Franchising is described as a method of structuring a productive relationship between two parties in which both contribute to the production or distribution of the product and service. It is a contractual relationship between a franchisor and a franchisee whereby a franchisor would permit a franchisee to make use of his/her trademark or patent, distribution network and commercial know-how in return for a royalty fee attached to a license.
The franchisor may also provide the marketing image as well as technical assistance for the duration of the agreement. Franchising does offer the perfect opportunity for expanding a franchisor's business while retaining his/her competitive edge.
In order to ensure uniformity in the presentation and selling of goods/ services, the franchisor may insist on certain requirements amongst its franchisees, such as requiring them to obtain stock from him/her or from selected suppliers or to produce the stock in accordance with the franchisor's specifications. In addition to the need to protect intellectual property rights such as trademark, the franchisor also supervises the location, the décor, and may arrange premises in accordance with the distinctive layout/format associated with the franchise. Despite all of these, it is important to realize that the franchisee's business is an independent business to that of the franchisor.
Inasmuch as this industry is described as a specialized sector with all the good intentions, it is also a business concept or model whereby the franchisors and the franchisees are engaged in an economic activity. Therefore, in terms of section 3(1), the competition legislation does apply to franchising agreements, as they constitute an economic activity within or having an effect within the Republic.