It will typically consist of 70 or more pages packed with legal clauses and you might be tempted to just sign it. Our advice: “Don’t!” Unless you read the franchise agreement properly, understand every clause it contains and are willing to abide by it, your venture into the world of franchising could turn into an unmitigated disaster. In this article, we’ll explain why complexity is unavoidable when it comes to franchise agreements, and how to deal with it.
The franchise agreement governs the relationship between franchisor and franchisee. Its complexity stems from the fact that unlike most other agreements, it deals with the consequences of a long-term business relationship entered into for mutual benefit. It is also worth noting that no matter what has been said “off the record”, unless it’s written into the franchise agreement, it is meaningless.
The good news is that while before the introduction of the Consumer Protection Act (CPA), franchise agreements could contain almost any provisions the parties agreed to, this has now changed. The CPA sets out in detail what information a franchise agreement must contain and states it must be drafted in plain language. Best of all, franchisees are granted the right to cancel the agreement without cost or penalty within 10 business days after signing it; all it takes is a written notification to the franchisor, no reasons need to be given.
This “cooling-off period” is granted in addition to the provision that the franchisor must provide qualified prospects with a disclosure document at least 14 days before the franchise agreement can be signed. This means that prospective franchisees have in effect 4 weeks within which to make up their minds. This makes them the best protected prospects in the world.
The content of the franchise agreement is governed by the Regulations to the CPA. These Regulations list a host of issues that need to be covered, including details of:
- The franchisor’s full corporate registration and contact information as well as that of its office bearers.
- The business system and related intellectual property and how the franchisee is expected to apply both.
- Territorial rights and/or restrictions as well as the franchisor’s involvement in site selection.
- The range of products or services the franchisee is permitted to trade in.
- Financial obligations throughout the lifetime of the franchise agreement. In addition to amounts payable it includes payment terms and funding options. The agreement must also state how any deposits paid by the prospective franchisee will be administered.
- Duration of the initial agreement, option to renew and the consequences of termination of the franchise agreement. These will include post-agreement provisions, for example restrictions on the former franchisee’s right to trade in the same sector.
- The nature and extent of the initial and ongoing assistance the franchisor will provide.
- Restrictions to the franchisee’s right to delegate management of the business to a third party, transfer it to his/her heirs or sell it.
- The general rights and obligations of the franchisor.
- The general rights and obligations of the franchisee.
The above is merely an overview intended to provide a sense of the consequences of signing a franchise agreement. It is not comprehensive and does not purport to constitute legal advice. Investing in a franchise is a serious undertaking. Should you consider this step, we strongly advise you to consult with an attorney versed in franchise matters before you sign a franchise agreement or make any payments.
To ensure consistency throughout a network, franchisors will usually have a standard franchise agreement. And although it should be balanced and fair, it is inevitable that the balance of power will be shifted in favour of the franchisor. After all, the franchisor is responsible for protecting the brand and the interests of all other franchisees in the network.
If you can’t live with a clause the agreement contains, insist on it to be removed. The franchisor will probably refuse. At that point, it will be better for you to walk away while you still can, rather than to sign an agreement you consider too onerous to abide by.
One more thing: As soon as you have signed the franchise agreement, file it away in a safe place and get on with the business of real business.
In the next article in this series, we will examine the role of the operations manual in a franchise. Should you wish to find out more about franchising and especially franchise finance in the meantime, contact the Business Manager at the Nedbank Area Office nearest to you. For contact details visit www.nedbank.co.za or your nearest Nedbank branch.