Franchising is a means of expanding your business which is not only cost effective but also allows you to actually generate income from your trademark. It also encourages entrepreneurship thereby growing the economy, which is always a good thing.
Section 1 of the Consumer Protection Act, 2008 (the CPA) defines a franchise agreement as an agreement between two parties, namely the franchisor and the franchisee respectively, in which consideration is paid or is to be paid by the franchisee to the franchisor in order for the franchisor to give the franchisee the right to carry on business within all or a specific part of the Republic under a system or marketing plan substantially determined or controlled by the franchisor or an associate of the franchisor.
There are of course other ways of expanding your business besides franchising, and these include mergers, acquisitions and joint ventures; however, franchising has the following advantages:
- It commercializes the intellectual property in your business – it allows the use of intellectual property assets and goodwill to generate income which ultimately improves the overall value and return of those intellectual property assets;
- It allows expansion but with reduced financial risk- since the franchisee has to raise all funds required to open and run the new franchise, the franchisor can expand without diluting its own equity and without increasing its liabilities;
- It has reduced labour risks – the franchisor does not assume any of the obligations or responsibilities for the employees of the franchisee’s business as those obligations will be for the franchisee;
- It allows the business to have a greater geographical presence and an increased market reach; and
- It, as a result of the immediate foregoing, grows the business brand.
The CPA sets out requirements for franchising your business. The first requirement is that there must of course be a franchise agreement in place which deals with intellectual property issues, operational details, financial agreements and the initial and ongoing rights and obligations of both the franchisor and the franchisee.
The CPA prescribes express pre-contractual disclosures and representations from franchisors, it allows for cooling-off periods and additionally directs that franchise agreements should not be unfair.
The CPA considers franchisees as consumers and seeks to protect them from being exploited by franchisors. Therefore, it requires transparency between the parties to a franchising agreement. The Competition Act 89 of 1998 is also relevant to franchise agreements and ensures a balance between the protection of the franchise system and the interest of franchisees and the public in ensuring adequate competition.
There are clearly a few requirements that need to be met in order to finalize a valid franchise agreement, however, once those requirements are complied with, franchising is fairly straightforward and is an advantageous way of growing your business and expanding your brand.
Should you need more legal advice on ways to expand your business or if you need assistance with the drafting of or interpretation of a franchise agreement please contact us.