How to Protect Yourself When Buying a Franchise
Protecting the long-term nature of your investment when buying a franchise is fundamental to fulfilling your dreams of owning a business.
While the Consumer Protection Act (CPA) covers buying a franchise, it more covers your consumer rights especially at the moment of purchase, rather than focusing on protecting contractual business rights.
Therefore, it is important before buying a franchise, to ensure that you have all the information you need to make an informed decision. As long as you:
- Do your brand research,
- Understand what you’re entering into and
- Seek out quality legal advice.
Buying a franchise should not be a daunting experience.
The following are a few tips to help you protect your investment and future livelihood when buying a franchise.
There are two prerequisites:
Thereafter, it is vital to do as much online research as possible. Existing franchisees will allow you to understand what their experience is first-hand so it is an advised idea to visit them and ask a lot of questions. Become familiar with the franchise’s website, speak to some of their existing franchisees, review any recent articles and comments on social media (while exercising some discretion with the latter, as they are typically invalidated). This will probably alert you to any risks associated with the brand.
Buying a franchise is a major investment not to be rushed into on the spur of the moment (and the CPA does offer you protection (the cooling-off period) to withdraw a buying decision after signing your franchise agreement). Especially be alert to a franchisor pushing you to make a decision as soon as possible – this is a long-term choice, and undue influence might mean this opportunity might not be the right time.
Note: There are 2 cooling-off periods:
- When you receive a disclosure document, you have 14 days to review all the information to make an informed decision before signing agreements,
- Thereafter when you sign the franchise agreement, you have 10 business days to cancel the agreement without incurring any penalties
2. Record any representations of promises
You should not rely on verbal undertakings. At a minimum, get permission if you are allowed to record on the voice recorder any conversations, and especially when promises are made on turnover or location. Then, if a franchisor fails to uphold that promise and a dispute arises, you won’t have to rely on memory.
You should have a disclosure document given to you that includes all the information, projections and expectations about the franchise opportunity and the franchise. This should be provided to you even before you have interviews with the franchisor. The roles and responsibilities and commitments made are documented in the franchise agreement. This is a legally binding document that can be taken to court and defended by an attorney. CPA clearly states you cannot misrepresent any figures and expectations.
There is a section in most franchise agreements where you can write down any representations you relied on when deciding to purchase the franchise. Every franchise agreement should have addendums/annexures/schedules pertaining to the specific franchise opportunity you are investing in.
You want to feel comfortable about all the fine print of what you are buying and operating for some years to come. Have a recommended lawyer – and even a specialist franchising lawyer – review the documents you have been asked to sign. They will likely pick up on anything abnormal or contrary to your interests in the franchise agreement. Have a financial advisor or accountant review the financial projections to determine if the franchise opportunity will be viable and if the projections are perceived as market-related and achievable in the current times. It will be money well spent.
4. Compliance with the law
We live in a highly regulated world today. This relates both to the operations of the franchise (and especially if it is a food business, with myriad health regulations) and the franchising industry itself which is governed by the CPA and Competitions Act. Because franchising is not regulated as such, this expansion mechanism is open for abuse. Every business, regardless of the industry has to comply to business statutory requirements i.e.
- Business administration,
- Health and Safety,
- Consumer Protection Act,
- Protection Of Protection Act,
- Consumer Protection Act and so many others.
Membership of FASA (Franchise Association of South Africa) would be something to look out for, though it is not compulsory for a franchise to join. Have your lawyer assess whether the franchisor is compliant with the Code, from the documentation you have been provided, The Franchise Disclosure Document and the Franchise Agreement.
5. Do a due diligence
Your potential franchisor is required to provide you with a disclosure document if you express interest in purchasing a franchise. This document is the most important you will have to review. It contains vital information regarding the financial state of the business, as well as backgrounds of the franchisor’s directors, the current franchisees and company-owned stores, intellectual property owned by the franchisor, the franchisor’s legal position, the costs of establishing and operating the franchise and other important policies which will impact franchisees.
6. Check whether your territory is exclusive
You should be clear about whether you have exclusivity in your location, suburbs or geographical region. If you do not have exclusivity, there is the real risk that another store or service provider of the same franchise will cannibalise your market in the future. At the same time, you should check whether any other similar franchise is in close proximity to your proposed location that could affect the viability of your preferred franchise.
It is against the Competitions Act to assign territories to a franchisee. Franchising adheres to a ‘gentleman’s agreement’ these days. This will ensure that each franchise business is viable and will be profitable to the best of the franchisor’s knowledge. If the territory has the potential for more than one franchise, market research and studies need to be done and presented to prove that the territory can sustain more than one operation in the area. Most franchise agreements state that they won’t open another franchise in x amount of km radius of your any one franchise.
The franchise agreement must clearly state the total investment required and stipulate whether any expenses, salaries/wages and costs of servicing loans are included in the purchase price. Further, the agreement must disclose any ongoing amounts payable to the franchisor.
9. Protection as a franchisee
Make sure the franchise agreement specifies your protection in a number of crucial areas:
- Franchise Agreement Renewal – you should have the right to renew your franchise agreement, provided you’ve upheld its conditions throughout the franchise agreement term.
- Franchise Agreement Termination – while a common clause is that franchisors can terminate a franchise agreement if the franchisee breaches it – make certain the reverse is also true if the franchisor fails to uphold the franchise agreement terms.
- Unit Resale – remember that you have the right to sell your business during the term of the franchise agreement, but most likely you can only select a buyer approved by the franchisor.
10. Cancellation of a franchise agreement
If you, unfortunately, wish to terminate your agreement – In terms of the CPA, you can cancel a franchise agreement without paying costs or a penalty within ten business days (the cooling-off period) after signing the agreement, by giving notice to the franchisor. The Franchise Agreement will have a termination clause and when it can take effect and under which circumstances.
The above information should assist you in purchasing your franchise. Perhaps also, you should closely study your responsibilities. Many disputes occur not because of franchisor negligence, but failure to understand your own responsibilities in running a franchise. Care and diligence in performing the responsibilities in the franchise agreement will help you avoid a breach of your franchise agreement once you are operating the business.
By Eamonn Ryan