Maria D’Amico, Franchising Law Expert
An exception to the Rule
Maria D’Amico is an expert in commercial law, franchise law and high court law. In 1987 she completed her LLB in Law at WITS. She has continued to study and growing her skills throughout her career, ultimately leading her to the realm of franchising. As a result, she has made her mark in an incredibly daunting industry, ultimately influencing franchise law for the better.
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The Creation of a Franchising Law Expert
Shortly after completing her articles, in 1990 Maria opened up her own law practice. In 2000 Maria qualified as a solicitor at the Institute of Law of the United Kingdom. In the latter part of the 2000’s Maria went on to complete the Canadian legal conversion exam.
Having previously served as an advisor to the Business Woman’s Association, Maria was instrumental in the merging of the BWA with two other women’s groups. Playing a role in an influential woman’s association drew attention to the considerable number of high powered business women in South Africa. Inspired by her peers, Maria continued to grow her career and the franchising sector.
Moving on from BWA, Maria became involved with FASA which has become, in her own words, ‘the high point of my career’. FASA led her career from being primarily litigation driven, to more commercial and namely contract based law.
These developments allowed for Maria’s involvement in shareholder disputes, which require the knowledge of many aspects of commercial law in order to court on the various facets of the dispute. Maria’s understanding of the law in this regard is invaluable to anyone involved in franchising in order to maintain the implementation of legal and transparent transactions throughout.
Prior to the implementation of the Consumer Protection Act of 2009, Maria has prided herself in drafting commercial and franchise agreements which are easily read and understood by the general public. These, ‘easy style type of agreements’ have had an immensely positive impact on the franchise industry.
Q: I have made a down-payment of R100 000 to secure the rights to a franchise. I had a verbal arrangement with a potential “sleeping partner” who would provide the balance of the funds required, about R400 000. This person has now withdrawn and I need to raise the money urgently, failing which I stand to lose my deposit.
A: We could tell you that you acted unwise by putting down a substantial deposit before you had the balance of the funds tied up in writing, but this would not be particularly helpful. Given the situation you are in, you should discuss your situation with the franchisor. Perhaps they can put you in touch with a “sleeping partner” or offer you a joint venture arrangement. Alternatively, they might decide to release you from the agreement and refund your cash. If nothing positive transpires, we would advise you to seek competent legal advice. FASA’s Code of Ethics which is binding on its members is unambiguous on this matter. It reads, in part, as follows: “A franchisor shall select and accept those franchisees who, upon reasonable investigation, appear to possess the basic skills, education, personal qualities and financial resources adequate to perform and fulfil the needs and requirements of the franchise.” One could argue that the franchisor did not investigate your financial situation properly before accepting the down payment. Unfortunately, these guidelines are binding on FASA members only and it is uncertain whether a Court of Law would enforce them.
Q: Is it correct or legally permissible for a franchisor to reject an application for a franchise without furnishing reasons for the decision?
A: The answer is “yes”. One of the most important obligations a franchisor has is to select individuals as franchisees who appear to possess the skills needed to succeed in the business. Access to adequate funding is another essential prerequisite. And then there is the all-important chemistry between franchisor and franchisees – see article above. To ensure the growth of their networks, franchisors need to bring additional franchisees into the system and have every incentive to do so. The decision to turn down an application is never taken lightly. However, to accept someone into the network who is unlikely to succeed in the business would be outright irresponsible. Franchisee failure causes disaster all-round, with the likelihood of the franchisee suffering significant financial losses extremely high. The brand could also be damaged, and relationships with other franchisees could be soured. Franchisors know from experience which kind of person fits their franchisee profile best and act accordingly. Scientific instruments can also be used for this purpose. Experience has shown, however, that, human nature being what it is, stating the reasons for turning down an application often lead to endless correspondence or worse. It is for this reason that most franchisors prefer to make their decision without giving reasons. They are within their right to do so and you have to accept that.
Q: At what stage am I entitled to receive a network’s disclosure document? I am asking this because the franchisor I am negotiating with wants me to sign the franchise agreement before he will give me a copy of the disclosure document. This does not sound right.
