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FRANCHISING

INTRODUCTION
Within a relatively short period, modern-day franchising, more fully described as
"business format franchising", has evolved to become the most popular business
concept ever created.
So what exactly is franchising? A franchise is an agreement between the
franchisor (the grantor of the franchise) and its franchisees (those who acquire a
franchise), granting the franchisee the right to operate under the name of the
franchise and use its trademarks, know-how, methods and procedures. Moreover,
the franchisee stands to gain from initial and ongoing training and advice offered
by the franchisor, as well as having access to bulk deals and group marketing
campaigns.
WHAT IS A FRANCHISEE?
A franchisee (recipient of a franchise) is an individual with a burning desire to
succeed in a business of his own but reluctant to operate in isolation, more often
re-inventing the wheel in the process as it were. Franchisees should be: Capable of absorbing new concepts quickly.
Willing to follow the franchisor's blueprint to the letter.
Positive people-persons imbued with the necessary enthusiasm to market the
business and motivate staff.
Adequately resourced to meet the initial (capital investment) and ongoing
(working capital) financial requirements of the business.
Able to manage and control the business, and willing to drive the brand at local
level.
Prepared to co-operate with the franchisor's team as well as with fellow
franchisees, and play an active part in programmes offered by the network.
Determined to build the business into the best and most successful in the
territory.
Convinced of the merits of the franchise and the brand, and prepared to defend
both against possible attack by competitors or others.
WHAT IS A FRANCHISOR?
The franchisor is the grantor (giver) of the franchise. To be deserving of the title,
the franchisor should: Know every facet of the business and have a hands-on approach to problem
solving.
Be honest and forthright in all dealings.

A good franchise agreement will be written in everyday language and set out in detail what it covers and what the respective rights and obligations of the parties are. AND HOW WIDESPREAD IS FRANCHISING? Franchising has taken the world by storm. the precise nature of the legal arrangement between franchisee and franchisor . To protect the brand from being brought into disrepute by the reckless actions of an incompetent or wilful franchisee. This principle applies to everything in the system: The pricing structure. There can be no part of the system itself that is hidden from the prospective franchisee. although the sector is far from saturation point. The sector employed 293 000 people and notched up a combined turnover of 58. because the franchise agreement regulates the relationship between the franchisor and the franchisee. This in itself is no cause for alarm. Have adequate financial resources to develop the concept and make the necessary investment into the brand. the franchise agreement must give the franchisor the power to exercise control over the way every unit of the network is . In the United States. and indicates significant potential for growth. Agreement exists that the minimum period should be one to two years but research has shown that most companies wait for six years or more before they roll out a franchise. how the marketing money is spent.97 billion Rand. Closer to home. what the franchisee's obligations to the franchisor are.nothing may be kept from the person who has invested in a franchise or is considering investing THE FRANCHISE AGREEMENT Newcomers to franchising are frequently astounded to find that a franchise agreement consists of 60 or more pages. franchising has made great strides as well. A survey carried out by Johannesburg-based Franchise Directions during 2000 reveals that South Africa had 478 active business format franchise systems that operated through a total of 23 625 outlets. widely seen as the home of modern-day franchising. BECOMING A FRANCHISOR To be ethical a franchise system must be transparent. Want to grow through others. or 12% of retail turnover. the franchisee's responsibilities during the set-up period.in this case as in so many others. and be prepared to share the rewards resulting from teamwork with franchisees. the more detailed it is the better.Have operated the business he wishes to franchise for a reasonable period. it is not quantity that counts but quality. This is far lower than the market share franchising enjoys in other parts of the world. about 50% of all retail business is conducted through franchised outlets. Strive for excellence in every facet of the business and determined to grow. But bulk alone is not enough . On the contrary.

