Legal Concerns

SMEs and franchisees are not made equal. But some legal issues span the divide.

Legal Concerns

There’s a lot of homework to be done once you decide to become a franchisee. There’s also loads of legalese to wade through, which is why you need the proper legal team in your corner to get things right. In this Q&A Nicolene Schoeman, founder of Schoeman Attorneys, and attorney of the High Court of South Africa, addresses the legal problems that franchisees face.

When a potential franchisee is shopping for a law firm, what fields of expertise should it practice?
People wishing to approach a law firm for these services should ensure that the firm specialises in commercial law, consumer law and contract drafting. Drafting and/or overseeing the drafting of franchise agreements involves the consideration and true understanding of many complex legal aspects.

Do the common legal issues that SMEs face also affect franchisees?
Common legal issues that SMEs and franchisees face are access to finance and legal compliance (primarily due to the overwhelming amount of regulation to comply with). To a certain extent, the issues of legal compliance are regulated by the franchisor or the franchise agreement.

SMEs and franchisees are therefore urged to seek legal advice in order to ensure compliance with the relevant regulations/contract terms and to manage legal risks most effectively.

What are the common lease issues faced by franchisees?
Issues surrounding lease agreements are faced by both SMEs and franchisees alike, specifically in instances where these enterprises are not formally incorporated structures (juristic entities). In this case the provisions regarding fixed term agreements as enshrined in the Consumer Protection Act of 2008 do not apply. This means that the tenant cannot cancel the lease agreement before its expiry.

The other issue commonly experienced is that lease agreements are generally very one-sided agreements and widely misunderstood by lessees. It is therefore highly recommended that SMEs and franchisees consult with an attorney before entering into any lease agreement.

What are the labour issues that a franchisee should be aware of?
Labour law and related issues are matters for the consideration of all employers. These issues pose a greater risk to SMEs due to cash flow constraints than to other more established businesses. Simply put, engaging in an employment relationship is a business risk – it is a capital outlay for approximately 12 months.

This is on the basis that should the employment relationship terminate unfairly, the maximum amount of compensation the CCMA usually awards an aggrieved employee is 12 months’ salary. Accordingly, both SMEs and franchisees should consult with a specialist labour law attorney prior to entering into an employment contract with an employee, to ensure that their understanding of the applicable legal provisions are accurate/sound and that the employment contracts comply with the prevailing legal provisions.

What does a potential franchisee need to know about continuity planning?
Continuity or succession planning is something that affects every business. The concept of a franchise is the replication of an existing business model or idea and therefore does not deter from the normal provisions regarding succession planning.

In doing succession planning however, the provisions of the franchise agreement or any restrictions placed on the franchisee in terms thereof, should be observed and measures implemented.

Simply put, like any other business (regardless of size) the franchisee’s business cannot continue effectively or may even fail in an instance where the franchisee becomes ill, incapacitated or permanently incapacitated (death) in an instance where no continuity or succession planning strategies have been put into place.

Franchisees are therefore urged to think carefully about who their replacement will be and plan how they will be replaced in such an unfortunate circumstance.

Tracy Lee Nicol
About the Author
Tracy-Lee Nicol is the managing editor of Franchise Zone Magazine and deputy editor of Entrepreneur Magazine. She studied her Masters degree in Art History and Visual Culture at Rhodes University and spent the next two years working and travelling in Asia. Her love of people, business and teaching is reflected in telling the stories of entrepreneurs, franchisees and franchisors, inspiring others to take the leap to being their own boss and bringing about positive change in South Africa.

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