A: It certainly isn’t! When the Franchise Association of Southern Africa (FASA) introduced an obligation on its members to prepare a disclosure document, the intention was to give prospects an opportunity to check out the franchise offer before they commit themselves. FASA even stipulates that the disclosure document must be given to a qualified prospect at least 14 days before a franchise agreement may be signed, or the prospect pays over any money. This has not changed; in fact, requirements are bound to become stricter in future. This does not mean that the franchisor is forced to put his intellectual property at risk. FASA recognises that the disclosure document contains confidential and sensitive information. To protect franchisors’ legitimate interests, they are entitled to insist that you sign a Confidentiality Undertaking. This compels you to respect the confidentiality of the information the disclosure document contains, and not to use it or pass it on to anyone else. For further details go to www.fasa.co.za. Let’s be charitable for a moment and assume that the franchisor you negotiate with does not know about this. In our minds, this raises serious concerns because it would indicate that he or she has not done the necessary homework. Before you go any further, you should obtain a list of the network’s existing franchisees, usually part of the disclosure document. Visit a good number of them and find out how they are doing. It may prove to be an eye-opener. Should the franchisor refuse to facilitate your access to established franchisees, we would advise you to simply walk away from the deal.
Q. I invested in a franchise about 10 months ago. The business is doing reasonably well but I cannot shake off the feeling that the franchisor makes more money from my labour than I do. The franchise agreement is for five years; is there any way of getting out of it before expiry?
A. When you enter into a franchise agreement, you do so for keeps. That’s why we advise readers to check out not only the opportunity itself but also their own motivation and willingness to stay the course. The only way you can break a franchise agreement prematurely is if the franchisor fails to fulfil its contractual obligations. If, for example, the franchise agreement stipulates that the franchisor will visit your branch at regular intervals to offer support but this does not happen, you would have a reason to demand performance. Should the franchisor fail to respond in an appropriate manner, you would have good cause to terminate the agreement. Keep in mind, however, that this is a serious step and one you should not take it lightly. To protect yourself from unintended consequences, we advise you to consult with an experienced attorney before you terminate the agreement.
Q. My franchisor refuses to distribute monthly operating results produced by other franchisees within the network. This makes it impossible for me to measure my own performance against network-wide benchmarks. I am very unhappy about this and want to know whether my request is unreasonable?
A. Not at all – being able to measure performance against similar operations is part of best practice in franchising. The only problem is that because franchising is unregulated, you have no way to force your franchisor to comply with your eminently reasonable request. We can only suggest that you get together with your fellow franchisees and present your demand jointly. Should this approach fail then there is nothing stopping you from creating an informal alliance with other franchisees and exchange figures on a regular basis. Unless your franchise agreement says otherwise, which is highly unlikely, the franchisor would have no right to stop you from doing this.
Q. I recently purchased an established retail business that operates under franchise. I invested all my savings and exhausted all available credit to pay the purchase price. I now found out to my horror that in terms of the franchise agreement which I took over from the seller and signed, I am obliged to set up and operate a coffee shop as an extension to the existing business. I don’t have the cash to do that and, seeing that my predecessor hasn’t done it, how can the franchisor force me to do it if I don’t want to?
A. Your problem proves two things we keep stressing over and over: Firstly, you should never deplete your cash reserves, rather opt for a lower investment, or extended credit terms. Secondly, read the franchise agreement and have its contents explained to you by an attorney with experience in franchising. Sadly, these two pieces of advice don’t solve your problem. We can only advice you to visit your franchisor, explain the situation and request time to build up financial reserves before investing in the coffee shop. The franchisor is unlikely to refuse because it is generally not in the network’s interest to force a franchisee into bankruptcy.
Q. I was interested in operating a franchise from a specific town and was still busy trying to arrange the necessary funding when the franchisor told me that another party was interested in the territory. To secure my rights, I paid a deposit of R150 000 and signed a pre-agreement which stated clearly that should I be unable to secure a suitable site and/or obtain funding for the balance of the investment, the deal would be cancelled and the deposit refunded. I failed on both counts but the franchisor refused to repay the deposit, placing the onus on me to find a prospect for the territory. I was unable to do that and have now found out to my dismay that the franchisor company has been put in liquidation. Please help me to get my money back.
A. It seems to us that you have fallen victim to the oldest con in the book. By telling you that someone else was interested, the “franchisor” prompted you to part with your money. We used inverted commas advisedly because a bona fide franchisor would never act in this way. Taking a deposit before a disclosure document has been issued and a cooling-off period has lapsed is strictly against the guidelines for ethical franchising issued by the Franchise Association of Southern Africa. This means that your “franchisor” has not acted ethically. From what you are saying, it appears to us that you may have legal recourse but court proceedings are lengthy and expensive. Embarking on such a process may mean throwing good money after bad and we cannot advise you to do that. However, you are the injured party and only you can make this decision. We realise fully that this is cold comfort for you but even the most rudimentary investigation of the opportunity prior to paying over the money would have sent alarm bells ringing. Should you find it in your heart to learn from this experience and make a fresh start at some time in the future, we urge you to contact us early on and we’ll go out of our way to guide you through the pitfalls.
