It is advisable to ask a lawyer who specialises in franchising – and has experience in this area – to review the Franchise Agreement. They must ensure that there is balance, especially in terms of the franchisor’s obligations; that the royalty fees are reasonable; that the business model is commercially viable and that all aspects of the agreement support the success of the franchisee rather than limiting it. This is vital, as an agreement may look simple, but any areas that are not correctly understood may have severe repercussions.
Other areas that you can turn to for protection include:
The Competition Act
The Competition Act makes it unlawful for a franchisor to fix prices for a franchisee’s products and services. The Competition Commission also has concerns regarding exclusive suppliers and territories. The latter may however not be prevented if there is vigorous intra-brand competition.
The Consumer Protection Bill
The Consumer Protection Bill will affect all franchises – current and future – in South Africa. The intention is for the Bill to function as a Consumers’ Bill of Rights, and it introduces a substantial number of new considerations in terms of fairness and equity.
The Bill will probably enforce full disclosure upfront, and make it possible to cancel an agreement if such disclosure was not offered or if it misrepresents what is sold. That’s important; because one of the biggest problems facing franchisees at present is that their purchase of a franchise does not match their expectations, either because a franchisor has puffed up the business system’s success, or because they have not known the right questions to ask confirming that success. The Bill will assist in avoiding such pitfalls, by ensuring that fuller relevant information is disclosed upfront. Giving franchisees the right to disclosure was a driving force behind the inclusion of franchisees in the South Africa’s Consumer Protection Act.
This principle came into effect after South Africa’s Department of Trade and Industry (DTI) found that many franchisees had been ruined financially after investing their life savings into a franchise that was sold to them with the promise that it would be far more profitable than it actually was. Under the bill, franchisees are explicitly included as “consumers” and are given an a host of consumer rights including the right to equality, privacy, choice, information, disclosure, fair responsible marketing, honest dealing, fair agreements, fair value, good quality, safety and supplier accountability.
Franchisees are also are protected against undue influence or pressure; unfair tactics; and false, misleading or deceptive representations concerning material facts.