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Franchisee Advice

Ten Good Reasons Franchise Buyers Need a Lawyer

Before you sign for that franchise, have a pro read the fine print.

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Finally you’re poised to become an official franchisee.

You’ve completed due diligence: researched potential firms, found a product that ‘fits’ with your interests, interviewed ten to15 other franchisees to hear the pros and cons. You’ve narrowed it down to the business you favour and it’s time to sign on. Then, the franchisor provides a copy of the franchise disclosure document and agreements.

Whether you understand it or not, once you sign, you are legally obligated to uphold all the document’s provisions. Now is when you need to consult a lawyer. Too often they aren’t called in until there’s trouble, but with your buy-in fee at risk, it is well worth the extra cash for an expert’s oversight.

But not just any expert. Go to a specialist. Anyone looking to open a franchise should get professional advice either from an attorney or from a franchise firm that has some experience in the field. Your local general practitioner isn’t going to have a clue what they’re looking at. A franchise attorney knows what to look for, otherwise it’s a waste of time and money. You don’t want to pay them to learn.

Talk to My Lawyer

In case you’re still hesitant, here are ten good reasons to bite the bullet and invest in legal counsel.

1. Setting Up the Business Entity

For tax and liability purposes you have to establish a formal business. Whether you decide to operate as sole proprietorship, limited or general partnership, private entity, etc, the lawyer will work with your accountant to help you choose the arrangement that will best protect your home and personal assets from liability claims and ensure your proper percent of the profits.

2. Plain English

When you read it, you may not always get the details of the deal; the lawyer reads the documents and explains. Attorneys are familiar with the terminology, recognising standard conditions and clauses and alert to red flags when there are unusual demands or missing critical items. In evaluating the company’s track record, one warning sign is litigation history. Your lawyer will be wary of any past lawsuits or bankruptcy filings involving the firm or its principals.

3. Looking for Negotiables

The franchisor holds the cards; you are the franchisee and there’s not much leeway for discussion. With the playing field tilted in the franchisor’s favour, the lawyer’s job is to level it. Depending on the company’s leverage – how long they’ve been operating, the extent of their business and experience, how eager they are to expand – some franchisors may soften some of the terms. While the monthly royalty and advertising fees you’ve assessed are probably set in stone, there might be room for concessions on time deadlines for your start-up date, ‘grand opening’ support and how much time you’re allowed to correct transgressions before they call a default.

4. Setting the Boundaries

The size and extent of the sales territory you are granted is critical to protect you from undue competition. The lawyer clarifies the extent of your dominion, determining the geographical area and demographics you’re granted for your outlet. How many kilometres is its radius? Are the boundaries guaranteed? What exclusivity or protection is granted? Do you have the right to relocate if your lease expires or if your shop turns out to be in a bad business location?

5. Support

The franchisor agrees to provide back-up support for your fledgling business and the lawyer helps spell that out answering questions such as: What kind of instruction will you get? How many days or weeks will it take? Will it occur at headquarters or close to your home? If away, who pays travel? McDonald’s, for instance, requires nine months of on-site training.

Once you’re up and running, how much will the franchisor monitor your business? Does the company provide a free operations manual and how often is it updated? What restrictions specify details of remodeling, redecorating, obtaining supplies, uniforms or ‘trade dress’?

All franchisees are required to contribute to the advertising fund. This must be carefully worded regarding possible challenges to how ‘advertising’ is interpreted. Is it brochures? Flyers? Booklets? Media ads? Local or national? Who pays for the company website, is it supported by the firm or by the advertising royalties?

6. Disputes About Performance

Both you and the franchisor are expected to honour the letter of the arrangements between you, and clarifying default conditions is a critical element of protecting you if something goes wrong. What happens if one of you doesn’t perform up to par?

Failing to pay royalties or to uphold franchise standards are common areas of dispute. Are you expected, for example, to pay a minimum Management Service Fee each month whether or not you meet your required gross sales? Careful legal language is required to ensure your ability to cure a default.

7. Renewal and Termination

While you may be entering the franchise gung ho, the lawyer steps back and considers what happens if something goes wrong.

  • Under what circumstances can either you or the franchisor end your relationship?
  • Can you be dismissed if you fail to meet performance levels or if the franchisor merely decides to move from that location?
  • Can the franchisor cancel your agreement if you lose your lease?
  • Are you planning to be able to renew when your current agreement expires?
  • If so, are you required to remodel?
  • What rights might you have to sell or transfer your franchise location to someone else?
  • Would the franchisor have a right to veto potential buyers?
  • What about disabilities and death?
  • If your franchise fails, will the franchisor be required to purchase your inventory and supplies?
  • If you terminate, will you be able to pursue other business opportunities without undue hardship?
  • On the other hand, what provisions are there if you decide you want to expand to additional franchises?

