Franchise Law, Franchise agreements and tips for Franchisors

FASA’s Chairperson Maria D’Amico, Consultant Attorney at Thomson Wilks Incorporated gives us insight into the importance of using specialist franchise lawyers when setting up a new franchise concept or for franchisees buying into a franchise.

“Franchise law is a specialised area and not all attorneys understand franchising. Whilst there are commercial attorneys that deal with contracts generally, a franchise is also a contract, but it must comply with the law and is unique in franchising” says Maria D’Amico.

Franchise law is specialised because we have an Act called the Consumer Protection Act (CPA) and an attorney who deals in franchising would need to understand how the provisions of the CPA are applicable to the franchise agreement and disclosure document (the franchise documents). When an attorney prepares a franchise agreement, it has to comply with the CPA. In addition, the CPA has regulations that set out the information that needs to be inserted in a franchise agreement.

I am of the opinion that if the franchise agreement does not comply with the CPA, the franchisee may resile from the franchise agreement i.e., elect to terminate the franchise agreement. Your franchise agreement is a legal document that contains all the obligations of the franchisee and the franchisor, which must also reflect the costs that a franchisee is to incur in establishing the franchised business. In other words, there must be no hidden costs.

In addition to the franchise agreement, there must also be a disclosure document that contains all the pertinent information relating to the franchisor and their brand, as required in the CPA. It is advisable that the prospective franchisee has the franchise documents perused by a franchise attorney to ensure that they are CPA compliant. A prospective franchisee may also wish to appoint an accountant, who understands franchising, to have the financial projections which are contained in the disclosure document reviewed, to determine if these projections are realistic to the franchised operation.

WHAT CAN A FRANCHISOR DO TO MINIMISE ANY FRANCHISEE BREACHES?

The franchisor should conduct a detailed evaluation of their prospective franchisee before concluding any franchise agreement. If necessary, the franchisor can have the prospective franchisee evaluated through training metrics so that the franchisor chooses the right calibre franchisee as that franchisee contributes towards the franchisor’s brand. If the franchisee does something wrong, and depending on the severity of the wrongdoing, it may affect the franchisor’s brand. The franchisor must not fall into the trap of just signing franchise agreements with willing prospective franchisees without evaluating whether that person fits in with the culture, personality and ethos of the franchisor’s brand.

The franchisor needs to have open and regular communication with their franchisees, especially in the beginning when the franchisee is adapting to the franchisor’s business system. There needs to be guidance and initial training. The franchisor should send field advisors to the franchisees on a regular basis to do operational audits on the franchised business and then give the franchisee feedback on such audits.

Whilst the initial training is imperative, the franchisor must never compromise on the ongoing training, especially when the franchisor introduces a new product or service or enhances their product or service offerings.

Any other Tips?

It is important for the franchisor to develop a good and working business relationship with their franchisees. The franchisor must want their franchisee to succeed as this enhances the franchisee and the brand as a group.

The franchisor is alerted to the fact that if they provide a franchisee with any projections, warranties, or any other representations, that are not part of the franchise agreements, then there is a provision in the CPA that deems this as part of the franchise agreement.

The franchise documents need to be consistent, and the same terminology ought to be used consistently throughout the franchise documents. The franchisor should make the franchise documents easy to understand. Avoid legal jargon. The CPA provides that agreements should be in understandable language. In South Africa we are fortunate to have a law demanding this, so South African agreements ought to be easier to understand in comparison to those in the UK or the USA.

A franchisor may become a member of the Franchise Association of South Africa (FASA) and the benefit is that a franchisor who becomes a member will (as a requirement) have their franchise documents evaluated to ensure CPA compliance.

For more information about the legal side of franchising you can contact Maria D’Amico

Email: maria@thomsonwilks.co.za

Tel: 011 784 8984

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Maria D'Amico

Maria D’Amico holds an LLB in Law (obtained at WITS) and has been practicing as an attorney for 33 years and working at Thomson Wilks Attorneys.

Maria is an expert in commercial law, commercial litigation and franchising and her understanding of franchising law is invaluable to anyone involved in the franchising industry.

Maria is also qualified as a Solicitor in England, the United Kingdom, completed her Canadian legal conversion exams and is a Civil and Commercial Mediator (having obtained her certificate from the ADR – Alternative Dispute Resolution group in London).