The franchise agreement governs the relationship between the franchisor and franchisee and includes critical provisions relating to obligations of parties and prevention of conflict, dispute and financial loss. It is essential for a franchisee to understand his rights, obligation, general provisions and risks in terms of the agreement.
Seven critical clauses in the franchise agreement:
1. Consumer Protection Act acknowledgment
In terms of the Consumer Protection Act 68 of 2008 the following provisions are to be acknowledged or included in the franchise agreement:
A franchisee is entitled to cancel a franchise agreement without cost or penalty within 10 business days after signing the agreement, by giving written notice to the franchisor.
The franchisor is not entitled to direct or indirect compensation from suppliers, its franchisees or franchise systems, unless this is disclosed in writing with an explanation of how it will be applied. The franchisor must supply the franchisee with a disclosure document, pre-agreement certificate and current list of franchisees.
2. Grant clause
An important clause relates to granting the franchisee a licence to operate the franchised business and use the franchisor’s intellectual property rights such as brand names, confidential information and copyright.
This clause will designate the territory in which the franchisee may operate and whether or not the franchisee has exclusivity rights. Where a franchisee is given exclusive rights to use the franchisor’s intellectual property in a certain area, for example, the franchisee will be entitled to exclude all others, including other franchisees and the franchisor, from operating in that area.
A franchisee can alternatively be granted the sole but non-exclusive right to operate the franchised business in a certain area. This means that the franchisor will not grant a licence to other franchisees in the area, however, it does not exclude the franchisor from opening one or more outlets and competing with the franchisee in that area.
A franchisee may be granted a non-exclusive licence, giving it the right to use the franchisor’s intellectual property without any exclusive or sole rights.
3. Payment clause
The franchisee is usually required to pay an initial lump sum, which is paid to obtain the licence to operate the franchised business. The breakdown of this amount may include the costs of setting up the franchise, equipment, advice, assistance and training by the franchisor, and an amount for goodwill.
Once the franchised business is operational, the franchisee is required to pay royalties to the franchisor monthly, quarterly or annually. These royalties may be fixed or calculated as a percentage of turnover, and are payment for ongoing use of the franchisor’s intellectual property.
In most instances, the franchisee will also be required to contribute a regular amount towards the marketing of the franchise. Such contributions are paid into an independently managed fund and the franchisor and its associated businesses may not enjoy any direct or indirect benefit from such contributions not afforded to independent franchisees.
4. Obligations of parties
The franchisor’s initial obligations include assisting the franchisee with setting up the franchise, furnishing the franchisee with the operating manual, disclosing the franchise system and training the franchisee. Ongoing obligations include additional training, assisting with resolving problems, assisting with management and providing guidance.
The obligations of the franchisee are fairly wide-ranging and include paying all sums due to the franchisor timeously, operating the franchised business in accordance with the franchise system as set out in the operating manual to protect the intellectual property, goodwill and reputation of the franchisor, keeping records and books of account, and marketing the franchise.
The termination clause should deal with timeous payment and provide the franchisor the right to terminate should the franchisee fail to comply with the operating manual, or challenge the intellectual property rights of the franchisor, or commit an act or omission that will damage the brand of the franchise system.
6. Resale rights
Franchisees are usually only permitted to sell their franchise with prior consent of the franchisor, and provided that the purchaser enters into a new franchise agreement with the franchisor on acceptable terms.
Many franchisors include a right of first refusal, which allows the franchisor to buy back the franchise at a rate determined by them, or to match any potential purchaser’s offer.
7. Restraint of trade
It is advisable to include a restraint of trade provision to protect the franchise system, which should be reasonable with regard to the area, nature of activity and period in order for it to be enforceable.
Factors To Consider Before Signing Up As A Franchisee
Franchising is a brilliant way to get into business with not many entrepreneurial skills as it comes with a roadmap to follow for success.
You’ve been considering entrepreneurship for a while, and now that you’ve finally raised some money and been approved for a loan, you’re ready to quit your 9-5 job to run your own business. You may even already have your eye on a particular franchise, but while franchising is considered an easier and more low risk way to get into business, are you suited to being a franchisee?
“The question is not ‘is franchising right for you’, but rather, are you right for franchising? Because if you don’t have the right attitude and skill set, it can be a very expensive mistake,” says small business expert and author Steve Strauss.
Franchising may seem like an easy way into entrepreneurship, but along with an established name and proven systems, come rules, regulations and little room for creativity. If you’re not ready to become a franchisee, but want to go into business for yourself, you may find yourself struggling to operate within the system’s blueprint.
Ask yourself these three questions before proceeding with the process of franchising:
1. Will you be able to follow the directions of the franchisor?
You’re buying into an existing and proven concept so it’s safe to assume that the franchisor knows best, and so you have to be open to learning and following guidelines for business success. If, for example, you have experience in advertising and think you have an improved technique of marketing the franchise, you may want to change the advertising material provided by the franchisor – don’t.
“Being a franchisee means following the directions of the franchisor, even when you think you know a better way,” advise experts from strategic and tactical advisory firm MSA Worldwide.
“In addition to initial training, you need to be prepared to accept coaching and advice from the franchisor on how you operate or market your location.”
2. Do you have the need to experiment?
Lou Groen may have had success in launching a new menu item that McDonald’s approved of in 1962, but not all franchisees are that lucky. Stick to the plan and limit deviations to the menu or anything that involves the customer experience.
If the franchisor’s concept doesn’t involve deliveries, offering them to your customers may cause issues for others within the franchise system. “If it’s not part of the franchisor’s concept, you’re deviating from the concept and therefore, no longer running your store as a franchise,” according to MSA. Franchising arguably limits innovation opportunities, so if you’re prone to implementing creative ideas and evolving business offerings based on said ideas, rather start your own independent business.
