3 Must know Franchisee Steps. Know your Rights.
Going into business or acquiring a franchise is exciting and can be very rewarding. But before you sign on the dotted line, it’s essential to understand what exactly you are getting into and have a good grasp of all aspects of law, the Consumer Protection Act, finances and ethical practices.
While you are in a legal frame of mind, get to know your rights as a franchisee as embodied in the Consumer Protection Act. Here’s a useful summary of the legal implications of franchising in South Africa
1. Bring on the paperwork
In fact, expect to sign on a number of dotted lines! Buying a franchise or starting up a new operation can be quite a legal education. There are a number of important legal documents that you can expect to come across with links to more in-depth information:
Before your deeper investigations can kick off you will be expected to sign a secrecy undertaking or non-disclosure agreement.
This document protects the franchisor against you disclosing any;
- Financial information about the franchise
- Strategic information about the franchise concept
It also ensures that they are only dealing with serious buyers and not just those fishing for information.
The disclosure document will give you a good understanding of the business concept and the franchisor. You will use this document to make up your mind whether you like the business and want to take it a step further. It also contains the contact details of existing franchisees. It’s highly advisable to contact some of them to enquire about their experience with franchisor support.
The franchisor will give you a franchise agreement to sign. This is a crucial document detailing the rights and obligations of you and the franchisor.
Get a lawyer, preferably one knowledgeable about the franchising sector, to go through the document, not only to make sure that it is fair to you, but also to explain any clause that you do not understand.
Contracts may vary; buying a Maxis franchise will have different clauses to that of a Cartridge Hyper franchise for example.
Remember to get legal and business advice on the lease that you sign with the landlord.
Choosing the correct site for your business is so important that many franchisors insist on approving the site before any rental agreement is signed. You must fully understand all lease conditions including:
- Lease period
- Total cost of occupation:
- Special levies
- Escalation clauses
- Annual increases
- Any penalties should you require to cancel the lease
In some cases, franchisors insist there be a clause saying they can take over the lease if the franchise agreement ends. You should not sign a lease agreement until you have signed the franchise agreement and qualified for franchise finance from a bank, or have enough funds available for the establishment cost and working capital required. See more information on funding agreements below.
Most prospective franchisees are unable to buy a franchise for cash. This means that they will need to enter into a funding agreement with a major bank.
Walk into any partnership with your eyes wide open and make sure that you have all the legal paperwork in order.
A business partner must add value, such as;
- Bring a skill
- Customer pool that you do not have
Even with these positive attributes make sure that your values and expectations of reward are aligned.
2. Research: Watch the bank
Find out as much as you can before you buy a franchise resale – both to ensure that you don’t overpay as well ensuring that you understand the legal and compliance status of the business.
Perhaps the first place to start is to understand why the franchise is up for sale.
Then, take the time to work with a savvy accountant and review the company’s audited financial records, including;
- Cash flow statements
- Balance sheets
- Accounts payable
- Accounts receivable
Then, go through the employee files including employee contracts and benefits. Unclaimed leave will be a liability passed onto you when you purchase the business. It’s also important to understand the major contracts that the company has with any clients as well as any past legal problems.
3. Franchising is not a free-for-all
Many of the clauses stipulated in the franchise agreement are there to protect the integrity of the franchise brand and other franchisees in the network.
Consistent quality and service levels are key to franchising success; you’ll soon find yourself on the wrong side of the legal agreement if you fail to follow the franchisor’s systems and guidelines stipulated in the operations manual.
If you are someone who would like to experiment with many new business and product ideas, then franchising may not be for you.
A legal helping hand
Understanding legal agreements can be difficult at the best of times, Franchise law is specialised and differ somewhat from other areas of business law. Ask the Whichfranchise legal experts for their advice with a franchise query that you may have.
Finally have a look at the many franchise resales that we have on the market.