Q. I entered into a franchise agreement two years ago. It is supposed to run for five years, with a renewal clause in my favour. I have no wish to renew at the end of the initial period, in fact I do no longer want to belong to this particular franchise. I like the industry, though, and wish to carry on under my own steam. The franchise agreement does not permit me to do that – what are my options for getting around this?
A. When you join a franchise, it’s for keeps! That is precisely the reason why we – and every other ethical source in franchising – advise potential franchisees to investigate the opportunity carefully before they sign the franchise agreement. You are not saying why you want to jump ship, but unless your franchisor is in breach of the agreement, your chances of having it set aside are slim to non-existent. Why not tell the franchisor how you feel and request assistance with selling the business? You could then move to another area and start afresh, this time under your own banner. The restraint clause is unlikely to preclude you from operating a similar business as long as you do not rely on the goodwill and systems of the franchisor.
Q. I came across a franchise opportunity that appealed to me. The franchisor told me that several people are interested in the territory I wanted to trade; if I wanted to secure the rights, I would have to make a deposit of R50 000 to show that I am serious. I was assured, albeit verbally, that should I change my mind, I would receive the deposit back – no questions asked.
I paid over the money in good faith but after receiving a copy of the franchise agreement, I no longer wish to proceed. Now the franchisor tells me that I can obtain a refund only if I bring another investor along. If I am unable to do this, I would have to wait until such a person shows up. According to the franchisor, this could take years. How can I get my money back?
A. It sounds like you have fallen for one of the oldest tricks in the book. If interest in the franchise, and your chosen territory, was so strong at the time you were asked to pay the deposit, why is the franchisor suddenly concerned about finding a replacement? If the franchisor is a member of the Franchise Association of Southern Africa (FASA) you have some recourse. According to FASA’s Code of Ethics, which is binding on its members, the franchisor must give you a disclosure document and a copy of the franchise agreement at least 14 days before any money changes hands. From what you are saying, it does not sound like this was the case, so you could ask FASA to intervene on your behalf. As matters stand, however, FASA has no statutory powers, meaning that their influence over errant franchisors, especially if they are non-members, is limited at best. If the franchisor is not a member, you may have to go the legal route but this can be costly and time-consuming.
Q: What are my rights as a franchisee when a franchise is de-franchised?
A: Your franchise agreement should deal with this eventuality. We have no access to this document, and you don’t give the reasons for being de-franchised, or how you feel about it. This means that we can only respond in very general terms. Should you feel that the franchisor has acted unfairly, you could approach the Franchise Association of Southern Africa (FASA) and ask for mediation. You could also go to court but this could become a lengthy and expensive process. Also, its outcome is never certain and even if you win, you may find it difficult to continue as part of the network. Assuming that you want to stay in the same business as an independent operator, you will have to give up everything that links you to the network. This may include your list of customers (which you would have built up while a franchisee) and even the premises you trade from. The good news is that restraints of trade are difficult to enforce, especially if you are a tradesman and want to continue working in your trade. Before you decide on a course of action, however, we recommend that you consult with an attorney with expertise in franchise matters.
Q. We operate a service business and currently have three branches, all located in and around Pretoria and operating profitably. We frequently receive calls for our service from other centres but are unable to accept the work because of the logistics involved. Should we expand through franchising or should we sell independent business owners a licence to perform the service under our supervision?
A. To provide someone with a licence to perform your service is essentially the same as franchising the concept, with one extremely important difference. A licence will not give you the degree of control over the licensee’s contact which a franchise agreement provides. To grow the brand, you would want your business partners to operate under your name, perform the service and conduct the business exactly as prescribed by you. Only a properly drafted franchise agreement will give you the necessary power to reign in reckless operators whose actions may damage the brand.
Q. Can you direct me to a place where they can create a well-structured business plan for me?
A. Many companies offer such a service – at a fee! but we are not convinced that this is the best way to go about it. Your business plan is your map towards business success.
When you want to use the business plan to raise money, it must reflect your aspirations and your passion should shine through. Once in business, you need it to get suppliers and staff on board. On an ongoing basis, you need to track the progress of your business.
Use input from your accountant by all means but, rather than paying someone else to draw up a run-of-the-mill plan, buy a good book on the subject, study it carefully and do the job yourself. This will assist you greatly when it comes to discussing the plan with funders, suppliers or key staff.
Ask the Expert
Maria’s law practice continues to thrive to this day while she advises franchising parties in need of a commercial and franchising law expert.