Do Business Well

In the early days of franchising, franchise associations the world over saw themselves exclusively as franchisor representatives, and the Franchise Association of Southern Africa (FASA) was no exception. However, the widely held assumption that FASA would lave been automatically biased against franchisees was incorrect wen then. From the outset, FASA was concerned with the promotion 4 ethical franchising in the widest sense of the word and today, this organisation embraces within its membership franchisors, franchiees and service providers.

The Franchise Agreement:
Some practical pointers

The franchise agreement forms the basis of all dealings with future franchisees. Given its importance, it should cover every possible angle, and its drafting is best left to an accomplished professional in this field.

From the prospective franchisor’s viewpoint

It happens from time to time that newcomers to franchising ask us to let them copy an existing franchise agreement. This cannot be recommended. Ethics aside, to withstand possible challenges at a later stage, franchise agreements need to be drafted to reflect the realities of the business and the environment within which it operates. This is one of the rare cases where misguided action results only in cons, with the best will in the world, no pros can be found. Consider the following:

• Franchising is no longer a new concept. Based on their accumulated experience, legal practitioners who specialise in the drafting of franchise agreements know precisely what a good franchise agreement should cover. Provided that the client presents the necessary information in a concise yet comprehensive format, drafting will proceed at speed and cost should not be prohibitive.
• In any event, the cost of drafting a franchise agreement pales into insignificance when compared to the cost of drawn-out litigation that could have been avoided, had the franchise agreement been drafted properly and unambiguously in the first place.
• Within the confines of one franchise system, the franchise agreement should be a standard document. Once drafted, it will be used repeatedly, making it possible to amortise its cost over many

franchise deals.

Another advantage of standardisation is that it simplifies negotiations with franchisees and eliminates possible dissatisfaction among franchisees that could arise when they ponder the question of who has the most favourable agreement.

Amendments to franchise agreements should only be made in response to developments in the market place, unavoidable changes in operational requirements or if necessitated by legislative demands. It will be much easier to implement such changes throughout the network if the agreement is standardised.

The franchisee’s angle

Prospective franchisees should realise that they are about to enter into an arrangement of great importance. In many cases, it will have the capacity to affect the rest of their lives. To avoid unpleasant surprises at a later stage when it is too late to do something about it, they should have the franchise agreement explained to them by the franchisor.

The next step should be to have the agreement scrutinised by a legal practitioner who truly understands franchising. This legal advisor should be able to explain the meaning of each clause and its possible consequences in layman’s terms. Should it emerge that any of the clauses of a particular franchise agreement are unacceptable, the prospective franchisee should walk away from the deal.

Conclusion

While the importance of the franchise agreement should not be underestimated, it should not be used as a daily reference manual. In fact, once the franchise agreement has been signed, it should be carefully locked away. If either party feels the need to refer to clauses in the agreement on a regular basis, something has gone seriously wrong with the franchise relationship.

In practice, this development has been inevitable, as franchisors andfranchisees have obvious roles to play and service providers facilitate the professional implementation of concepts. In reality, neither one of theseparties can exist in isolation and each one stands to gain from the continued orderly development of the industry. Accordingly, it has always been FASA’saim to promote ethical franchising, rather than the narrow self-interests of franchisors alone and a careful study of FASA’s code will confirm thatvirtually all its provisions are designed to protect the interests of franchisees. First published in 1979, the FASA Code was an earnest attempt by FASA to regulate an industry that, due to its limitless potential and dynamic growth, was bound to attract its fair share of suspect operators who, either throughsheer naiveté or with fraudulent intent, would expose gullible would-be entrepreneurs to unacceptable risk or worse. Having been updated and strengthened several times since, the FASA Code continues to offer a goodmeasure of protection to prospective and established franchisees, provided of course that they deal with members of FASA. It should be understood that,as matters stand, FASA does not have statutory powers. As a result, this body, best intentions notwithstanding, simply lacks the ability to imposesanctions against wayward franchisors that operate outside its membership.

FASA’s Code of Ethics and Business Practices has some standing, however, as attorney Freek Potgieter, writing in the Franchise Book of Southern Africa 2001, confirms. Extracts from his relevant observations read as follows: “In Government Notice 2014 of 1998, published on 18 September 1998, a harmful business practice has, amongst others, been declared by the Minister (of Trade and Industry) to mean: `… directly or indirectly inviting the public to buy franchises; or receiving funds from franchisees; unless the parties comply with the conditions of membership of the Franchise Association of Southern Africa.’ Elsewhere in the same article, he continues: “The principles contained in the Code and any further developments have and will continue to have far-reaching implications for franchisors as they are binding on all franchisors irrespective of FASA membership.”

The Disclosure Document

One of the greatest problems facing prospective franchisees is to ensure that they know what they let themselves in for when they purchase a particular franchise. In the past, some people have lost their investment, or have found themselves locked into an unworkable contract with untrustworthy people, either because of misrepresentation or fraud on the part of a self-styled franchisor, or because they failed to investigate the opportunity properly. In this context, it should be remembered that the purchase of the best franchise might end in disaster if the franchisee turns out to be the proverbial square peg in a round hole. Careful investigation is therefore essential, but where to begin?

As early as 1994, FASA’s members acknowledged the need for prospective franchisees to have comprehensive and reliable information about the franchise opportunities available to them. This would have to happen long before prospects are asked to enter into a binding agreement or make any payments to the franchisor. This realisation led to the creation of an addendum to FASA’s Code in the form of an addendum requiring members to provide prospects with a comprehensive disclosure document. The disclosure document must contain all relevant facts about the franchise opportunity (see Figure 9 on the previous page).

