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How to protect yourself when buying a franchise is especially important now, with many people who were retrenched during the pandemic considering using their pay-outs to and fulfil their dreams of owning a business.
This is also why the Consumer Protection Act (CPA) covers buying a franchise, with the aim of the act not focusing on protecting businesses rights, but consumer rights, because it is usually consumers who buy a franchise.
Before buying a franchise, it is very important to ensure that you have all the information you need to make an informed choice, such as all the clauses and compulsory disclosures that must be included in a franchise agreement to protect franchise buyers.
The provisions and regulations of the CPA ensure transparency and proper disclosure to protect franchise buyers from unfair or unreasonable terms and risks. Any franchise agreement is worthless if it does not correspond with the provisions of the CPA.
Section 5(6) makes it clear that a franchise buyer is not only protected after signing a franchise agreement, but also regarding:
A franchise agreement is an agreement that includes provisions that the franchise buyer (franchisee) pays for the right to do business in South Africa, and that payment is made in exchange for services the franchisor will provide, as well as the use of the brand and marketing, such as advertising, trademarks, commercial symbols and logos, branding, and labelling owned or licensed by the franchisor.
The agreement must also provide that the franchisor substantially determines the system or marketing plan, that the business will have the franchisor’s uniform look, that the business is materially connected to the brand, and that the franchise agreement governs the business relationship.
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According to section 7, franchise agreements must be in writing, signed by both parties and in plain and understandable language. It must also include:
The agreement must also give full details of the financial obligations of the franchisee in terms of the franchise agreement or franchise business, including the initial fee payable to the franchisor on agreement, and what it will be used for and the funds required to establish the franchise including purchase or lease of property, site conversion costs, decor and signage, equipment, furniture, hiring and training of staff, opening stock and legal and financial charges, the initial working capital, where possible and the basis on which they are calculated.
The franchise agreement must also stipulate the total investment required and give a clear statement whether any expenses, salaries/wages and costs of servicing loans are included in the purchase price.
It must also show the amount of funding available from the franchisor, if any and the conditions for funding and the total amount that the franchisee must pay for the funding before borrowing.
Furthermore the agreement must disclose any on-going amounts payable to the franchisor and details if this amount is fixed or variable and whether all or part of the amounts are included in the price of goods and services that must be bought from the franchisor or other preferred suppliers, the date or intervals when the amount is due and if any fee must be paid for administrative services provided by the franchisor and what these services entail.
A franchisee can cancel a franchise agreement without paying costs or a penalty within ten business days after signing the agreement, by giving notice to the franchisor.
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