What do I need to know about franchise contracts?

In the franchise contract, the franchisor’s promises must be presented to the franchisee in writing and subjected to careful scrutiny. This is why it is highly recommended to seek professional assistance in drawing up a well constructed contract. When researching a franchise, start with a franchise consultant, then get the advice of a lawyer. There […]


In the franchise contract, the franchisor’s promises must be presented to the franchisee in writing and subjected to careful scrutiny. This is why it is highly recommended to seek professional assistance in drawing up a well constructed contract.

When researching a franchise, start with a franchise consultant, then get the advice of a lawyer. There is no such thing as a generic franchise agreement. A franchise agreement needs to reflect the specifications of the business. Rather start with a non-disclosure document because this provides the principles that govern the franchise.

A non-disclosure agreement is a legal contract between two or more parties that outlines confidential knowledge the parties wish to share with one another, but wish to restrict access to. This kind of agreement provides ‘peace of mind’ and should prevent your idea from being ‘stolen’! It is wise to seek the services of a lawyer to draw up a non-disclosure agreement because it needs to be as be as comprehensive as possible.

A franchise consultant can help with everything from getting the ball rolling with regard to non-disclosure agreements, strategy, implementation, business development and even go as far as to offer comprehensive franchise and entrepreneurial development training. The best place to start is to contact the Franchise Association of South Africa. (FASA)

Typical terms and conditions of a franchise agreement

The agreement will first identify and describe the parties (franchisor and franchisee) involved. It will then identify and record the intellectual property rights available to the franchisee through the franchise arrangement, along with definitions of franchised business, intellectual property and so forth.

Next, it will detail the grant of the franchise: whether it is an exclusive, sole or ordinary franchise. Information about payment is also included (the franchise fee, royalties, advertising, administration fees and working capital). The Franchisors’ Obligations (initial and ongoing) are outlined, as well as the obligations of the franchisee (also initial and ongoing). Further information contained in the agreement relates to use of trademarks;the operating manual;conditions about change of ownership, death and incapacity of the franchisee and termination;conditions of restraint;disclosure, surety, confidentiality, a possible provisional period, as well as general clauses.

Are there particular clauses that prospective franchisees should be mindful of or look to include?

Pay special attention to the grant clause, as this will determine whether you are the sole franchisee operating in a certain territory (exclusive grant);whether the franchisor may also operate an outlet in the same territory (sole grant);or whether there are no restrictions on the number of franchisees who may operate in that area (ordinary grant). The number of operators naturally impacts on your ability to turn a profit.

Make sure you have a thorough understanding of the franchisor’s obligations. Bear in mind that although the Franchise Agreement may appear to be onerously biased in favour of the franchisor, it is in the interests of all involved in the franchise system to ensure that there is consistency in branding, service, product and the like. There must be a balance, however, and this is where the franchisor’s obligation to develop the franchisee and provide guidance is key.

Franchise Zone
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Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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