A good franchise can help fulfil your dreams but you have to keep your eyes wide open – and two sets of eyes are better than one. Typically a franchisee has already identified a franchise concept and fallen in love. At that stage, it is very useful to have someone who is detached review the agreement and look at the system non-emotionally to be sure you understand the commitment you are facing.

8. Dotting the Is, Crossing the Ts

Once you’ve decided to go ahead and buy the business, the lawyer oversees the paperwork before you sign, preparing the asset or stock purchase agreement along with other documents that may be required.

9. Negotiating with Other Parties

In setting up a business, you’re apt to be hiring contractors, arranging deliveries with suppliers, employing staff. A lawyer helps work out the stipulations and clarifies responsibilities. For instance, when you’re leasing a business site, a lawyer may alert you to the required language that ensures you’re allowed to post signs and logos on the property.

10. Managing Dispute Avoidance and Conflict Resolution

Despite the care taken in drafting agreements, disputes do arise. Some common issues calling for litigation include lying about earnings, failure to provide ongoing training and support, terminating the franchise and enforcing post-term obligations.

In starting your search for a lawyer, word of mouth can be a very effective first step, so ask friends and colleagues for referrals. Then, do some research on the Internet. Besides legal firms specialising in franchise law, potential franchisees can also consult with search firms and brokers that specialise in matching up franchisors and franchisees. Additionally you can turn to FASA for a list of suppliers as well as some advice.

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Franchisee Advice

5 Tips For Franchise Agreements

Below are 5 tips to ensure that your franchise agreement complies with the CPA.

Justine Krige

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South Africa has some great homegrown franchises – Mugg and Bean, Steers, Debonairs and Nandos, to name a few.  South Africa is also no stranger to international franchise groups, such as McDonalds, KFC, Wimpy and SPAR, although there has been an increase in the number of international franchises investing in South Africa in recent years.

The Consumer Protection Act, No 68 of 2008 (“CPA“) is the first piece of legislation in South Africa that specifically regulates franchise agreements. The CPA prescribes certain minimum requirements for franchise agreements, as well as certain information that must be disclosed prior to a franchise agreement being signed.  It is important that all franchise agreements comply with the CPA as provisions in franchise agreements may be declared to be void for non-compliance.

Below are 5 tips to ensure that your franchise agreement complies with the CPA:

1. Make sure you meet the minimum requirements

The CPA prescribes “minimum requirements” for franchise agreements.  These requirements, which are set out in the Regulations to the CPA, set out mandatory terms (i.e. terms which must be included) and prohibited terms (i.e. terms which must not be included).  They also prescribe that franchise agreements must be drafted in simple and plain language so as to be easily understood.  Legal jargon must be avoided unless absolutely necessary.

Related: The Perils Of The Franchise Agreement

2. Include prescribed minimum information

The CPA prescribes minimum information that must be included in a franchise agreement.  Most of this minimum prescribed information is fairly general in nature and would be contained in the franchise agreement in the ordinary course (for example, name and description of the types of goods or services that the franchise relates to, the obligations of the franchisor and franchisee, and any territorial rights).

There are, however, certain more unusual requirements in relation to prescribed information, which information would not necessarily be contained in a franchise agreement in the ordinary course (for example, the qualifications of the franchisor’s directors, and details of the members/shareholders of the franchisor).  These more unusual requirements must be kept in mind when preparing a franchise agreement.

3. Prepare a disclosure document

The CPA requires the franchisor to provide certain minimum prescribed information to the franchisee in a disclosure document delivered to the franchisee prior to the signature of the franchise agreement (including a list of current franchisees, if any, and of outlets owned by the franchisor; the direct contact details of the existing franchisees; an organogram depicting the support system in place for franchisees; and an auditors certificate confirming that that the franchisor’s audited annual financial statements are in order).

This information is intended to provide the franchisee with enough information about the franchise, its financial viability and potential business success so as to enable the franchisee to make an informed decision as to whether or not he/she wishes to “acquire” the particular franchise.

4. Prepare a non-disclosure agreement

It is important to ensure the protection of confidential information which may be disclosed to the prospective franchisee during the preliminary stages of negotiating and concluding a franchise agreement.

This may include, for example, the growth of the franchisor’s turnover, and written projections in respect of levels of potential sales, income and profit. Although not a requirement under the CPA, it is advisable for a franchisor to ensure that a prospective franchisee executes an appropriate confidentiality agreement prior to being sent the disclosure document.

Related: What Constitutes a Fair and Balanced Franchise Agreement?

5. Beware the “cooling-off” period

It is important to bear in mind that a franchisee has an entitlement under the CPA to cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.

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Franchisee Advice

6 Top Tips For Reading Management Accounts

There is a golden key that reveals the secret of whether your business will survive and thrive. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.

Richard Mukheibir

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There is a golden key that reveals the secret of whether your business will survive and thrive. It is not the brilliance of your business concept. It is not your talent for talking clients to sign on the dotted line. It is keeping tabs on the figures that summarise the strength of your business – your monthly management accounts.