3. Are you a team player?
These first two questions you address should already lead to the realisation that everything you do affects everyone in the franchise chain. One bad experience at your establishment and suddenly, all the stores are affected by bad press or unsavoury social media attention.
“Other franchisees are relying upon you to offer to the consumer a consistent level of service, product quality, and brand message. You are going to have to work with others in the system in making decisions,” advise experts.
Remember that as part of a chain of other business owners, you may have to accept that majority rules when it comes to decisions where franchises do have a say.
3 Ways You Can Innovate And Improve As A Franchisee
Although your role as a franchisee isn’t really to innovate, there’s room for creativity if you go about it the right way.
When you signed on the dotted line after reading and agreeing with the franchise agreement, you knew that you were buying into a proven system where everything has already been thought out for you, and all you have to do is follow the formula for success.
But you’re a franchisee longing to put your own imprint on your business, and it may be frustrating to feel boxed in by a formula, while you’re bursting with new ideas.
“Franchising, by its nature, discourages innovation on the part of franchisees, who are required by their franchisors to follow very specific policies and procedures on exactly what they will sell, how they will make or deliver it,” notes Randy Myers, contributing editor for CFO and Corporate Board Member magazines.
This doesn’t mean your ideas will never see the light of day though. But before you approach your franchisor with your brilliant insight, consider the following steps that may well lead you down an innovative path:
1. Get the basics right first
Franchisors know that customers like consistency as it makes them comfortable and trust every location of their franchise they choose to visit. But, even the strictest franchisors get hungry for new ideas. It’s the timing that’s vital for your idea to even be considered.
“Most good systems don’t want new franchisees to even think about innovations until they learn the existing system inside out and prove that they can execute it like a star,” said Jeff Elgin, CEO of FranChoice, a network of franchise referral consultants. “At that point, they have become successful, their base is secure, and they have earned the right to consider innovations.”
It’s wise to ensure you’ve learned your franchisor’s existing business model before you suggest any improvements.
2. Do your homework
So, you’re doing well and you’re sure your idea will be welcomed as a crucial innovation to the franchise system – but research your proposal, suggests Kim Stevens, VP of Regional Development and Director of Franchise Awarding at Woodhouse Day Spas. “Especially if you’re suggesting something that would impact all franchisees, create a business plan before approaching your franchisor,’ she says.
It’s also good to have another look at the franchisor’s policy for accepting new ideas to ensure you’re prepared for tough questions before you propose your idea.
3. Speak to the right people
Elgin recommends you first identify the person at the franchisor’s head office who’s responsible for receiving new ideas. “Many of the ideas a franchisee comes up with will already have been proposed by another franchisee,” notes Elgin.
To avoid wasting your time, no matter how great you think the idea is, present it as early as possible before spending anything developing the idea.
3 Pricing Tactics To Recession-Proof Your Franchise
As consumers tighten their belts, how can you ensure your franchise is their first choice in the midst of strict budgeting and curbing of spending?
Whether or not there is a dip in the economy, you have stock on shelf you need to sell. But, if consumers are cash-strapped, you have to make every effort to ensure that your franchisees aren’t running at a loss.
“There’s no doubt that shoppers are more discerning about what they need and how they shop. However, quality remains significant and brands that continue to delight their customers will reap the benefit of being chosen,” says Ailsa Wingfield, executive director marketing and communications: Africa, at Nielsen.
Why not give customers the best of both – value for money at a competitive price – by applying one or more of the following pricing tactics in tough economic times:
1. Consider a greater focus on your house brand
“The days of in-house retail brands being treated with a fair amount of disdain by South African consumers have come to an end,” says Wingfield.
The global performance management company’s research has found that R38.4 billion of the amount consumers spend at hypermarket and supermarket tills – or R10 out of every R50 – is spent on private label products. South African consumers are beginning to feel that the quality of these house brand products is as good as that of established name brands.
Since research indicates consumers are further likely to shift between branded products and retailer private label offerings, it would be of benefit to your franchise if your in-house products are perceived as viable value alternatives of similar or better quality.
2. Sell products in bundles
This the method combining various products and selling them together as one bundle for a lot less than if they were being sold separately. This method is great for moving items that might be selling slower but also great for achieving a higher value perception in the minds of consumers.
CEO of GuruShots, Gilon Miller, says there are several bundling techniques you could apply, including:
- Pure bundling, where you offer a group of products that are only available as a bundle and aren’t sold separately.
- Mixed bundling, where you offer products that are sold both as bundles and as individual units.
- New- or lesser-product bundle, where you bundle a successful product with a newer or less successful product – the stronger product will help the other product find its way into a new market.
Bundling results in cost efficiency, more competitive pricing and might also encourage customers to regard a single store as a source for several solutions.
Related: How To Recession-Proof Your Business
3. Add even more value
When you price your product in alignment with the value your customer sees in it, you’re preventing both you and your customer from the possibility of losing out on value.
Calculating your optimum price, involves asking yourself these questions:
- Will your customers save money or time by using your product or service?
- Is your product or service is unique?
- Will your product or service help customers gain a competitive advantage?
- What does the competition charges?
“Value-based pricing ensures that your customers feel happy paying your price for the value they’re getting,” says Patrick Campbell, co-founder and CEO of Price Intelligently. “Pricing according to the value your customer sees in your product prevents you from short-changing yourself while creating an experience for customers that’s most aligned.”
The more value your customers see in your product, the more they will be willing to pay for it, ultimately improving your bottom line. When your pricing is reasonable, they won’t need much convincing to make the purchase at your franchise instead of your competitor’s.
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