The small print of franchise agreements explained

To start a franchise business can be a formidable and monstrous experience. The drive behind the franchising movement is threefold. For business owners to expand their business through franchising the risk is much lower due to the fact that the costs pertaining to expansion is shifted to the franchisee. The business will grow in a much shorter period and the franchisee is not only another employee in the business: he is the manager of his own business. It is true that not all types of businesses can implement the franchising scheme. In order to adopt the franchising scheme the fundamentals of the business should be easily duplicated. Usually franchise agreements relate to businesses involving the sale of detailed goods and/or products or the implementation of a system that is unique in that sector of business. Franchising is the use of someone else’s business model or structure that proves to be pioneering forward and is successful in the market.

There are usually various demands imposed on the franchisee by the franchisor.  However, a franchise is still an independent business with its own legal personality and needs to comply with relevant legislation.  Since the 1st of April 2011 all franchises must comply with the new regulations published in terms of the Consumer Protection Act (hereinafter referred to as the “CPA”).  All franchise agreement must now comply with these regulation to avoid any penalties.  In essence, the franchise agreement is entered into by the franchisor and the franchisee in terms whereof the franchisor authorises the franchisee to copy the franchisor’s business model, trade under his name thus authorising the franchisee to use and implement the intellectual property of the franchisor’s business.  The agreement between the franchisor and the franchisee will also have to address commercial aspects such as the franchise fee and royalties payable, how market increases will be addressed and royalties payable to the franchisor.  The most important aspect of the franchise agreement is therefore for the franchisee to be licensed to use the intellectual property and trade marks of the franchisor’s business.

Before the CPA, a franchise agreement was not regulated except through common law principles of law of contract and the Franchise Code of Ethics and business practices.  The CPA drastically changed the position when the principles of common law were codified and incorporated in the regulations of the CPA to deal in depth with the rights and duties of franchisors and franchisee. The regulations also provided for the content and best practices to be included in franchise agreements.

Accordingly, a franchise agreement needs to be in writing, in plain understandable language and must be signed by the franchisee.  To protect the franchisee from brief mistakes, the CPA regulations now provide for a cooling off period in terms of which the franchisee will have ten business days after signing the franchise agreement to cancel such agreement by way of written notice to the franchisor.


All new franchise agreement must now contain the following clause providing for a cooling off period on the top of the first page of the agreement:

“A franchisee may cancel a franchise agreement without cost or penalty within 10 business days after signing such agreement, by giving written notice to the franchisor.”

The CPA provides for a further list of clauses to be included in the franchise agreement that will not be discussed in full due to the nature of this article. This discussion does not contain a full list of the requirements, but highlights those which we believe are of importance. One can accept that if such provided clauses are not inserted in the franchise agreement, one will be penalised.  The CPA further provides for clauses that are general to use in franchise agreements and which the use of now after the incorporation of the CPA regulations will be void. 

Regulation 2(2) specifically deals with the contents to be included in a franchise agreement. Accordingly the franchise agreement must now contain provisions that will disclose unreasonable fees, costs and prices pertaining to the franchise agreement and relationship between the franchisor and franchisee. The regulations under the CPA further provide for provisions to be included that will protect the franchisee from the inclusion of further costs involved with conduct or requirements that are not essentially necessary for the protection of the franchisor’s business system and clauses indicating that the franchisor will not be entitled to any benefits, financially or otherwise, from suppliers to its franchisees unless this is specifically disclosed to the franchisee in writing. 

It is important to note that any provision in a franchise agreement which is inconsistent with any of the provisions provided for in the regulations will be void.  It is therefore advisable that your franchise agreements, new or existing (i.e. agreements drafted and concluded before 31 March 2011), are revised, amended and/or drafted by an attorney.

Further, regulation 2(3) deals with the provisions pertaining to the financial issues surrounding a franchise agreement. This is where most prospective franchisees become paranoid. Accordingly each franchise agreement must now entertain clauses in terms whereof the franchisee is or will be informed of the direct or indirect consideration payable by the franchisee to the franchisor, i.e. the franchise fee, any deposits to be paid by the prospective franchisee and how these deposits will be dealt with by the franchisor, the amount or expressed percentage of such contribution, and the full particulars of the financial obligations of the franchisee in terms of the franchise agreement.

The CPA regulations further provides for the ordinary content which one would expect to find in franchise agreements, but now requires more detail than before. It should be borne in mind that when preparing a franchise agreement  same should to be in compliance with the CPA, and that franchisees are defined as consumers as per the definition of the CPA and therefore for all purposes that non-franchise provisions in the CPA and regulations will also find application to such an agreement.

The advise always given to conduct a due diligence of the franchisor’s business before signing a franchisee agreement is now underwritten by the CPA regulations which provide for a list of information that needs to be disclosed to prospective franchisees 14 days before the franchisee signs the franchise agreement. These disclosures help to determine the royalties and franchise fees that are payable and are usually calculated on the familiarity and popularity associated with the franchise, its trade marks and intellectual property. It is therefore advised that the reviewing and redrafting of franchise agreements and disclosure documents be undertaken without delay in order to comply with the CPA and avoid possible penalties. As mentioned, the exemptions in the CPA do not apply to franchise agreements and therefore all the provision of the CPA will find application to franchise agreements.

July 29, 2014

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