The term of the franchise agreement typically extends over five to ten years.. whilst the second begs the question "reasonable from who's point of view?" Progressive attorneys with a good understanding of franchising have come to accept the need for a balanced view and the use of language that leaves no room for ambiguity. followed by an explanation of what constitutes a breach of contract. This will force franchisors that continue to use outdated agreements to have them reviewed. He may well have an excellent grasp of legal concepts but if he lacks an understanding of the way franchising works. he is bound to overemphasise the rights of the franchisor whilst minimising his obligations. this is subject to the franchisor's approval which shall not be unreasonably withheld. extend to the right to terminate the agreement. one often comes across meaningless clauses like: "The franchisor will use his best efforts . you are given the rights to use the franchisor's trademark. The first example makes one wonder how you would define 'best efforts' and is this likely to be good enough. Another common restraint is that restricting you from operating a business in competition to the . The rights and obligations of the franchisor are set out. As a result. in extreme cases. that franchise agreements are standard agreements and virtually non-negotiable.. it means that a franchise is granted. that the franchise agreement should be one-sided by recording all the rights of the franchisor whilst placing all the obligations on the franchisee. So. The franchise agreement will explain the terms of the franchise relationship.operated. it is almost inevitable that the term "grant" will crop up and it is essential that you understand its meaning. Initial and ongoing payments the franchisee needs to make and his obligation to operate the business in accordance with guidelines that are usually contained in the operations and procedures manual. badly written agreements that stress the obligations of the franchisee but fail to protect his legitimate rights should be rejected. trade connections and all the other things that make up the franchise package. whilst it is accepted. never sold. and it is important that this is done." or " . It follows that the franchisor must be in a position to reign in an errant franchisee and. We have said already that the agreement should reflect the respective rights and obligations of the parties.. however.. and the sooner the better. On expiry of the agreement. identify the contracting parties and describe what the grant of the franchise entails. The reason for this is that the franchisor's attorney compiles the franchise agreement. This limitation is necessary as it protects the franchise against incompetent operators entering the network and possibly bringing it into disrepute. Expect to find a provision that will limit your right to sell the business. will be explained. expertise. all rights revert to the franchisor. with good reason. This does not mean. apply sanctions that would. usually linked to an option in favour of the franchisee that the agreement may be extended for a further period. and what the sanctions will be.. In other words. but only for a period and subject to certain terms and conditions." and so on. Although legal jargon should be avoided. Many franchise agreements tend to fall down on this point.. In layman's language. if necessary.

comprehensive details regarding your legal and ongoing financial obligations. and the cost involved.aspx . a list of existing franchisees. Like it or not. FINANCIAL CONSIDERATIONS Payments which franchisees are expected to make to the franchisor can be broken down into initial payments and ongoing payments. but it is essential that you understand their meaning before you sign the agreement.za/MyBusiness/SEDAStart/Pages/Franchising. Given the importance of the franchise agreement.seda. the activities of the franchise and the level of investment you are expected to make.franchised business. the legal fee will be money well spent. once concluded. but to protect their interests. Such clauses are not necessarily bad. the franchise agreement could be set aside by a competent court. you can carry out an in-depth investigation that. as well as a list of past franchisees who have left the network and why. You are entitled to expect that the disclosure document contains all the information you need to make an informed decision regarding the viability of the franchise offer. an important tip: make sure that your franchise agreement contains a clear reference to the disclosure document. This way. complete with contact details. even the fairest of franchise agreements will contain clauses that could severely limit a franchisee's rights. payment terms and formulae used to calculate the various fees should be explained fully in the disclosure document. For further information contact your nearest Seda branch http://www. prospective franchisees should seek competent legal advice to ensure that the clauses are fair and reasonable. Moreover. should it emerge at a later stage that the disclosure document was incomplete or less than truthful. Armed with this information. Depending on the circumstances surrounding the case. both during the time you are a franchisee and for a limited period thereafter. Lastly. the franchisor¼s business references and a letter by its auditors.org. This is in fact the crux of the matter. the extent support you can expect to receive. Both clauses are necessary. Amounts. should leave you in no doubt regarding the bona fides of the franchisor. it is even conceivable that the franchisor could face fraud charges. should be included. This would include the history of the business and its office bearers. FRANCHISE TRAINING Specialised training to both franchisors and franchisees in the field of franchising and business management is offered by a number of Franchise consulting companies. THE DISCLOSURE DOCUMENT By doing your homework.