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Franchisee Advice

What Constitutes a Fair and Balanced Franchise Agreement?

Unless you have a legal background, you will be shocked when your prospective franchisor hands you a copy of the franchise agreement.

Mark Rose

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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.

  • Introduction

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.

  • Prescribed content

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.
  • Recommended process

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.

  • Conclusion

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.

Written by Mark Rose of Nedbank and Eric Parker of Franchising Plus.
Copyright rests with the authors.

Mark Rose is the Head of New Business Development at Nedbank Business Banking. He holds a Masters in Business Administration (MBA) from the Oxford Brooks University, as well as various business qualifications from the Gordon Institute of Business Science (GIBS), the University of Stellenbosch Graduate School of Business, and the University of South Africa Graduate School of Business. Nedbank’s New Business Development unit develops customised industry specialised offerings to the medium sized business market, including Franchising, Agriculture, Professional – including Financial and Legal Practices, and the Medical Fraternity. This unit has also developed a unique Enterprise Development proposition. For specialist advice and more information on the Nedbank Franchising proposition visit the website or send an email to franchising@nedbank.co.za

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1 Comment

1 Comment

  1. Franchise Ethics

    Feb 20, 2012 at 18:30

    Whist franchise contracts are very important, choosing the right franchise is critical. If you need to refer back to your franchise agreement, it is likely that you have got some problems. That is bad news and a position you will regret being in. Choose your franchise well. Things can and sometimes do go wrong, and not always through events that you control as a franchisee. To gain the experience of one franchisee who found themselves in this position with a global franchise, visit http://www.cdicorp.info

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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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