At the same time, the FASA Code itself was amended to make it mandatory for FASA members to present a disclosure document to prospective franchisees. Moreover, a mandatory cooling-off period in favour of prospective franchisees was also introduced. The relevant section of the FASA Code provides that a certain number of days must elapse between the date on which a prospective franchisee receives copies of the disclosure document and the franchise agreement and the earliest date on which an agreement can be signed or any monies paid over.

At the time of going to print, the cooling-off period is seven days but feedback suggests that prospects need more time to consult with their professional advisers. In response to this finding, the number of days will be increased in the near future and FASA will be able to furnish the latest information on request.

FASA’s Disclosure Document Requirements
Appendix 1 to the FASA Code of Ethics and Business Practices
lays down the minimum amount of information a disclosure
document must include:

1. Full and traceable informationabout the franchisor company including contact details and details of professional affiliations.
2. Details of qualifications andbusiness experience of the franchisor and his officers in the type of business being offered as a franchise and the operation of a franchise.
3. Details of criminal or civilaction against the franchisor or his officers, either taken during the past three years or pending.
4. Full details of the franchiseoffer and the underlying business.
5. Full details of the obligationsof the franchisor vis-a-vis the franchisee.
6. Full details of the obligationsof the franchisee vis-a-vis the franchisor.
7. An explanation of the most important clauses of the franchise agreement, including restrictions placed on the franchisee.
8. Financial projections for at least two years and an explanation of the basis on which these projections were calculated.

Full details of all payments, initial and ongoing, the
franchisee will be expected to make, and what he can expect to receive in return for these payments.

1. A list of existing franchisees and their contact details.

An auditor’s certificatecertifying that the franchisor’s business is a going concern and able to meet its obligations as they fall due.

1. A statement by the franchisor to the effect that to his best knowledge and belief, the financial situation of the franchise company has not deteriorated since the day the auditor’s certificate was issued.

FASA also prescribes that the disclosure document should be updated at least annually, more frequently, should material changes occur.

Breach of confidentiality

Although FASA’s franchisor members were supportive of the requirement to furnish prospects with a disclosure document, they were appalled to find that compliance made them vulnerable to commercial espionage. Acting in good faith, franchisors had handed copies of their disclosure documents and franchise agreements to individuals who had presented themselves as prospective franchisees. Both these documents contain highly confidential information, however, and it soon emerged that some of the recipients had ulterior motives.

• While pretending to be interested in the franchise, some individuals obtained this documentation so that they could pass it on to one of the franchisor’s competitors, possibly in the mistaken belief that this would act in their favour. It must be said that such underhanded action has no place in a franchise relationship, and any franchisor worthy of this title will show such an individual the door.
• It was also found that some people would utilise the confidential information for their own ends, to help them set up a business of their own and in opposition to the franchisor.

To protect themselves against such blatant misuse of trust, most franchisors now expect prospects to sign a confidentiality undertaking before they will issue them with a disclosuredocument. The only obligation a properly worded confidentiality agreement should impose upon a prospect is an obligation that he would observe confidentiality and would not to use the 1_…,

information in any way whatsoever, should he decide to withdraw from negotiations. Under no circumstances should it bind him in any other way.

Section 15 of the ASA Code

We have already stated that the widely publicised success of franchising had the unintended effect to attract reckless and sometimes even outright fraudulent operators who were not too keen to build a solid franchise Infrastructure. All they wanted to do was to reap quick profits from the goodname of franchising. By simply inserting the word “franchise” into their recruitment advertisements for ill-conceived and unproven business schemes, they managed to attract responses, usually from people who could least afford to invest their money into schemes of doubtful merit.

It must be said that in most cases on record, it would have required little investigation to establish that such offers lack even the most rudimentary components of a bona fide franchise, yet these rip-off schemes continue to pop up from time to time. Every time one of them fails, as they always will, the concept of franchising is blamed for the losses hapless investors have suffered. This conveniently ignores the fact that in reality, such fraudulent schemes have absolutely nothing in common with franchising except the name, which has been used as part of an elaborate misrepresentation.

15. Franchise Schemes

15.1: Franchise scheme means a scheme where a company, firm or individual, known as the franchisor, gives to a person, known as a franchisee, the right, often exclusive, to sell specified products or other specified services in return for an initial payment, a percentage of the profits (or a royalty), or any other consideration.

15.2: Advertisements by franchisors seeking franchisees are not acceptable unless the franchisor has provided all the information required by the media in advance of publication. Such advertisements should not mislead, either directly or by implication, as to the support available or the likely reward for the investment and work required. For the franchisor or the franchisor’s agent (if any) the advertisement must state: Name of senior executive - Full title of the company - The street address of the company.

In response to representations by FASA, the Advertising Standards Authority of South Africa (ASA) agreed to act by inserting “Section 15″ into the official Code of Advertising Practice, which is now binding on all its members. Section 15 deals specifically with the wording of advertisements that seek to recruit franchisees. It reads as follows:

These requirements apply to both display and smalls advertisements. FASA, assisted by feedback from both its members and alert members of the public, is monitoring the situation carefully and reports offenders to the ASA. Although this does not appear to have stopped misleading advertisements from being published altogether, probably because of the short lead times that are customary in the publishing industry and the extreme pressure this creates, it has certainly led to a substantial reduction in the number of observed incidents. This is yet another example of FASA’s effectiveness in regulating fr

Possibly related posts: (automatically generated)
The FASA Code of Ethics and `Business Practices

• What does a Franchise Agreement cover?
• The parties to the franchise agreement
• Some Franchise Terminology
• Franchisee Selection Tips
• Preparations for franchising
• Is a franchise the optimal solution? From the prospective franchisor's viewpoint
• Business format franchise
• McDonald's: Surpassing the dream
• Is the business franchiseable? Some critical success factors
• Modern-day Franchising Part 1

6 Comments »