it is very important to ensure that you have all the information you need to make an informed choice, such as all the clauses and compulsory disclosures that must be included in a franchise agreement to protect franchise buyers.

The provisions and regulations of the CPA ensure transparency and proper disclosure to protect franchise buyers from unfair or unreasonable terms and risks. Any franchise agreement is worthless if it does not correspond with the provisions of the CPA.

Section 5(6) of the CPA

Section 5(6) makes it clear that a franchise buyer is not only protected after signing a franchise agreement, but also regarding:

• requests for offers to enter into a franchise agreement
• offers by a potential franchise seller to enter into a franchise agreement with a potential franchise buyer
• a franchise agreement or an agreement following on a franchise agreement
• the supply of any goods or services to a franchisee in terms of a franchise agreement.

The franchise agreement

A franchise agreement is an agreement that includes provisions that the franchise buyer (franchisee) pays for the right to do business in South Africa, and that payment is made in exchange for services the franchisor will provide, as well as the use of the brand and marketing, such as advertising, trademarks, commercial symbols and logos, branding, and labelling owned or licensed by the franchisor.

The agreement must also provide that the franchisor substantially determines the system or marketing plan, that the business will have the franchisor’s uniform look, that the business is materially connected to the brand, and that the franchise agreement governs the business relationship.

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Section 7 of the CPA

According to section 7, franchise agreements must be in writing, signed by both parties and in plain and understandable language. It must also include:

• The exact words: ‘a franchisee may cancel a franchise agreement without cost or penalty within ten business days after signing such agreement, by giving written notice to the franchisor. (Section 7(2) Consumer Protection Act. 2008)’, as prescribed by regulation 2.
• Provisions to prevent unreasonable or overvalued fees, prices or other direct or indirect payments and unnecessary or unreasonable conduct regarding the risks of one party, or the protection of the legitimate business interests of the franchisor, franchisee or franchise system.
• A clause that the franchisor is not entitled to any undisclosed direct or indirect benefit or compensation from suppliers to the franchisees or the franchise system, unless the franchisees are informed in writing.
• The name and description of the types of goods or services the franchisee is entitled to provide, produce, render or sell, as well as the franchisor’s and franchisee’s obligations and a description of the franchise.
• Direct or indirect payments the franchisee must make to the franchisor.
• Details of the territorial rights, if any, granted to the franchisee and a description of the site or premises and location of the franchise business, as well as the nature and extent of the franchisor’s involvement or approval in the process of site selection.
• When the franchisee or his estate may transfer or assign the rights and obligations under the franchise.
• A description of the trade mark or any other intellectual property owned by or licensed to the franchisor used in the franchise and the conditions for use.
• The identity of the master franchisor, if there is one, as well as the franchisor’s legal name, trading name, registered office and franchise business office, street address, postal address, email address, telephone number and fax number and the names, identity numbers, towns of residence, job titles and qualifications of the franchisor’s directors or similar officers.
• If the company is not listed on the stock exchange, details of any proprietor, member or shareholder.
• Information about initial and on-going training and assistance from the franchisor.
• The terms and conditions of termination, renewal, goodwill and assignment of the franchise, as well as the option of extension or renewal and extension or renewal terms. The duration and terms of the renewal of the franchise agreement in line with the Act and the effect of the termination or expiration must also be included.
• A written explanation of any terms or sections that the prospective franchisee does not fully understand (this must be done in writing).
• Any restrictions on the franchisee.
• Confirmation that any deposits from the franchisee will be paid into a separate bank account and a description of how these deposits will be dealt with.

Financial details

The agreement must also give full details of the financial obligations of the franchisee in terms of the franchise agreement or franchise business, including the initial fee payable to the franchisor on agreement, and what it will be used for and the funds required to establish the franchise including purchase or lease of property, site conversion costs, decor and signage, equipment, furniture, hiring and training of staff, opening stock and legal and financial charges, the initial working capital, where possible and the basis on which they are calculated.

Total investment

The franchise agreement must also stipulate the total investment required and give a clear statement whether any expenses, salaries/wages and costs of servicing loans are included in the purchase price.

It must also show the amount of funding available from the franchisor, if any and the conditions for funding and the total amount that the franchisee must pay for the funding before borrowing.

Furthermore the agreement must disclose any on-going amounts payable to the franchisor and details if this amount is fixed or variable and whether all or part of the amounts are included in the price of goods and services that must be bought from the franchisor or other preferred suppliers, the date or intervals when the amount is due and if any fee must be paid for administrative services provided by the franchisor and what these services entail.

Cancellation of a franchise agreement

A franchisee can cancel a franchise agreement without paying costs or a penalty within ten business days after signing the agreement, by giving notice to the franchisor.