• Expert Advice

The Consumer Protection Act (Act No.68 of 2008)

Franchising in South Africa is regulated by Consumer Protection Act. The franchise agreement is defined as the agreement between the franchisor and franchisee where:

• Consideration is paid by the franchisee to the franchisor.
• The franchisor grants the franchisee the right to carry on business under a system or marketing plan determined or controlled by the franchisor.
• The operation of the franchisees business is associated with advertising schemes, programs, trademarks, commercial symbols, logos, or any marketing that is conducted, owned, used, or licensed by the franchisor.
• It governs the business relationship between the franchisor and the franchisee, including their relationship concerning the goods or services to be supplied.

Entering Into a Franchise Agreement

Before a franchise can sign a franchise agreement, the franchisor must provide the franchisee with the following documents:

• An unsigned copy of the franchise agreement.
• The most recent and up-to-date disclosure document.
• Any relevant agreements or information pertaining to the agreements that the franchisee needs to enter into with the franchisor, landlords, funding sources, and suppliers.

Read More: Franchise Legal Agreements

Cooling-Off Period

Once the prospective franchisee has received the documents, they have 14 days to conduct due diligence on the opportunity and the documents before signing the franchise agreement. Franchisees may consult with business and financial mentors, advisors, and legal experts to make an informed decision about joining a franchise.

What is a Disclosure Document

• The purpose of a disclosure document is to provide a prospective franchisee with sufficient information relevant to the franchised business opportunity, enabling them to make an informed decision about joining a franchise.
• This document contains highly confidential and comprehensive information pertaining to a franchise opportunity.
• According to the FASA Code of Ethics, such a document must be given to qualified prospects before a franchise agreement can be signed.
• This document gives franchisees insight into whether the franchise is right for them. It uncovers the franchise system and provides detailed information about the franchisor.
• The disclosure document must:
  • Comply with the requirements stipulated in Section 3 of the Consumer Protection Act.
  • Ideally comply with the regulations and guidelines set out by FASA.
  • Be maintained and updated each financial year.
• Franchisors need to comply with these regulations to avoid contravening the law and misrepresenting their prospective franchisees.

What Information Is Included In A Disclosure Document?

The disclosure document includes the following information as specified by the CPA: 

• The number of outlets the franchisor has- both franchised and company-owned.
• A list of existing franchisees and their conduct details for you to contact as part of your due diligence.
• Information pertaining to the franchisor’s financial position, such a turnover, net profit, and the number of outlets.
• A statement by the franchisor affirming that, to the best of their knowledge and belief, the financial situation of the franchise company has not deteriorated since the auditor’s certificate was issued.
• Finanacial projections on hose the franchise opportunity should perform and an explanation of the basis on which these projections were calculated. Note that these projections will differ based on the area, site, and franchise commitment.
• A letter from an accountant or auditor certifying that the franchisor is a going concern and adheres to sound accounting principles.
• The support structure for the franchise.

Appendix 1 of the FASA Code of Ethics and business practices states that the following information should be included (but not limited to): 

• Information as stipulated by the CPA.
• Full and traceable information about the franchisor company, including contact details and details of professional affiliations.
• Details of the qualifications and business experience of the franchisor and their officers in the type of business being offered as a franchise and the operation of a franchise.
• Details of any criminal or civil actions against the franchisor or their officers, either taken during the past three years of pending.
• Full details of the franchise offer and the underlying business.
• Full details of the obligations of the franchisor vis-à-vis the franchisee.
• Full details of the obligations of the franchisee vis-à-vis the franchisor.
• An explanations of the most important clauses of the franchise agreement, including any restrictions placed on the franchisee.
• Full details of all payments, initial and ongoing, the franchisee will be expected to make, and what they can expect to receive in return for these payments.
• A list of existing franchisees and their contact details.
• An auditor’s certificate certifying that the franchisor’s business is a going concern and able to meet its obligations as they fall due.

Read More: Disclosure Document