Watch out for unscrupulous franchisors

Small Business Connect

The single biggest way for franchisees to protect themselves against unfair practices by un-scrupulous franchisors is to seek legal advice before signing any agreement. So says franchise attorney, Esmari Jonker, of SWV Inc.

“Franchisees are willing to pay R500 000 or more for a business, but they do not want to spend a couple of thousand rand to seek legal advice,” says Jonker.

The unwillingness to spend on legal fees could cause a franchisee to end up in a legal battle that could cost him or her R100 000 or more and which could take up to a year or two to resolve.

A common spin-off of the lack of legal advice sought, according to Jonker, is that franchisees subsequently realise that they are responsible for all kinds of costs in addition to the royalties that they are required to pay to the franchisor.

Or, in other cases, franchisees discover that there are certain restrictions that have been placed on them and that they are only able to source products from the franchisor directly or from one of the franchisor’s suppliers, despite being able to buy the goods at a fraction of the cost from a different supplier.

“These examples are all a result of the agreement not specifying anything, but instead providing only high-level wording,” says Jonker.

For example, where a franchisee has to pay additional costs, it is important that the franchisee requests the exact rand amount to be disclosed by the franchisor, so that the franchisee knows exactly what additional fees need to be paid each month.

Jonker says franchisees also need to ascertain that where a franchisor commits to something, the agreement stipulates exactly what the franchisor promises, to ensure that the franchisor delivers on those promises.

“It is also important for franchisees to be aware of their rights as per the Consumer Protection Act (CPA),” says Jonker.

The CPA covers franchisees by allowing them to cancel an agreement within 10 business days after entering into it with the franchisor. The CPA further requires that a disclosure document be issued by the franchisor prior to entering into an agreement with a franchisee.

A disclosure agreement needs to contain certain important information such as the franchisor’s financials and number of outlets as well as be accompanied by supporting documents from the franchisor’s accountant or auditors, a list of existing franchisees, key business information and an organogram that depicts the support system for franchisees.

Should a franchisee discover that the franchisor has contravened the CPA, a complaint can be lodged with the National Consumer Commission.

However, Jonker says this is not always helpful to a franchisee.

“Lodging a complaint can take up to several months and in the end might only result in a notice being issued against the franchisor.

The franchisee will then still have to go to court to try to resolve the matter, which could cost between R100 000 to R200 000 in legal fees,” says Jonker.

She says she believes franchisees sign agreements in such haste because they are sometimes desperate and afraid to lose the deal.

“Some, not all, franchisors tell franchisees that if they don’t sign quickly, the business will go to another franchisee,” says Jonker.

She says unfair practises are to be found in every sector and it was difficult to single out any specific industry.

However, she emphasised that not all franchisors are bad and that good research, and speaking to existing franchisees prior to entering into any franchise agreement, would assist in determining whether a franchisor looks after the interests of its franchisees.

“Reasonable and experienced franchisors who take the interest of the franchisees to heart, is the cornerstone of a successful franchise business,” says Jonker.
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