Related: 6 Things You Need To Know About Profit And Cashflow

Many entrepreneurs are usually more interested in operations and find product development or sales much more enjoyable than catching up on accounts. I sympathise – I’m one of them! So if you feel the same way, my top tip is always to make sure that you partner with or employ someone who can oversee the finances for you.

But that does not mean you can let the figure boffins and the finances take care of themselves. To function properly in your business, you need to know the outcome of your sales and development strategies – and the story of that is told in your management accounts.

 If you never look at your management accounts, it is like blinding yourself in one eye. It means you risk being literally blindsided by a big surprise, whether it is heading for a significant loss or being confronted by an unexpected provisional tax payment.

Here is how Engela van Loggerenberg, our Group Financial Manager, puts management accounts in perspective for our new franchisees. She urges them to focus on six key areas:

  1. Priorities: Management accounts can help you pinpoint areas that you need to prioritise, whether to capitalise on growth or because they are not performing as well as you hoped.
  2. Strength: All businesses aim to grow their assets over time and the balance sheet in your management accounts will reflect whether and how you are achieving that.
  3. Control: A strong balance sheet is one that shows you have your business liabilities well controlled. The key marker here is your current liquidity ratio, which results from dividing your current assets by your current liabilities. To keep your business healthy, always aim to keep this ratio at least 2:1.
  4. Revenue: Ideally, you want to see your revenue grow month by month. Check your income statement both for the trend in actual revenue and also for actual against budgeted revenue to check how well your strategies are delivering results.
  5. Profitability: Of course, revenue is not the same as profitability. You need to know your gross profit – the basic figure of your sales less the cost of those goods – and net profit, which also deducts a range of other expenses including taxes. Track the percentage of these two profit figures as well as the actual cash amount they represent to keep a check on whether your costs are creeping up too high.
  6. Finance: Most businesses at some point want to finance their growth by borrowing from a bank. A set of well-regulated management accounts is a prerequisite to obtaining finance.

Your management accounts do not have to be particularly complicated to give you these vital pointers – and if you are figure-shy, the more straightforward the better.

The important thing, though, is that you do not allow yourself to be too scared to ask if there is something which is not clear to you. That is the way to keep control of this key to your business fortunes and to keep building your business from strength to strength.

Related: 7 Things Every Entrepreneur Should Know About Managing Cash In The Business

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Company Posts

A Three-Pronged Approach To Franchise Success

Danie Nel, head of business development for Cash Crusaders franchising, says the brand’s success over the past 22 years 
is attributed to the sentiment that “a profitable franchisee 
is a happy franchisee.”

Nedbank Franchising

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What is your current footprint?

220 Stores. We’re looking to increase that number by another 20 stores for the 2018 financial year, which will then bring us to a total of 240 stores. Depending on the economy, we’re looking to grow our footprint even more to around 300 to 350 stores nationwide in the near future.

What are some of your brand’s biggest achievements that other franchises can learn from?

Our ability to read the retail market and innovate to stay ahead of times. We have recently launched an online platform where customers can sell their goods or borrow money — all online. This was a first for online retailing. One other achievement that I would wish to highlight is the launch of our mobile phone range, Doogee, exclusive to Cash Crusaders. Personally, having the honour of opening our 200th store was a tremendous achievement.

Franchisor involvement has also played a big role in the success of the organisation. Our CEO Sean Stegmann and other senior managers are as much involved in the business as any other operations manager or operator.

There is simply no ‘ivory tower’ management in our business and it makes a huge difference.

Related: How Sorbet Franchisee Kate Holahan Is Nailing Success By Following Her Dream

What are some of the challenges you’ve encountered and how have you overcome these?

Some of our daily challenges include securing a premises at a favourable rental and securing a franchisee with sufficient unencumbered capital, who is credit- worthy. Once the store is open, cash flow management and stock procurement is key.

In addition to this, it’s a challenge to achieve profitability immediately and to meet franchisee expectations. It’s also vital to ensure superb customer service and to retain those customers in the current retail and economic climate. I would say that our single biggest challenge is to retain and to build our customer base.

What attracts franchisees to Cash Crusaders?

Our unique retail model that allows for multiple streams of income through one business. These three profit centres include: New goods (variety of imported quality goods), second-hand goods (which we buy directly from the public, either through customers coming directly to our stores, or via our house-buy system offered by some of our stores) and secured lending (a financial service where customers can borrow money against valuables, determined at store level, and the loan is repaid within 30 days — or the contract is renewed for another 30 days with interest and service fees charged).

Why is it important for successful franchises such as yours to have a strong banking partner and how does it benefit both the franchisor and the franchisee?

Gone are the days where you just got a deposit book or cheque book and a little business loan from your bank. Banking has become more sophisticated and the technology that the bank offers is as important as its service, making life for both the franchisee and the franchisor easier on a day-to-day basis.

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