South Africa has no specific franchise law, but some legislation applies to franchising in South Africa, including the Competition Act and the Consumer Protection Act (CPA). The CPA bestows certain rights on franchisees as consumers, specifically potential franchisees considering purchasing a franchise.
When researching a franchise opportunity, it’s a good idea to understand how franchise agreements work and what other legal aspects to consider before taking the plunge.
What rights do franchisees have under the CPA?
Franchisees should be aware of the following CPA regulations:
- A potential franchisee must receive a CPA-compliant Disclosure Document, together with the Franchise Agreement, to review the opportunity before signing the franchise agreement
- The franchisee has fourteen days within which to review the information in the Disclosure Document and Franchise Agreement
- Should the franchisee then elect to sign the franchise agreement, this agreement may be cancelled without penalty within ten days of signing
Are franchise fees negotiable?
While the franchisee may review the Disclosure Document and Franchise Agreement and have it explained to them, it is unlikely that the franchisor will negotiate on franchise fees. However, the franchisee may expect assistance from the franchisor in negotiating a lease for the outlet to get the best possible offer from the landlord.
What information can I expect to find in the Disclosure Document?
A CPA-compliant Disclosure Document should include the following information:
- Company information on the franchisor, including its contact details and registration information
- A list of current franchises or outlets, with contact details
- An indication of network growth including growth in the franchisor’s turnover and net profit for the past financial year and growth in the number of outlets for that year
- A statement on the financial viability of the franchisor and a statement by its accountant on the financial viability of the company
- A breakdown of the investment required, including the initial fee, establishment cost and working capital required
- The ongoing franchise fees that will be payable by the franchisee
- The franchisor may include financial projections
- The document should also provide information on potential other agreements to be signed, including supplier agreements
How does a franchise agreement work?
The typical franchise agreement has a duration of 5 years, with an option to renew for a further five years. The franchise agreement is, therefore, a long-term agreement. It describes the working relationship between the franchisor and franchisee, including the following aspects:
- Roles and responsibilities of each party
- Obligations of each party
- Renewal conditions
- Description of fees and when they are payable
- Conditions that will lead to termination and consequences of termination
Can a franchisor terminate a franchise agreement?
A franchisor has the right to terminate a franchise agreement under certain conditions, including the following:
- Breach of the agreement by the franchisee, including failure to comply with operational standards
- Any unlawful act committed by the franchisee
- If the franchisee is liquidated
- If the franchisee does anything to bring the franchisor’s image into disrepute
- If the franchisee shares confidential information on the franchise
What happens when a franchise agreement expires?
Suppose a franchise agreement expires due to the end of the initial term of the agreement. In that case, the franchisee usually has the right to renew the agreement by expressing interest in renewing in writing.
If the agreement expires due to termination, the franchisor may remove all intellectual property from the franchisee’s premises, and other remedies may also apply
In summary, a franchise agreement is a long-term commercial contract dealing with the rights and obligations of both the franchisor and franchisee. It’s a good idea to do in-depth research on the franchise before signing an agreement. The CPA protects the rights of franchisees to make informed decisions.